Many Americans fear an increasing U.S. deficit and believe it will ultimately lead to economic crisis. The facts, however, may surprise you.
By the most basic measure of economic performance—the change in real gross domestic product (GDP)—the U.S. economy performs best when current account deficits (which largely consist of the trade deficit) are high.
Since the emergence of local, regional and national economies, there has been a constant evolution in the stages of cultural and economic development. Globalization is another step in that evolution. It is not a unique event just bursting onto the scene, but rather, the 21st century version of a predictable age old dynamic. Yet due to the accelerated pace at which change now occurs, a backlash is growing and supported by a variety of groups.
New research and analysis reveal that companies linked to the global marketplace perform better than those that only operate domestically. And the employees and communities of globally-engaged firms prosper more. But the benefits don’t just apply to exporters.
The data reveal that companies that import, invest abroad or are recipients of foreign direct investment (FDI) also prosper more than their domestically focused counterparts. And, the analysis compares apples to apples: companies of the same size in the same industries. This research is likely to persuade many firms to expand their horizons. How will it affect your strategic plan?
On several occasions since World War II, and currently, the U.S. economic locomotive has been instrumental in pulling the rest of the world out of periods of poor economic growth. As this occurs, global markets improve, creating new opportunities for traders and investors. Today, new opportunities are emerging in Europe, Latin America and Asia, as well as risks that may affect your company’s bottom line.
In this extremely competitive global economy, financing is not only a necessary part of the export process, but also a very important tool. Your ability to offer your foreign customers liberal payment terms can provide the necessary edge to sell more goods and services worldwide. But, in doing so, it’s essential to accurately weigh the risks. This could mean the difference between international success and failure.
With amazing, even surprising speed, the economic crisis that impacted many Asia Pacific countries during the late 90’s has begun to fade. To varying degrees, the countries have begun the struggle toward recovery. What does this mean for your business?
The swift improvement in Asian economies is certainly encouraging news for U.S. exporters. And while not all countries are expected to increase demand immediately, the overall growth will surely support the continuing economic expansion in the United States.
Asian growth is projected to increase this year, signaling a departure from negative trends inflicted by the Asian crisis. As regional growth rises, U.S.-Asian trade will move into high gear. But that’s not all.
Japan, which has not yet escaped economic malaise, also should benefit from more economically vibrant neighbors. Furthermore, as the world’s second largest economy and the United States’ third largest export destination, Japan represents a huge market. And although its economy is predicted to remain flat, it continues to offer a variety of export, import, and investment opportunities you may wish to consider.
Among other problems, Japan is trying to recover from high levels of debt and low levels of confidence in the financial sector caused by the bursting of the economic bubble in the late 1980s and early 1990s. Additionally, many Japanese sectors, especially transportation, construction, labor, power, telecommunications and energy, are highly overregulated.
Consequently, competition has been constrained and inbound investment has been limited. In response, the Japanese government has taken strong steps to stimulate the economy and lighten the regulatory burden. According to the office of the U.S. Trade Representative, the Japanese government estimates that if deregulation plans are fully implemented, by 2003 Japan’s gross domestic product (GDP) will grow by an additional 0.9% annually.
Japan’s GDP per capita exceeds $29,000. This is slightly less than the United States’ $31,000, and 38 times more than China’s. Due to the purchasing strength of Japan’s 126 million consumers, U.S. exports there, although down, are still tremendous as compared to other markets.
For example, U.S. exports to Japan last year reached almost $58 billion. Although this is down from its high of $67.5 billion in 1997, it’s still just 10% less than all U.S. exports to the Newly Industrialized Countries (NICS), and more than a third of the total U.S. exports to the Pacific Rim.
U.S. high-tech companies, primarily those producing computers, semiconductors, software, pharmaceuticals, medical devices, and aviation products, are extremely competitive in Japan. And many of these large firms have established a solid presence there.
As a result, these firms have learned what it takes to introduce new products quickly. Smaller, new-to-market U.S. firms with innovative technology are often able to find an agent or joint venture partner and begin exporting to Japan with few regulatory hurdles.
Through foreign direct investment, U.S service companies are gaining a greater foothold in Japan. In fact, U.S. providers of retail, entertainment, internet, franchise, restaurant, hotel, marketing, and design services are finding Japan an accommodating market.
