America's Trade Gap: The Good News In The Bad News

The massive layoffs and restructuring that have wrenched Corporate America in recent years were supposed to have big payoffs. High productivity. Greater competitiveness in overseas markets. An America better able to defend its home markets. That's why the government's latest trade report, released on Jan. 19, came as such a shock.

It showed that last year's merchandise trade deficit, based on results through the first 11 months, is likely to hit $170 billion. That would soundly top the previous record, in 1987, of $160 billion--a number that fueled protectionist sentiment and led to tough trade legislation. Now, as another massive wave of imports rolls into the U.S., the question is: Has anything really changed?

Yes. Today's trade deficit is far different--and far less disturbing--than the tab the U.S. ran up in 1987. For one thing, today's economy is much larger, so the deficit now accounts for just 2.5% of gross domestic product, vs. 3.5% seven years ago. Moreover, the rising deficit is due mainly to the success of the U.S. economy, which in 1994 grew almost twice as fast as the economies of its major trading partners. Faster growth translates directly into more imports, says William R. Cline, an economist at the Institute for International Economics, who estimates that each additional percentage point of economic growth raises the trade deficit by about $15 billion.

Just as important, the surge of foreign products is far more concentrated in wealth-producing capital goods than in the past. This isn't just about sneakers and VCRs: The U.S. is importing more computers, machine tools, steel, and the like --products that are more likely to yield productivity gains for the U.S. economy. In 1987, 21% of imports were capital goods. Now, they account for 28%. In the past year alone, imports of capital goods have increased some 21% (chart).

Indeed, import growth in recent years has been driven primarily by the U.S. investment boom. Purchases of foreign steel are up some 38% over the past year because domestic steelmakers haven't been able to meet demand from auto makers and other customers. "We're running as flat out as we can," says John R. Scheessele, president and CEO of WCI Steel Inc. In the machine-tool industry, too, rising demand has boosted imports, generally without hurting domestic manufacturers. In the first 10 months of 1994, machine-tool imports totaled $2.3 billion, up 30% from a year earlier--but domestic machine-tool orders are up about the same. "I don't hear anyone complaining about losing share to foreigners," says PaineWebber Inc. analyst Eli S. Lustgarten.

STRONG SUIT? Certainly, there are distressing sides to this record trade deficit--chiefly the flood of high-tech electronics from overseas. Over the past year, imports of semiconductors, computers, telecom equipment, and related gear rose by some 25%, or $13 billion, a startling increase in an area that was supposed to be one of America's strong suits. Moreover, there are virtually no U.S. manufacturers supplying some of the hottest accessories, such as optical-disk players in multimedia computers. In notebook computers, another fast-growing PC niche, as much as 40% of the materials cost for each computer resides in the screens--which are made almost entirely in Asia.

But this demand for foreign-made parts mainly reflects the explosion of computer and telecom equipment demand in the U.S.--which, again, should lead to higher economic growth. Consider personal-computer maker Dell Computer Corp. Some 65% to 70% of the parts going into its machines are produced outside the U.S., "and that proportion is increasing," says Stephen C. Martson, Dell's vice-president for worldwide procurement. "The labor cost for a lot of the things we buy isn't a lot, but it's significant enough that factories for our suppliers tend to be located in Asia."

Even these difficulties in the high-tech markets may not be so worrisome, because those big import numbers may be artificially skewed upward. Some U.S. semiconductor manufacturers ship boards and other products overseas for testing and assembly. When these products come back into the country again, they are counted as imports. True, such transactions inflate exports, too--but the effect on imports likely is greater.

Will the trade deficit begin shrinking any time soon? The growth gap between the U.S. and its trading partners should narrow in 1995, boosting U.S. exports and restraining imports. In addition, the weakening of the dollar over the past year against the yen and the mark will soon help, since exchange rates take about two years to affect trade. And some industries are adding capacity that should reduce import demand. North Star Steel Co. is spending $140 million on a new minimill in Kingman, Ariz., that will produce half a million tons a year. And Oregon Steel Mills Inc. is building a new mill in Portland and upgrading its rail mill in Colorado. Says Chairman and CEO Thomas B. Boklund: "We'll be able to give the imports a run for their money."

CAR CRAZY. On the downside, the U.S. is still running massive trade gaps with Japan and China that show no sign of disappearing. Imports of motor vehicles and parts surged some 15% over the past year, even though Japanese-transplant production in the U.S. rose to more than 2 million vehicles in '94.

And the U.S. will be hurt in '95 by the weakness of its two closest trading partners. Turmoil in Mexico will cut U.S. exports to Mexico by some $11 billion in 1995, estimates DRI/McGraw-Hill. And with Canadian currency weakened by some 20% against the U.S. dollar since 1992, "it will be difficult for the U.S. to compete with Canada," says Cline. Indeed, the trade deficit with Canada rose to $13 billion in the first 11 months of 1994, the third-largest deficit behind Japan and China. As a result, forecasters such as DRI/McGraw-Hill believe the trade deficit may actually grow in 1995.

But that in itself is not a bad sign for the economy. As the U.S. tries to remake itself for the Information Age, the old rule that developed countries should be capital exporters may no longer hold. Ultimately, the true test of a trade deficit is not how big it is but how wisely the U.S. uses what it buys.

Before it's here, it's on the Bloomberg Terminal.