Global markets provide access to a large set of products and Americans are big spenders. The chart’s red line shows imports of goods up considerably since 2009 to almost $190 billion per month last year. Nearly 60% of those products came from five countries: China (21%), Canada (14%), Mexico (13%), Japan (6%) and Germany (5%). U.S. Census NEWS reported almost the same amount for January 2016. At that buying rate, imports of goods will total $2 trillion this year.
What’s driving spending? Income and prices influence buying. With national income up as our economy expands, consumers buy more domestic and foreign merchandise. The chart’s green line displays a 21% upswing in the value of the U.S. dollar (USD) against other currencies since 2011. Advantages accrue to American buyers. How that translates into amounts actually paid requires a closer look at foreign exchange markets. The Chinese, for example, prefer payment in their currency, the yuan; Mexican businesses prefer payment in pesos; Germans prefer euros, and so forth. Because foreign exchange rates change daily, translating foreign prices can be more complicated at times than translating foreign words.
We imported $13.5 billion in Colorado last year, which accounted for 20% of personal spending on goods. According to the U.S. Census Bureau, two-thirds of the state’s imported goods came from five countries: Canada, China, Mexico, Germany and Switzerland. Major imported commodities included: crude oil, digital processing units, medical items, instruments and appliances, and aircraft items.
Shopping through Colorado’s top-5 foreign markets is unlike shopping at the Park Meadows Mall: we cannot add up our total expense because items are denominated in foreign currencies (columns 3 and 6 in table). Direct quotes, or prices of foreign currencies in USD (columns 4 and 7), allow us to translate. In 2009, for example, one euro cost $1.39, one Canadian dollar 88 cents. Multiplying local prices by FXR, our 2009 Cart totaled $47,687. With local prices rising 2%/year through 2015, our items cost more (column 6). In March 2016, however, the FXR was $1.11/euro, a 20% increase in the USD against the Euro-zone currency. The 2016 Cart amounts to $43,994, savings of $3,693 due mainly to a lower dollar-price for our big-ticket item, the German car. Even with increasing foreign prices over six years, the rising value of the USD against three of five currencies listed provides a nice discount for Americans.
– Foreign Merchandise and Prices –
|Market||Product||Local Price||USD/FX||USD||Local Price||USD/FX||USD|
Notes: 1) CAD = Canadian dollar, CNY = Chinese yuan, MXN = Mexican peso, EUR = euro, CHF = Swiss franc. 2) FXR from Board of Governors of the Federal Reserve System. Retrieved from research.stlouisfed.org .
Although we ignored transaction charges and taxes, conditions in global currency markets determine exchange rates, which affect prices of imported merchandise. The value of the USD moves with income growth in countries, differences in inflation and interest rates across countries as well as expectations of future conditions and actions by governments and speculators. The Chinese government, for example, attempts to maintain a small range of variation for its yuan. Varying combinations of factors pulled up the value of the USD, improving global shopping for American buyers. The USD holds a distinctive position as a global reserve currency meaning that it is used by businesses and by governments around the world for transactions. That adds to demand for the USD and benefits Americans. In a future article, I’ll highlight impacts and adjustments our domestic businesses face from the rising value of the USD.
By Paul J. Kozlowski*
*Dr. Paul Kozlowski is professor emeritus of business economics and finance at the University of Toledo, and past-president of the Mid-Continent Regional Science Association. He has served as an advisor to business and government organizations for over thirty-five years, and his articles have appeared in a variety of economic publications and books. He holds a Ph.D. in economics from the University of Connecticut and lives in Denver.