II. THE STATIC RELATIONSHIP BETWEEN U.S. EXPORT GROWTH AND FOREIGN ECONOMIC GROWTH
Quantifying the relationship between U.S. export growth and foreign economic growth helps reveal what has driven U.S. export growth in the past and how U.S. export growth may evolve in the future. A static analysis captures the contemporaneous relationship between U.S. export growth and each foreign region’s GDP growth by holding growth in other regions constant. The analysis shows that U.S. export growth exhibits a varied relationship with changes in growth in other regions. These differences can be explained by differences in each region’s economic size, its share of U.S. exports, and other factors such as its distance from the United States.
While numerous studies have focused on understanding the relationship between U.S. export growth and overall foreign growth, this analysis investigates further whether the relationship differs across regions. [7]
Such analysis requires a framework that jointly accounts for U.S. export growth and regional GDP growth. Following the literature (Cardarelli and Rebucci; Ahearne and others; and Senhadji and Montenegro), a regression model is used to uncover the contemporaneous relationship between U.S. export growth and the factors that may be correlated with this variable, including growth in several distinct regions and changes in exchange rates between the currencies of foreign countries and the United States.[8]
Consistent with the existing literature (Krugman; Houthakker and Magee; and Hooper, Johnson, and Marquez), the regression shows U.S. export growth increases with aggregate foreign growth and declines with an appreciation of the U.S. dollar. [9] A benchmark regression based on aggregate foreign growth shows that a 1.0-percentage-point increase in growth in all regions is associated with an increase in U.S. export growth of 2.1 percentage points (Table 1, column 1). This figure, 2.1, may also be described as the “elasticity” of U.S. export growth with respect to foreign GDP growth. Additionally, each percentage point that the dollar appreciates against foreign currencies reduces U.S. export growth by 0.2 percentage point, holding foreign growth constant.[10]
However, considering only aggregate foreign growth in analyzing U.S. exports may mask important differences across regions. Even if two regions have the same growth rate, the relationships between their growth and U.S. export growth are unlikely to be the same. A regression that breaks down aggregate foreign growth into separate growth rates for individual regions can help determine how U.S. export growth is related differently to each distinct region’s GDP growth.[11] An analysis of the relationships between regional growth and U.S. export growth suggests that changes in GDP growth in Europe are associated with the greatest changes in U.S. export growth. A 1.0-percentage-point increase in the European growth rate is associated with a 1.0-percentage-point increase in the growth rate of U.S. exports (Table 1, column 2). In comparison, the increase in U.S. export growth associated with an increase in growth of 1.0 percentage point in Canada, Asia, and Mexico is only, respectively, 0.5, 0.4, and 0.2 percentage point.[12]
These findings raise the question of why growth in some regions, such as Europe, is more relevant to U.S. export growth than growth in other regions, such as Mexico.[13] There are two possible explanations for these differences.
First, the size of a region’s economy plays an important role in influencing the relationship between the region’s growth and U.S. export growth. The elasticity of U.S. export growth with respect to each given region’s GDP growth, after controlling for the size of the region’s economy, indicates how U.S. export growth would vary with that region’s growth if the region were the whole world (Table 1, column 3). The actual relationship between U.S. export growth and the given region’s growth can then be calculated by multiplying the export growth elasticity associated with that region by the region’s share of world GDP.
For example, the elasticity of U.S. export growth associated with Canadian GDP growth is 19.8, and Canada’s average share of world GDP is 0.024. Thus, a measure of the sensitivity between movements in U.S. export growth and movements in Canadian GDP growth can be derived by multiplying 19.8 by 0.024 to obtain 0.5, meaning that U.S. export growth tends to increase by 0.5 percentage point when Canada’s growth increases by 1.0 percentage point.[14] In comparison, the export growth elasticity for Europe is 3.8 and its share of world GDP is 0.301, which leads to an approximate overall sensitivity of 1.1 percentage points.[15]
Second, the strength of the trade relationship between the United States and a given region also influences the relationship between that region’s growth and U.S. export growth. The elasticity of U.S. export growth with respect to each given region’s GDP growth, after controlling in this case for the region’s trade share with the United States (its share of U.S. export goods), indicates how U.S. export growth would vary with that region’s growth if the region were to account for all of U.S. exports (Table 1, column 4).[16] The sensitivity between movements in U.S. export growth and movements in a given region’s economic growth can thus be decomposed as the product of its trade share with the United States and the corresponding export growth elasticity. For example, the elasticity of U.S. export growth with respect to Mexican GDP growth is 2.5. Multiplying that figure by Mexico’s trade share of 0.105 yields 0.3, meaning that U.S. export growth tends to increase by 0.3 percentage point when Mexican GDP growth rises by 1.0 percentage point.[17]
These decompositions show that both a region’s economic size and its relative share of U.S. exports are important in determining the relationship between its economic growth and U.S. export growth. For example, because Europe accounts for both the largest share of world GDP and the largest share of U.S. export goods, changes in European economic growth are associated with the largest changes in U.S. export growth. Similarly, Mexico’s and Canada’s much smaller shares of world GDP make them much less relevant to U.S. export growth than Europe. [18]
Also, regions with smaller GDP shares tend, predictably, to buy fewer goods from the United States, which is reflected in the positive relationship between GDP shares and export trade shares for different regions (Chart 4). However, both Mexico and Canada, despite the relatively small sizes of their economies, nevertheless stand out as important trading partners of the United States because their trade shares with the United States are substantial.
In addition, factors other than economic size and trade share matter. Estimates of export growth elasticities differ across regions after controlling for the economic size of the regions, suggesting that growth in different regions is related to U.S. export growth in fundamentally different ways (Table 1, column 3).[19] One readily apparent explanation for this heterogeneity is the varying distance between the United States and the different regions. An examination of the export growth elasticity (controlling for the share of world GDP) for each region and that region’s distance from the United States shows that the export growth elasticity declines with distance from the United States (Chart 5).[20] This possibly is because the goods imported by regions that are far away from the United States may be the goods that are more needed by those regions, and, therefore, are less sensitive to changes in growth of those regions.[21]