America’s economy is so strong, it can afford its splendid isolationism

Das Capital

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The US is less reliant on the world than the world is on the US.

America’s economy is focused on its substantial domestic market. It is less exposed to trade (around 15 per cent of GDP) than other large economies.

Reliance on trade is lower if trading with Canada and Mexico under the North American Free Trade Agreement (Nafta) is excluded.

The US remains a major food producer with agriculture being an important industry. The country is a net exporter of food, controlling almost half of world grain exports.

It is also rich in mineral resources. Historically it was dependent on oil imports which constitute a substantial part of its $600bn (£373bn) trade deficit, but the US is now seeking to cut imports and increase its energy independence through increased production of shale gas and oil.

In its 2012 World Energy Outlook report, the International Energy Agency predicted the US could become self-sufficient in energy by 2035.

It also said that the US would overtake Saudi Arabia and Russia to become the world’s largest global oil producer by the end of the current decade and supplant Russia as the world’s largest gas producer by 2015.

This dramatic reversal is based on new technology, which has enabled America to access oil and natural gas, especially shale gas, from geological formations that were previously inaccessible.

US oil output has risen 25 per cent and is forecast to increase by an additional 30 per cent, to 11.1 million barrels per day by 2020. In combination with energy conservation measures, increased production has reduced US petroleum imports to around 40 per cent of total consumption from 60 per cent in 2005. American shale gas production has increased to over 35 per cent of total natural gas production from 2 per cent in 2012.

The forecasts are probably overly optimistic. Current high levels of US oil and natural gas production rely on high oil prices to make high-cost domestic sources competitive. Rapid growth of shale gas extraction is a function of massive speculative financial investment in the sector, which is unsustainable at lower gas prices resulting from the current oversupply.

There remains considerable uncertainty about depletion rates of shale gas reservoirs, environmental consequences and the true level of reserves.

While US energy independence is not likely in the near term, increase in domestic energy production and reduction in imports provides America with a significant competitive advantage and reduces its reliance on foreign suppliers.

The increase in domestic gas production has also reduced prices significantly. US gas prices are 50 per cent to 70 per cent below prices in other countries. They were around $4 to $5 per million BTUs (British Thermal Units), compared to around $9 in Europe and $17 in Japan. If this were to continue, it would provide America with lower cost electricity and fuel for industry as well as low cost feedstock for many industrial processes.

American dominance of key industries makes it an indispensable monopolist, ensuring demand for many of its products. In technology and software, pharmaceuticals, complex manufactured products (aerospace, defence hardware, heavy machinery), entertainment and services, the difficulty in finding substitute suppliers or high switching costs limits potential loss of markets for American products.

A weaker dollar also reduces the cost base of domestic production, encouraging a shift of production, manufacturing and assembly work back into the US. Based on changes in the value of the currency adjusted for wage rises and inflation, the dollar has devalued by 35 per cent over the past decade. Combined with lower energy costs, if sustained, this may encourage the nascent trend of re-shoring – relocating offshore production back to America.

This should assist in creating the jobs needed to reduce unemployment. Stronger growth and lower unemployment will assist in reducing the large US budget deficit and addressing its public finances.

A shift to a more closed economy fits America’s natural isolationism, focused on aggressively protecting the nation’s economic self-interest while expanding US power and influence.

In an advertisement for Chrysler cars shown during the US Super Bowl in 2011 to the largest television audience in US history, an ageing Clint Eastwood gruffly states: “It’s half time, America. And our second half is about to begin.” It was an interesting riposte to the advocates of an Asian or Chinese century. The game certainly isn’t over.

Satyajit Das is a former banker and author of ‘Extreme Money’ and ‘Traders, Guns & Money’