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Looming Trade Deficit May Cloud Kentucky's Sunny Economy

This week Kentucky boasted a handful of economic achievements.

Kentucky’s manufacturing sector added 1,100 jobs in April (4,700 since last year), GM announced a $439 million expansion of its Corvette factory in Bowling Green, and Kentucky’s exports were reported to be up 11 percent in 2015.

Plus, the unemployment rate fell to 5 percent—the lowest it’s been in 15 years.

But State Office of Employment and Training Economist Manoj Shanker warns that a continued strong dollar could squelch demand for Kentucky goods.

“So what’s helped us really, the reason we’re doing all these exports is because energy costs are low, which means the cost of making goods is lower in Kentucky and in the U.S--but what hurts us is that the dollar is strong, so it’s more difficult to export,” Shanker said.

While Kentucky and the U.S.’ economy have rallied admirably since the Great Recession, much of the rest of the world is still struggling to catch up.

Countries that haven’t made strong recoveries can’t afford to buy as many of our goods. Because their currencies aren’t as strong as the dollar, they’re able to export their goods at a much lower price than U.S. manufacturers can.

This phenomenon has led to a trade deficit in the United States—we import more than we export—which has grown to $51.4 billion according to the U.S. Commerce Department.

The trade deficit isn’t simply caused by other countries not being able to afford U.S. goods, said Jason Bailey, the executive director of the Kentucky Center for Economy Policy.

He said countries such as China and Japan artificially weaken their currencies by buying up dollar-dominated financial assets.

“Because it changes currency values it makes the dollar more expensive that makes any good that is produced by a Kentucky manufacturer more expensive in the whether they’re selling in Europe, Asia or wherever,” Bailey said.

Bailey said Kentucky is especially vulnerable to the trade deficit because the state has the eighth-largest share of factory jobs compared to total employment. Expensive workers, materials and facilities could lead manufacturers to outsource.

“It makes it cheaper for employers to just move off shore,” Bailey said. “And that’s the big thing we’ve seen happen over the last 15 years is that we’ve seen these manufacturers relocate to China, which is one of these countries that engages in currency manipulation, because then the cost of production in China becomes that much cheaper than it is in the U.S.”

The U.S. Senate is currently considering legislation that would create an international system to crack down on countries that manipulate their currencies.

Ryland Barton is the Managing Editor for Collaboratives. Email Ryland at rbarton@lpm.org.

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