A Ball And Chain Spelled T R A D Eby
Quick. What's the biggest drag on the U.S. economy? No, it's not defense, real estate, or any other domestic sector. It's foreign trade--by a wide margin. In the past year and a half, the economy has grown at an annual rate of 2.9%. Excluding the widening in the trade gap, growth would have been 3.8%. The problem for the outlook: That drag is going to continue for a long time.
The deterioration in the merchandise trade deficit continued in September. Exports fell short of imports by $10.9 billion. The August gap was $10 billion, a bit larger than the government had first reported. Exports did manage a 2.1% rise in September, to $38.9 billion, but imports jumped 3.4%, to a record $49.8 billion.
The September trade deficit was a bit worse than the Commerce Dept. had estimated when it figured third-quarter gross domestic product. Trade is likely to weigh against the revised GDP data, due on Dec. 1, but other sectors will probably show up stronger than first estimated, resulting in a slight upward revision to the 2.8% pace of real GDP originally reported.
Through September, the trade deficit in goods is 44% larger than in the same period last year. It's on track to hit $120 billion in 1993, the largest since 1987 (chart). Because the U.S. runs a trade surplus in services, such as travel and tourism, the overall gap will be less. But while the service surplus has been little changed since early 1992, the goods deficit has ballooned.
The main problem is the difference in growth rates between the U.S. and the rest of the world. Although U.S. growth is far from robust, most of Europe and Japan are mired in recession. As a result, exports of goods last quarter were no higher than they were at the end of 1992, while imports have surged.
So far this year, the U.S. trade balance has worsened with nearly all major regions. In September, the balance with Mexico even slipped into deficit. However, for the year, the U.S. still has a surplus with Mexico, and a 1994 surplus is assured now that the North American Free Trade Agreement has passed Congress. NAFTA will boost Mexican growth, lifting demand for U.S. exports.
On the U.S. side of the border, the near-term NAFTA impact will be small. Mexico buys 9% of U.S. goods exports, but that's only 0.5% of U.S. GDP. A pickup in the pace of U.S. exports to Mexico from no growth this year to 10% in 1994 would be a flyspeck on GDP growth.
To be sure, the new twist in the 1990s is the emergence of trade with the developing nations--a trend that started even before the recessions in Europe and Japan cut into their purchases of U.S. goods. Although the U.S. still sells and buys more merchandise from the industrialized nations--56% of all exports and imports--trade with developing countries is growing much faster (chart).
Imports from developing countries are rising almost three times as fast as goods coming from the developed nations, especially Japan, Canada, Europe, and Australia. The gains have been big in labor-intensive goods, such as toys, footwear, and clothing, and in commodities, including oil, chemicals, and metals.
However, because these nations are growing so rapidly, their purchases of U.S. goods are also speeding up. The fevered pitch of export demand in some of these regions is in sharp contrast with the moribund economic states of Japan and most of Europe. For example, exports to the newly industrialized Asian nations were up 14.5% in the year ended in the third quarter, but exports to Japan had dropped 1.3%.
While demand from Latin America and East Asia remains a big plus for U.S. exports, growth there has just offset weaker demand from the industrialized countries. At the same time, recession-wracked foreign producers are targeting U.S. markets in an attempt to compensate for weakness at home. This trade mix is likely to persist for several more quarters.
The different speeds of economies worldwide, though, is only one reason why the U.S. is having such a hard time correcting its trade imbalance. Increasingly, the trouble with trade is the trouble with imports.
The U.S. expansion has fanned widespread demand for foreign goods. But it's not just VCRs and other consumer items. The boom in capital spending, especially for computers and other high-tech office equipment, has generated its share of imports as well. All told, nearly 24% of all nonoil goods purchased in the U.S. in the third quarter were produced overseas (chart). This loss of market share is one factor weighing down the U.S. manufacturing sector.
Of course, the flow of imports would not be such a big problem if U.S. exports were rising as well. Unfortunately, that isn't the case. Because of the economic slumps hurting some major trading partners, U.S. exports in September were up only 3.2% from a year ago, while imports had increased by 8.2%.
The divergence between exports and imports is short-circuiting the progress made in some trade sectors. One example is capital goods. Weak business investment in Europe and Japan has hurt foreign sales of U.S. heavy machinery and computer equipment. After soaring from 1990 to early 1992, U.S. exports of capital goods have risen 3.1% over the past year.
The spending boom on business equipment at home, though, has caused imports of capital goods to jump by 11.6% from a year ago. As a result, the U.S. trade surplus, which hit a high of $18.1 billion at the end of 1991, narrowed to just $8.5 billion in the third quarter (chart). Because equipment investment in the U.S. is unlikely to let up any time soon, our trade surplus in capital goods will continue to shrink.
Foreign companies have drummed up business in the U.S. by holding the line on prices. U.S. producer prices for capital equipment have risen 1.7% during the past year. That may not seem like much, but the makers of imported capital goods have actually cut prices by 0.6%.
So, will exports ever climb back to their double-digit growth pace of the late 1980s? The competitiveness of U.S. manufacturers suggests it's possible--but only if growth quickens among industrialized nations. Canada, Britain, and Australia are already in recovery, and turnarounds in Italy and France may not be far off. Japan and Germany, though, are still struggling in recession.
The collapse of the Japanese and German labor markets has been especially hard on U.S. exporters of consumer goods. In October, the German unemployment rate hit 8.8%, while 2.6% of Japanese workers were jobless in September. Both rates are at five-year highs.
In addition, expectations of recovery in Japan and Germany continue to be pushed further into the future. Many private economists are lowering their growth forecasts for Japan for both 1993 and 1994. And Germany's "five wise men," an independent council of economic advisers, recently projected stagnation in 1994, with a significant chance of a double-dip recession. For the U.S., that means exports to these countries may not pick up again until 1995.
Consequently, gains in exports next year are likely to come mostly from industrializing countries, whether they are on the Pacific Rim or in South America. To be sure, it will take many years before their purchases of U.S. goods equal the mammoth markets of Europe, Canada, and Japan. But in the near future, growing demand from Chile to China may be the most lucrative game in the trade sector.
However, when the industrialized economies finally do kick in, the enhancements that U.S. manufacturers have made to productivity, cost reduction, and product quality are set to give U.S. factories an edge in the global marketplace. That, plus freer flow of goods and services, could give the economy a considerable lift.