Japan must continue to increase its imports of processed foods to compensate for declining agricultural labor output, according to the U.S. Department of Commerce. This means U.S. exporters of processed food stand to benefit.
Additionally, U.S. suppliers of consumer goods are making Japanese inroads through new marketing channels, including direct marketing, private label, discount shopping and foreign-owned retail stores.
The U.S. Department of Commerce has identified products in strong demand in Japan. These include:
Reportedly, many U.S. firms have found it difficult to obtain information on Japanese duties and taxes, as well as standards, regulations and other barriers. And the process often can be cumbersome, slow and discouraging.
However, steps have been taken by Japanese authorities to simplify the process. Nevertheless, it is recommended that U.S. firms work closely with a Japanese partner to obtain guidance and an understanding of the culture and business environment.
Asian output no longer is falling. Improvements in the region’s trade surplus, combined with an easing of local monetary and fiscal policies, have resulted in growth. Thus, all regional economies, except Japan’s, are predicted to achieve annual GDP growth in the 0% - 3% range in the year 2000.
Korea is recovering well, and in some cases, leading the pack. China, which partially has been insulated from the Asian crisis, has taken steps to stimulate its economy. The result: an increase in domestic demand that has somewhat offset a deteriorating trade balance. By mid-1999, however, China’s currency may be allowed to gradually depreciate — which may make your exports less price competitive.
In response to the global crisis, many countries are implementing reforms to bolster their economies. For several nations, this will lead to sustainable growth. However, in the short-term, some economies will continue to experience difficulties.
To help you reassess export markets, source goods or seek investment opportunities, you should factor in country growth projections. This is because healthy or increasing growth often results in robust demand, while decreasing growth frequently leads to lower priced products and attractive investment opportunities.
In 1999, world growth is anticipated to meet last year’s expectations of 2.2% GDP, and rise 3.5% in 2000, according to the International Monetary Fund (IMF). But not all economies will move in the same direction.
Growth of advanced economies is expected to decline slightly to 1.6%, while increasing to 3.5% in developing countries. Imports, on the other hand, are expected to remain the same in advanced economies, but jump significantly in developing markets.
The Organization for Economic Co-operation and Development (OECD), projects the European Union to achieve solid growth of 2.2% and 2.5% GDP in 1999 and 2000, respectively.
Although slightly lower than last year, the IMF estimates 1999 growth to reach 2.6% in France, 2% in Germany, and 1.9% in Italy. The UK’s GDP is projected to achieve .9%, the lowest in the EU, but begin improving in the second half of the year.
Central and Eastern European GDP growth is expected to hit 2.2% this year, slightly lower than 2.5% estimated last year, according to the IMF. Hungary and Poland have fared well, and both economies are anticipated to grow approximately 5% this year. However, Russian GDP, which is expected to fall again, this year by 8.3%, has dragged down the regional forecast.
In addition to concerns over reversing the reform process, Russia continues to lack the economic, financial and political policies that will restore investor confidence.
Canada primarily has been impacted by the decline in commodity prices, especially forest products, coal and base metals. Nevertheless, the IMF projects Canada’s GDP growth to reach 2.2 % in 1999.
Brazil’s devaluation of the real is creating instability that will result in lower growth projections for the region. Prior to this, the IMF projected Argentine GDP growth to reach 3%. And Chile’s economy, which has suffered a deterioration in its external accounts, mostly due to lower world commodity prices, was estimated to reach 2% GDP growth.
According to the IMF, the Mexican economy, which is stinging from lower oil revenues, is anticipated to hover around 3.5% growth this year. However, by 2000, its GDP growth is projected to exceed 4%.
Asian growth is expected to jump from 2.6% in 1998 to 4.3% this year. Indonesia, Malaysia, the Philippines and Thailand, all negatively affected by the crisis, are expected to rise from the ashes, reducing double-digit negative growth to -1% this year. India and China are expected to top 4.8% and 6.6% growth, respectively.
Japan’s ability to strengthen its financial infrastructure is uncertain. Thus, its growth projections hover around 0%, showing minimal improvement in the year 2000.
