After shrinking by nearly 60% from 1987 to 1991, America's merchandise trade deficit widened last year and is clearly headed higher in 1993. Economist Joseph Carson of Dean Witter Reynolds Inc. is convinced, however, that the trade setback is a temporary phenomenon, resulting from the U.S. economy currently being out of sync with its recession-plagued major trading partners.
Once the other big industrial economies turn upward, Carson predicts, the trade deficit will shrink sharply. "America's basic competitive position," he says, "is extremely strong."
As proof, Carson points to a little-noticed yet startling development: a dramatic improvement in the trade performance of domestically owned U.S. companies vis- -vis U.S. affiliates of foreign companies. Although the Commerce Dept. doesn't highlight this comparison, Carson derives the data by simply subtracting government data on the exports and imports of foreign affiliates from the overall U.S. trade statistics. The results are revealing.
As the chart shows, the trade deficits posted by U.S. operations of foreign companies have hardly reacted to the dollar's sharp decline since 1985--remaining in a narrow range of $80 billion to $90 billion. By contrast, the trade deficits of U.S. businesses plunged 74% from 1986 to 1990 and disappeared entirely in 1991. In that year, according to recently released data, U.S. companies posted a $14.6 billion trade surplus--their first in more than a decade.
Why the different responses to the dollar's fall? Since much of the trade flows of U.S. operations of foreign companies consists of intracompany shipments from overseas, notes Carson, the parent companies at first try to absorb the negative effects of currency shifts on their profits. Also, the falling dollar lowered the price tag of U.S. assets. This encouraged many foreign companies to make added investments in U.S. production and distribution operations that initially depend heavily on foreign products, parts, and materials.
Carson argues, however, that such dependence will inevitably decline in response to exchange-rate shifts and other developments, such as wage restraint and productivity gains, that have vastly boosted U.S. competitiveness. The trade surplus posted in 1991 by U.S. companies underscores the fact that the U.S. is now the low-cost producer among major industrial nations.
"GM's decision to move some auto production back to the U.S. from Mexico, and plans by BMW and Mercedes-Benz to set up plants in the U.S. are straws in the wind," says Carson. As America's productive capacity grows in the years ahead, he predicts, its trade performance will grow ever stronger.