Trade prospects strong
St. Louis — The 1980s international outlook for US manufacturers is quite promising. Data Resources Inc. and Wharton Econometrics, two major econometric consulting firms, are both forecasting the continued devaluation of the dollar against major European currencies. The real cost of borrowing in the United States should be lower than in any other developed nation; and US nit labor costs of manufacturing should also be less than those in its major European competitors. These factors all contribute to making the US a dominant low-cost export center through the 1980s.
Since 1976, the dollar has been devaluating against most major currencies. Even on a price-adjusted basis, compensating for countries' differentials in inflation rates, the US has gained a competitive price advantage because of the dollar's movements.
Over the same period, the US share of world manufactured trade has been increasing.
A close look at the movement of these two variables over time suggests a causal relationship -- as the price-adjusted dollar falls, the share of US world trade increases. The US share of world trade has increased from 15.5 percent in 1976 to a little over 17 percent today (see chart).
The devaluation of the dollar through the '80s will continue at a slower rate than in the '70s. The major shocks to the dollar caused by the floating rate appear to be over. Continued devaluation will be driven by a US trade deficit and interest rates that are low relative to its major trading partners.
An average annual inflation rate of 8 to 9 percent will cause the price-adjusted dollar to remain at about 1980 parity levels against European currencies, and to fall below parity against the Japanese yen. This should help US manufacturers maintain the relative trading advantage gained against Europe from 1976 to 1980. US price competitiveness against Japanese goods hould also improve because of the dollar's position.
A lower real cost of borrowing in the United States will improve its partners. Data Resources Inc. forecasts that this condition will continue well into 1984.
The possibility exists that in the late '80s Japanese real borrowing costs will equal those of the United States and that those of the United Kingdom will be less. In the near term, however, lower real borrowing costs will enable US manufacturers to finance operations less expensively than its foreign competitors. Again, this leaves US companies in a favorable position to expand world markets.
Lower real borrowing costs could pose a danger to some companies, because they induce local foreign investment in plant and equipment. Such investment would increase competition in the home market.
There may be a trade-off, however. Increased foreign investment will increase available jobs and help reduce unemployment. It would also increase competition, forcing US manufacturers to improve efficiency and lower costs. Increased employment would greatly benefit the economy, while improved efficiency would increase the competition that has moved in across the street.
A third favorable condition for US manufacturers in the '80s is lower manufacturing costs.
In currency-adjusted terms, European manufacturers for labor. Though greatly improved productivity reduces European unit labor cost, it does not reduce it enough to offset the US cost advantage.
The Japanese should be able to maintain their lower unit labor cost advantage against the developed world even though their labor costs have increased. Japanese productivity gainst offset increased labor costs enough to keep them highly competitive against the US, Canada, and Europe. US manufacturers should prepare themselves for a continued challenge from Japanese competitors.
Energy costs have become a major determinant of manufacturing costs. Current energy costs in the US are substantially less than those of its European and Japanese trading partners.
Deregulation of the oil industry, however, will cause US energy costs to increase at an increasing rate relative to pre-deregulation increases.The energy costs of US overseas competitors should increase with inflation.
US participation in world trade will not be an easy street in the '80s. The developed world faces a growing challenge for market share from the newly industrialized nations of South Korea, Taiwan, Singapore, and Mexico.
It may be difficult for some US manufacturers to change their strategies and market outlooks in order to position themselves to serve global markets. But, on the whole, US manufacturers are beginning the 80s with a very favorable position from which to expand into foreign markets.