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When U.S. interest rates are in a rising environment, it means that U.S. debt will become more attractive to foreign investors and subsequently push up the value of the U.S. dollar. Supporting this conclusion, we have already seen a drastic appreciation of the U.S. dollar against almost all global currencies over the past 12 months.
For the U.S., a stronger dollar means more global purchasing power which means more goods can be bought per dollar spent. The increased purchasing power theoretically means that the U.S. will increase their imports which will benefit the largest U.S. importers.
For exporting economies, rising U.S. interest rates and a stronger U.S. dollar are generally viewed as bullish. These economies will be able to grow their export-based businesses which will increase the efficiencies that come with large-scale production, hopefully driving sustainable lower-cost production in the future.
Many commodities are priced in USD and this creates interesting situations in the commodities space. A prime example is the market for sugar in which Brazil is the largest exporter. Brazilian sugar producers are willing to produce at levels below marginal costs due to the exchange rate benefits from receiving USD for their goods.
|Rank||Country||Exports||Imports||Total Trade||% of Total Trade|
Canada’s major import from the U.S. is vehicles. Vehicles are complex finished goods that have many inputs from around the world that are used in production. It is difficult to estimate whether rising interest rates in the U.S. will negatively impact the production levels for these goods, due to the close proximity of Canada and the U.S. (which keeps transportation costs low), and the falling costs of global inputs for vehicles.
China’s major import from the U.S. is electronic equipment. These goods are usually old electronics that are sent to China for repair or repurposed into more valuable goods. The cost of purchasing electronics from the U.S. should increase for China, thus increasing the price of finished goods bought by the U.S. In a rising interest rate environment these two effects could cancel each other out.
Machines, Engines, Pumps
Mexico, Japan, Germany, South Korea, and the United Kingdom all import machines, engines, and pumps from the U.S. The cost of importing these goods will increase in a rising interest rate environment. The price increase will increase the likelihood of these countries looking for other producers of machines, engines, and pumps. This category will be hard hit by rising interest rates and large transportation costs.
Oil, a necessary input for almost all business processes, is the major import for Brazil from the U.S. Higher oil prices for Brazil suggest that their economy will have to devote more resources to buying oil and less towards growth initiatives. Rising interest rates will be a heavy negative on Brazil and other economies that import oil from the U.S.
All other things equal, countries that export oil to the U.S will see an increase in the demand for oil as interest rates rise. A rising interest rate environment is positive for trade partners who export oil to the U.S.
A rising interest rate is bad for U.S. producers of electronic equipment but good for international exporters of electronic equipment. However, this relationship may not be so straightforward since finished electronic equipment are complex goods, and factories that have the ability to produce such goods may take many years to build.
Rising interest rates are a strong positive for international producers of vehicles since these producers will gain a price advantage on finished vehicles. Where the relationship becomes complicated and unclear is in the input pieces for the vehicles from other nations. The producers of finished vehicles purchase many of their car parts from other nations which means that the gains in exports to the U.S. in a rising interest rate environment could be negated or increased by the changes in input costs.
Iron and Steel
Producers of iron and steel, both major exports from Brazil to the U.S., will directly benefit from an increase in interest rates in the U.S. However, it is worth noting that iron and steel are inputs mainly used in manufacturing and construction which is subject to general GDP growth constraints. If the U.S.’s manufacturing growth or construction sectors slow down, then iron and steel exporters will suffer.
Machines, Engines, Pumps
Exporters of machines, engines, and pumps will benefit from an increasing interest rate environment in the U.S. Producers of these goods will gain an increasing competitive advantage over U.S. producers of machines, engines, and pumps as the USD appreciates which will help international producers overcome the locational costs of shipping their products.
|Country||Major Import||Major Export|
|China||Electronic Equipment||Electronic Equipment|
|Mexico||Machines, Engines, Pumps||Vehicles|
|Japan||Machines, Engines, Pumps||Vehicles|
|Germany||Machines, Engines, Pumps||Vehicles|
|South Korea||Machines, Engines, Pumps||Vehicles|
|United Kingdom||Machines, Engines, Pumps||Machines, Engines, Pumps|
|France||Machines, Engines, Pumps||Machines, Engines, Pumps|
|Brazil||Oil||Iron and Steel|
One thing is certain, U.S. interest rates will rise in the future, and as a global investor you need to know how your portfolio will be impacted. In general, exporting economies of raw or input goods will profit the most from these rate rises, while more complex goods in developed economies will be more likely to rotate into close substitutes for a small price advantage. The global economy is a complex ever-changing machine, and global investors must constantly be monitoring, and adjusting in order to continue making outsized gains.
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