The United States makes up about 4 percent of the world’s consumers; the 19 states of the Euro area only slightly more. More than 80 percent of the world’s population lives in what economists classify as emerging economies. Of course, some emerging economies are more advanced than others. But outside of North America, Europe, Japan, and Australia, more or less everybody else is emerging—a very large pool of potential consumers whose income is growing.
Perhaps the most fundamental, and obvious, of all economic principles is that if you’re selling something, you’re better off if that thing is something people want to buy. It is relevant in a discussion of the character of trade with emerging economies because the incomes of people in emerging economies are increasing more rapidly than the incomes of people in industrialized, or developed, nations.
Advantages of Proven Technologies
Emerging economies are catching up to leading industrial economies, on one hand, because they don’t have to invest in developing cutting edge technology, only in the best of the already proven technologies. They might not deliver the benefits of a superior technology, but neither did the emerging economy have to absorb the costs of developing technologies that didn’t work out. So an emerging economy gets a huge gain in income from implementing a relatively unsophisticated production process that is proven, and that can be implemented inexpensively and quickly because it is proven.
Just a few decades ago, China was making furniture for export with hand drills. Moving to digitally controlled processes led to huge productivity enhancements, spectacular gains in productivity. Those processes had been in place for many years in the United States and other industrialized nations’ furniture factories. Total factor productivity, the combined productivity of capital and labor, while noisy for both the United States and China, has been notably greater in China since 1980 (See figure 19.1).
Agriculture is another industry in emerging countries ripe for increases in productivity. Switching from plows and animals to tractors, even the most unsophisticated tractors, allows a farm community to plow more land faster with far less labor. The established technology is relatively easy to adopt because it’s understood and inexpensive and can deliver exponential growth in productivity.
Telecommunications historically has been a major challenge for undeveloped nations. But wireless technology is providing a solution. Emerging economies have been able to skip the expense and logistical challenges associated with installing landline communications by building cell towers. They might not have 5G connectivity but they do have smartphones that do far more than allow people to talk to each other and have made enormous strides in providing communications technology that is not very expensive.
Figure 19.1 Swings in total factor productivity: China and the United States
Source: U.S. Census Bureau
Source: U.S. Department of Housing and Urban Development. Release: New Residential Sales
Units: Thousands, Seasonally Adjusted Annual Rate
Frequency: Monthly U.S. Census Bureau and U.S. Department of Housing and Urban Development, New One Family Houses Sold: United States [HSN1F], retrieved from FRED,
Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HSN1F,
October 26, 2020.
Implementing developed technologies and processes is helping a large segment of the globe grow incomes more rapidly in terms of buying power than industrialized nations where growth is constrained by the capital investment required to research, develop, and produce new advances.
With greater incomes, people in emerging economies buy more goods and services, and not only more of the same goods and services they bought before. They can buy better things. We see that first in emerging economies in improved diets and healthier lifestyles, evidenced, at least in part, in taller people. Anecdotally, higher income is also moving emerging peoples from the ravages of limited food to the first-world problem of being able to afford a worse diet, consuming foods we’re better off not consuming.
Increased consumption doesn’t stop with food. From bikes to motorcycles to cars, emerging nations are moving up the consumption chain across the board to higher value products. Many of those products are manufactured in the United States as the United States has moved toward making high-value products.
The United States largely gave up making low value-added products in the latter half of the twentieth century. Processes and plants for cutand-sew operations, low value-added manufacturing, and labor-intensive manufacturing moved offshore. The exodus was painful for many parts of the United States, in particular the South which lost the majority of its apparel manufacturing industry just as the Northeast United States had when textile manufacturers moved their operations to Southern locations a century earlier. Today the abandoned textile mills in Georgia are reminiscent of the same scenes 150 years ago in the Northeast.
The United States is relatively good at making the high-value products the emerging world is shifting their buying toward as their incomes rise. The secular trend favors exports of things made in the United States. Other countries will try to emulate the United States, knock-off our products and technologies, but we have a considerable lead in expertise, infrastructure, and investment in making high value-added products. And it is not so easy to knock off very high value-add products. Gulfstream and Lear have international competitors in the corporate jet space but are extremely successful and recognized as high-end brands. Many U.S.-made highly engineered medical devices are in great demand around the world.
Services as Exports
High net worth people around the world with health issues come to name brand hospitals in the U.S. for treatment. The United States has also been a major exporter of education. A degree from a top U.S. university is held in high esteem internationally.
Health care, education, and the like are intangible exports. We have benefited dramatically from investing and innovating in these areas, and can continue to do so. There has been some hesitation to consider—and difficulty in measuring—such intangible services as exports, but their value to the U.S. economy is enormous. The out-of-country tuitions foreign students pay to U.S. universities and graduate schools make up a notable portion of our export economy and a substantial credit to the balance of trade, not to mention the universities’ cash flows. Tourism is also contributing an increasing share of the overall portion of the balance of trade provided by high value-added exported services. And the economic benefits are spread throughout the country—at least they were pre-COVID-19.
Exported services won’t turn around the trade deficit in the short term, but they will increasingly make their impact long term. COVID slowed that trend but did not make it any less important to pay attention to service exports. It’s easier to calculate the merchandise side of our exports, how U.S.-branded goods sell abroad. But it’s also easy to recognize the value of U.S. service exports. Just look around the world to count the number of highly placed public and private sector officials and office holders with U.S. degrees.
• More than 80 percent of the world’s population lives in what economists classify as emerging economies, a large and growing market.
• The incomes of people in emerging economies are increasing more rapidly than incomes of people in industrialized, or developed, nations.
• Emerging economies are catching up to leading industrial economies, to a large extent because they don’t have to invest in developing cutting edge technology, only in already proven technologies.
• With greater incomes, people in emerging economies buy not only more, but better goods and services, those with a higher value-add. It is first seen in improved diets, but spreads across the entire consumption bundle.
• The United States is relatively good at making the highvalue products the emerging world is shifting toward as their incomes rise.
• The United States leads the world in exports of health care and education.
• Exported services won’t turn around the trade deficit in the short term, but they will increasingly make an impact in the long term.
Equilibrium
Emerging economies are gaining in income and changing what they consume toward a bundle closer to what industrial economies consume. It spells an emerging and very large market for the goods and services the United States is already producing, and includes high value-added services such as education. This secular trend is not fast moving, but it can make a substantial contribution over time if the United States acts to take advantage of the evolving global economy.