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Weekly UpdatesEXECUTIVE SUMMARY
This study examines the conclusions regarding the state of international competitiveness for the United States based on Its trade performance internationally. We examine the relationship between trade performance and international competitiveness, and the inadequacies of using trade performance measurements criteria alone. We offer a definition and formula for determining a country's trade performance index. We then test the model empirically using historical time series trade data for the United States. Our findings indicate that trade performance alone may not be an adequate indicator of the state of US. international competitiveness. Its impact on competitiveness may be largely influenced by factors beyond competing firms' ability to control
Keywords: international trade, competitiveness
JEL Index: F14
INTRODUCTION
In an integrated world economy, the achievement and maintenance of a competitive position is vital for the growth and sustainability of the U.S. economy. In fact, the ability of any country to be internationally competitive is now considered an important indicator of its economic health. The concept of competitiveness has gained importance in recent decades from perspectives of growth and development, and has become one of the central preoccupations of government and industry in every nation (Porter, 1990). It is a particularly fundamental subject for the United States considering the role it plays on the world economy. A combination of several factors makes the U.S. an attractive marketplace for the rest of the world. As a result, U.S. businesses are under immense pressure to outperform rival lower cost firms both at home and abroad.
Attention to international competitiveness would tend to follow from the huge trade deficits realized by the U.S. economy in recent decades. Over the last two decades, the U.S. has rapidly changed from the world's largest creditor to the world's largest debtor nation. As a result, much public attention has been generated concerning the U.S. relative performance on the global economy. Many programs and much rhetoric have accompanied the concerns about U.S. global competitiveness; yet it is seldom clearly defined, and has not been addressed by policy makers in a meaningful way (Lenz, 1991).
This study defines the meaning of international competitiveness, and seeks to determine, among other things, the impact of U.S. trade performance on its ability to compete internationally. A connection is often made between competitiveness and trade performance. As a result, significant trade deficits such as those experienced by the United States over the last two decades have been regarded by some as a symptom of a loss of competitiveness in the global market, thereby urging for a more protectionist stance by the government (Parry, 1993). A framework of measurement that offers a more solid understanding of the concept of competitiveness is formulated to help in measuring and determining the impact of trade performance on competitiveness. The inadequacies of using trade performance measurements criteria are examined. It is envisaged that the findings will provide a more accurate understanding of the state of U.S. international competitiveness, and also open up inquiry into a more adequate measurement of competitiveness that overcomes the inadequacies of trade performance criteria alone. The adoption of effective policy measures aimed towards gaining and sustaining competitiveness is dependent on an adequate assessment of the state of competitiveness.
UNDERSTANDING INTERNATIONAL TRADE AND INTERNATIONAL COMPETITIVENESS
International competitiveness is the relative ability of a country's firms to produce and market products of standard or superior quality at lower prices relative to rivals in the international market (Ezeala-Harrison, 1998). This ability determines the country's relative performance in international trade. That is, where international trade may be an "engine" that drives economic growth of nations, international competitiveness represents the "fuel" that empowers that engine (Ezeala- Harrison, 1999).
Factors that determine competitiveness can be categorized as macro-level and micro level parameters. At the macro level, competitiveness is determined by short-run factors, which typically are those that characterize the environment in which firms operate. Generally, these constitute institutional and infrastructural factors such as the financial sector viability, the size of government deficit, the level of protectionist trade barriers, the degree of diversification of export products and markets, the size of a country's public indebtedness, and the quality of infrastructure and utilities. On the other hand, micro-level parameters operate at the firm or industry level, and constitute factors such as technological progress, factor productivity, and quality of the workforce. Generally, firms have the ability to influence the micro-level parameters, unlike the macro-level parameters, which are determined exogenously, and are subject to change in the short-run. Thus, the notion of a competitive nation is not as clear as that of a competitive firm. Ultimately, competitiveness is determined at the industry or farm level. (1)
The use of trade performance indicators, which refer to a country's total exports versus total imports of goods and services, and the relative changes in imports and exports over time, ascribes competitiveness to a favorable relative position in a country's trade transactions with other countries. In a macro sense, trade performance is a measurement of the national current account balance. In a micro sense it is used as a measurement of the import/export share(s) of individual goods and services. Unlike the case with productivity measurement, with trade performance indicators, there is a reasonable basis for confidence as to what is being measured (Markusen, 1992).
