Markets Live: Soft start to profits season – Sydney Morning Herald

2:07pm: The decade that preceded the 2008 financial crisis was marked by massive global trade imbalances, as the United States ran large bilateral deficits, especially with China. Since the crisis reached its nadir, these imbalances have been partly reversed, with America’s trade deficit, as a share of GDP, declining from its 2006 peak of 5.5 per cent to 3.4 per cent in 2012, and China’s surplus shrinking from 7.7 per cent to 2.8 per cent over the same period.

But is this a temporary adjustment, or is long-term rebalancing at hand?

Many have cited as evidence of more durable rebalancing the “onshoring” of US manufacturing that had previously relocated to emerging markets.

Apple, for example, has established new plants in Texas and Arizona, and General Electric plans to move production of its washing machines and refrigerators to Kentucky.

Several indicators suggest that, after decades of secular decline, America’s manufacturing competitiveness is indeed on the rise. While labour costs have increased in developing countries, they have remained relatively stable in the US.

In fact, the real effective exchange rate, adjusted by US manufacturing unit labour costs, has depreciated by 30 per cent since 2001, and by 17 per cent since 2005, suggesting a rapid erosion of emerging markets’ low-cost advantage – and giving America’s competitiveness a substantial boost.

Moreover, the shale-gas revolution in the US that took off in 2007-2008 promises to reduce energy costs considerably. And America’s share of world manufacturing exports, which declined by 4.5 percentage points from 2000 to 2008, has stabilised – and even increased by 0.35 percentage points in 2012.

Upon closer inspection, however, the data for 1999-2012 present little evidence of significant onshoring of US manufacturing. For starters, the share of US domestic demand for manufactures that is met by imports has shown no sign of reversal. In fact, the offshoring of manufacturing increased by 9 per cent (see chart).

Read more at Project Syndicate.