What began last year as a financial crisis in one country has led to global financial turmoil today. In order to successfully navigate these uncharted waters, U.S. exporters need to develop finance strategies to retain existing customers, and explore new markets here and abroad.
A decade ago, the currency collapse in a developing country barely would have been felt in the United States or elsewhere. Today, however, the impact has profound consequences.
In 1995, Federal Reserve Chairman Alan Greenspan said that the highly efficient and increasingly sophisticated international financial system “has the capability to rapidly transmit the consequences of errors of judgement in private investment and public policies to all corners of the world at historically unprecedented speed.”
This was exemplified by the Mexican peso crisis, which was ignited on December 20, 1994. What began as a short-term liquidity problem quickly sparked panic and resulted in the fall of investor confidence, followed by a precipitous drop in the Mexican stock market.
Perceiving that the crisis would erupt in other developing countries sharing similar economic and political characteristics, investor fear spread to Brazil and Argentina. As a result, their stock markets also fell, along with those of other developing countries worldwide.
Having surveyed the tornado-like path produced by the Mexican peso crisis, it appears that the Asian crisis, although more severe, is following a similar course.
The financial problems that began in Thailand in 1997 quickly have spread throughout East Asia. They have added to the severe economic difficulties experienced by Japan in recent years, and have put pressure on China to devalue its currency in order to remain globally competitive.
The Indian subcontinent has not been spared. Poor East Asian economic performance has closed export doors for Pakistan, a country experiencing debt problems. India, too, is facing economic difficulties.
Believing that too many eggs in the emerging market basket is risky, many global investors have pulled their money from Russia.
This has resulted in a downturn of the Russian stock market, the devaluation of the ruble, and increased fears of default on foreign debt by the Russian government and domestic banks. These events have compounded the country’s economic troubles caused by the failures of central planning and the dissolution of the Soviet Union.
In an attempt to stabilize the economy, retain existing investment and attract new funds, newly appointed Russian Prime Minister Yevgeny Primakov recently said Russia intends to meet its domestic and foreign debt obligations, and continue with free market reforms, with some modifications.
Although Russia’s economy is relatively small and has minimal impact on capital and trade flows, it has exposed economic vulnerabilities not only in Eastern Europe, but in other corners of the globe, as well.
The fallout of the Russian crisis is now being felt in Latin America. Venezuela and Brazil’s currencies are under pressure and stock markets throughout that region significantly have decreased in value.
As prices for commodities fall, resulting from lower world growth forecasts, countries rich in natural resources are feeling the pinch. Depressed oil prices are impacting Venezuela and Mexico, which rely heavily on oil export revenue, while Chile and Peru are hurting from the drop in copper prices. And, Argentina is marred from the fall in agricultural prices.
Even the Canadian economy is affected, primarily due to its exposure of forest products, coal and base metals. Other developed countries sharing these difficulties include Australia and New Zealand.
Due to the Asian financial crisis, many companies located in impacted countries are finding it difficult to obtain financing for their purchases. In an attempt to continue exporting to these customers or to attract new buyers, U.S. exporters need to offer longer and more flexible terms. In order to limit your risks, consider utilizing export credit insurance or government guarantees.
To compensate for declining exports resulting from the financial turmoil, consider tailoring your product to satisfy the needs of new foreign markets.
Sound economic structures in Canada and the European Union should keep the crisis from doing real damage there. Durability derived from newly enacted reforms in Latin America will likely deter severe fallout. Consequently, these export destinations should remain relatively vibrant.
Also, consider domestic markets in which you’re currently not selling. For instance, from 1996 through 2020, the world’s elderly population consisting of those age 65 and over, will rise almost twice as fast as school or working age groups. You may wish to cater to the tastes of this fast-growing U.S. and world market segment.
With change comes opportunities—and risks. Whichever strategy you choose to pursue, be sure to analyze the short- and long-term ramifications, and balance the potential rewards with the risks.
There’s no doubt that exports are very important to the growth and prosperity of the United States — and to companies like yours. However, succeeding internationally in today’s rapidly changing global environment is not easy.
Economic conditions, government policies and the level of confidence in a given currency can change rapidly. Successfully adapting to these changes is not only important — it’s vital.
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