Economists keep watchful eye on depreciating U.S. dollar, ag exports

COLLEGE STATION – U.S. agriculture should pay careful attention to the value of the U.S. dollar and foreign currency as potential pitfalls could be looming ahead, threatening domestic exports, according to a Texas AgriLife Extension Service economist.

The U.S. dollar has depreciated approximately 15 percent in the last six months compared to many other currencies, making exports less expensive to foreign buyers and consumers, said Dr. Parr Rosson, AgriLife Extension economist and director of the Center for North American Studies at Texas A&M University.

China and Japan, however, have taken action to lower the value of their currencies, making their products less expensive on the world market and raising the cost of U.S. exports to consumers in both countries.

This action creates more competition for U.S. exports from export competing countries, Rosson said.

“This makes their products less expensive and makes U.S. products more expensive to consumers in China and Japan,” he said. “It’s feared that the European Union may adopt a similar policy if the euro continues to strengthen. If this occurs, it could result in an all-out trade war.”

Tuesday, China announced that it will raise interest rates in order to try and reduce the effects of inflation and avoid the house price bubble experienced by many other countries. The higher rates put upward pressure on China’s currency, but the government appears to have intervened in the market to mitigate currency appreciation.

The G-20 Summit, scheduled for Oct. 21-23 in South Korea, will try to “identify and prioritize” the most pressing economic issues, one of which is currency manipulation, Rosson said.

“The danger we face is getting into a trade war in which countries retaliate against trading partners who devalue their currencies by implementing higher tariffs or some trade restriction.” The U.S. House of Representatives passed a bill to do just that in late September.

Rosson noted this happened during the 1930s. The Smoot-Hawley Tariff, or the Tariff Act of 1930 raised tariffs on 20,000 imports to record levels. It is believed by many economic experts that the Smoot-Hawley Tariff contributed to the severity of the economic crisis of the Great Depression, reducing world trade and raising costs to consumers, thereby lowering standards of living worldwide, Rosson said.

“During that time, other countries responded to high U.S. tariffs by raising their own tariffs, which led to higher consumer prices,” he said. “A lot of people maintain that the Great Depression wouldn’t have been as severe had this situation not occurred.”

Higher tariffs and higher consumer prices would lead to a buildup of inventories as a result of not moving goods to export locations, Rosson said. That could further slow the economic recovery in the U.S. and globally.

Even as agricultural prices have increased, U.S. exports have remained strong, Rosson said. This is attributed to the relatively low value of the U.S. dollar, which is currently trading almost even with the Canadian dollar.

“The belief is that China will retain a low-priced currency to export more,” Rosson said. “China is the number two U.S. agricultural export market. Cotton, soybeans and many other products are in high demand there. So, a relatively weak Chinese yuan will limit their ability to purchase U.S. agricultural products.”

Rosson said what many would like to see happen is China’s currency determined by the market rather than by the government.

“There will be dual impacts if their currency appreciates,” Rosson said. “Some analysts indicate that the yuan could appreciate by a minimum of 20 percent and possibly by as much as 40 percent. However, that would be somewhat disruptive to the Chinese economy in the near term. U.S. exports to China would be boosted over time due to stronger consumer demand and lower cost U.S. products.”

U.S. agricultural exports remain strong, Rosson said.

“Exports are booming,” he said, with agricultural exports running 14 percent above last year. “The U.S. Department of Agriculture chief economist has indicated that we may set another record (for exports). That’s certainly good news for U.S. agriculture, but we’ll need to watch exchange-rate policies and economic recovery around the world to see whether or not this actually happens.”

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