However, in spite of its clarity, trade performance, when used as an indicator of competitiveness raises other concerns that render it as a misconception (Markusen, 1987). The productivity of a country may be relatively stable over a given period, but prices of goods being traded globally do in fact change, depending on several conditions: an increase in the number of countries producing a given product will likely lower global prices because of increased supply. Resulting lower revenues from a country's trade may not necessarily be interpreted as decreased competitiveness relative to other countries. Also, government protectionist policies may result in an improvement of trade balance in a given industry against its competitors abroad without improvement in industry productivity. Thus, an industry can have a favorable trade performance and yet not be competitive. In another scenario, factors of production may be shifted from an industry that generates large revenues from cross border transactions to another industry that is less expert-import oriented, perhaps due to a change in (economic) policy. These factors may remain productive elsewhere, even though trade performance may deteriorate. Therefore, trade performance and competitiveness should not be taken to mean the same thing.
Given the definition of international competitiveness offered by Ezeala-Harrison (1998), a country's state of competitiveness is shown to be a dynamic phenomenon due to changes in either or both micro and macro level packages of parameters. Sustainability of competitiveness will endure if the sources of a firm's cost advantage are difficult for competitors to replicate or imitate. While a country's competitiveness and living standards improve primarily through (factor) productivity growth, foreign trade also plays an important role. Porter (1985) argues that cost advantage leads to superior performance if the firm provides an acceptable level of value to the buyer so that its cost advantage is not nullified by the need to charge a lower price than competitors. It is then easy to see how a cost advantage in production can support a strung export performance, or import-competing performance in domestic markets. Also, foreign trade will allow a firm to employ more efficient foreign technologies in the production process, and to use cost efficient raw materials and finished goods that are obtained at a lower cost abroad. As a result, production is made efficient, consumption is enhanced both locally and abroad due to lower costs of production, and ultimately living standards are improved.
TRADE PERFORMANCE INDEX: THE BASIC MODEL
There are several measures used to analyze a country's performance in international trade. For example, a country's terms of trade (TOT) shows a country's export prices relative to its import prices. It is expressed as an index, which is calculated by dividing an index of prices received for exports by an index for prices paid for imports:
TOT = [P.sub.X] / [P.sub.M], (1)
where [P.sub.X] = price of exports, and [P.sub.M] = price of imports
A rise in the index implies an improvement in a country's terms of trade. This makes it possible for a country to purchase more imports with the same amount of exports. An improvement in a country's terms of trade may occur when export prices rise, when import prices fall, when export prices rise at a faster rate than import prices, or when export prices fall at a slower rate than import prices. Deterioration in TOT occurs when import prices rise, when export prices fall, or when import prices rise at a faster rate than export prices, or when import prices fall at a slower rate than export prices. Ezeala-Harrison (1999) explains the role of TOT in international competitiveness by stating that through the achievement and maintenance of international competitiveness, a country could influence its TOT level, and therefore be capable of influencing the level of revenue realized from its exports and the expenditures incurred on its imports. He argues that the ability m influence world market commodity prices of a country's products (the key determinant of the TOT level) depends on how internationally competitive the products of that country are in the international market place. Thus, a country that has achieved relative competitiveness for its products (micro-level competitiveness) by, for instance, producing at minimum cost per unit, enables its exporting firms to market products efficiently through maintenance of stable foreign exchange rate of its currency (macro-level competitiveness). This is expected to ensure a desired level of prices for its exports, and therefore a favorable TOT.
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