July 17, 2007

Isle of Shoals

SO APPARENTLY LE MONDE is thrilled about the stellar rise of the euro against the U.S. dollar, as Joe Noory over at No Pasaran! reveals. As evidence of this, he notes a cartoon in which an overly-fed bureaucrat -- complete with euro-embossed fascist armband -- measures up (or rather, down) an ever-shrinking George Washington. Mr Noory's comment is as follows:

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Celebrating the “strength” of the overvalued Euro, our intrepid Le Monde cartoonist can’t even bring himself to use the color blue. Instead, while favoring book-burning red, he doesn’t seem to realize that he lives in an export economy where their overpriced rubbish now costs even more.

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It's especially problematic when you consider what exactly France exports. According to the U.S. Department of Commerce -- which has a kick ass site for trade statistics -- we gauche Yankee capitalists imported some $37.1 billion of French goods in 2006. Industrial products made up 27 pc of the total, while pharmaceuticals were about 10 pc.

As it turns out, the stuff you tend to think about when you think of French imports was actually a small portion of the total. We imported about $2.8 billion annually (or 7.5 pc) in terms of wine, liquor, vinegar and beverages; $1.9 billion (or 5.2 pc) in fine art and collectibles; some $1.3 billion in terms of perfumes and such; about $191 million in non-knitted apparel; $70 million in pre-made food and related products; about $55 million in chocolates; $34 million worth of shoes; $985,000 worth of tobacco and, last AND least, some $234,000 worth of woven baskets and wickerware. During 2006, the euro was worth about $1.20 to $1.30.

What's interesting about the trade statistics is how they shift over time. For instance, Americans like French reactor parts and similar goods, and are willing to pay for them, as evidenced by the fact we bought nearly $6 billion worth in 2006, up from about $5.2 billion in 2001. That goes the same for wine and spirits, up from about $1.6 billion in 2001 to $2.8 billion last year. But there's no denying that French exports in other categories are off -- way off -- from where they once were.

Art purchases are down -- from $2.2 billion in 2001 to $1.9 billion last year. Sporting equipment is off from $89 million to $54 million. Cotton is down from $42 million to $26 million. Coffee and tea are down from $16 million to $5 million. Fruit and nut products, from $9 million to $2 million. The market for French tobaccos has practically disappeared and as for wickerware, it's fast heading downhill too.

But perhaps most alarming for the French is their losses in aircraft and parts -- down from $5.8 billion to $4.3 billion -- and electric machinery -- down from $2.2 billion to $1.8 billion. About the only similar comparable loss the U.S. has, meanwhile, is in machinery -- down from about $2.1 billion to $1.9 billion.

On an overall basis, the U.S. has grown its imports to France from about $19.9 billion to $24.2 billion from 2001-2006, a 21.7 pc increase. France's imports to the U.S. have grown from about $30.3 billion to $37.1 billion, an increase of 22.6 pc. Sounds good for everyone, doesn't it? There's just one problem.

In 2001, the euro started out being worth about 95 cents. At the end of 2006, it was worth about $1.32. That's an increase of 39 pc in dollar terms in just five years. The dollar, meanwhile, went from being worth about 1.05 euros to being worth about 76 euro cents. That's a drop of 29 pc in euro terms. (I double-checked the math on this. If Currency A drops from being worth 2 units of Currency B to 1 unit, that's a 50 pc drop; if Currency B appreciates from being worth 0.5 units of Currency A to 1 unit of Currency B, that's a 100 pc gain, despite it looking funny).

So although France earned $37.1 billion on its imports in 2006, the currency fluctuation meant that the $37.1 billion was worth just 28.1 billion euros, compared to a 2001 valuation of 31.8 billion euros on that $30.3 billion in exports. Simply put, they're worse off than they were five years ago. Meanwhile, we're getting five billion more dollars a year for our exports than we were back in 2001.

U-S-A! U-S-A! U-S-A!

Now, I realize that trade doesn't exist in a vacuum. The world economy has grown over the past few years and France's loss isn't necessarily America's gain. Depending on the product, it might be Mexico's gain or China's gain or Canada's gain. For instance, the sharp decrease in fruits and nuts being imported from France may well be due to Central America producing a lot of cheap fruit that Americans are buying instead.

That's borne out in the Commerce statistics. Our trade deficit with France was roughly $12 billion per year as of 2006, up from $10 billion in 2001. But on an overall basis, our trade deficit doubled to -- God save us -- $817 billion in 2006 from $410 billion in 2001. That France's share of the pie has shrunk shows how our other trading partners are profiting from an expensive euro.

Along those lines, it's worth noting that although the euro has appreciated notably in the last few years, other currencies -- such as the Chinese yuan and the Mexican peso -- have not. The yuan has only appreciated about 6 pc in the past year or so and that's largely a function of China artificially depressing its value; the Mexican peso has fallen in value against the dollar this decade. (It used to be 9 pesos to the dollar, now it's 11).

The long and short is that the euro's rise makes things even more difficult for France and its neighbors. (Yes, our $24.1 billion will get far fewer euros than it once would have, but that doesn't really matter, because we're sending all our dollars to Asia for cheap electronics).

Meanwhile the euro keeps increasing in value -- it's now at $1.38, according to the market. If it keeps going higher, there's going to be a lot of pain in the forecast for the French -- and overall, those pains will be far sharper than the American tourist who discovers his dollars don't go nearly as far as they once did on the Old Continent.

In the meantime, though, I would invite the French to use their supercharged euros the way so many of our trading partners have in the past -- through making risky investments in loss-leaders that allow us Americans to get our dollars back cleverly and sneakily.

*cough* Pebble Beach *cough* *cough* Chrysler Corp. *cough*

Please. We need the money.

Posted by Benjamin Kepple at July 17, 2007 12:01 AM | TrackBack
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