What's Sabotaging Growth? The Stubborn Trade Gapby
True or false: A weaker dollar, increased American competitiveness, continued recovery in Europe, and sharply slower U.S. growth have narrowed the huge American trade deficit. If you said true, join the throng. Many analysts thought the trade gap would be shrinking by now. Instead, foreign trade remains a big drag on the economy, and any significant relief may not be on the way until 1996--or later.
In June, the trade deficit for goods and services increased to $11.3 billion, from $11 billion in May. For goods alone, the gap was a towering $16.4 billion, up from $16.1 billion. Even after adjusting for prices, the real deficit in goods continues to widen (chart).
The yawning trade gap's toll on the economy is sizable. Without a deterioration in the trade deficit during the first half of the year, real gross domestic product would have grown at an annual rate of 2.3% instead of 1.6%. The June deficit suggests that the drag on the second quarter's growth was even larger than the Commerce Dept. first estimated. GDP revisions are due on Aug. 30.
Exports are not the problem. The trouble is America's ever-growing appetite for imports. Goods exports have risen at an average 12.2% yearly pace for the past four quarters. The problem is that imports have been rising at a 13.4% clip for six quarters.
Stubbornly strong import growth means that, while many U.S. manufacturers will continue to reap benefits from their increased competitiveness in growing foreign markets, others will get slammed by increased competition from abroad. That means gains in industrial output in the second half will be smaller than might otherwise occur in an economy expected to grow at an annual rate of 2% to 21/2%.
THE IMPORT DELUGE has defied the restraints of a weak dollar and subpar growth. Why? Because no amount of productivity growth or dollar weakness can overcome the wage advantage of making sneakers in China or TVs in Korea, rather than in the U.S.
In June, imports of goods and services fell 0.6%, but that followed a 1.2% gain in May. In the second quarter, real imports grew at a 9.4% annual rate, little changed from their 10.1% pace in the first quarter and from 11.4% in the fourth. That's despite the sharply slower growth of total domestic demand--at an annual rate of 1% last quarter, down from 3.5% in the first quarter.
Foreign-made goods already capture a record 28.1% of nonoil goods purchases, up from 20.1% at the start of this expansion (chart). And it isn't just apparel and cars. Other imports, from semiconductors to railcars, are increasing as well.
Indeed, because of the strong yen and mark, the market share of imported cars in the U.S. has dropped considerably since the late 1980s. In July, foreign cars accounted for 20.2% of all cars sold, down from 30% in 1988. Add in light trucks and vans, which are mostly made stateside, and imports' share of motor-vehicle sales drops even more.
But other goods imports are soaring. So far this year, imports of nonauto consumer goods are up 13.9% from a year ago. Industrial supplies have jumped 19.8%. And capital goods have soared 21.6%.
In particular, the U.S. capital-spending boom has increased imports of advanced-technology products by 26.7% in the first half. Semiconductors are up 46.5%. U.S. exports of high-tech goods have increased by a much smaller 11.3%, causing a 36% decline in the trade surplus for advanced technology products.
Since the U.S. addiction to imports seems impervious to anything but a recession, it is unlikely that import growth will slow by much in the second half. That means exports will have to shoulder most of the weight of reducing the trade gap.
HAPPILY, THE EXPORT NEWS is encouraging. Export growth has held up surprisingly well. Although overseas shipments of goods and services fell 1.2% in June, they are up 10% from a year ago. And that solid growth comes despite the economic troubles of America's three biggest trading partners.
Japan and Canada are struggling to post any kind of growth. Mexico is reeling from its steep peso devaluation in December and subsequent austerity measures in March. After seasonal adjustment by BUSINESS WEEK, Mexico's real GDP plunged at a 25% annual rate from the first quarter to the second, following a 10% drop from the fourth quarter to the first. Mexico's
GDP statistics are released in an unadjusted form.
U.S. exports destined for south of the border plunged in the first half, including a 17.6% fall in the second quarter vs. a year ago. In fact, the U.S. is bearing nearly the entire burden of Mexico's efforts to turn last year's trade deficit into a surplus, even though Mexico still has big deficits with other countries.
Canada also has slowed its buying of U.S. goods. But second-quarter exports to Canada are still up a healthy 11.5% from a year ago. In Japan, trade reform and the strong yen have allowed some market inroads. Exports to Japan are up 23% over the year.
HOW WILL THE DOLLAR'S new strength affect trade? The greenback was rising even before the aggressive central-bank intervention. Indeed, the August action worked because it complemented market forces. As a result, the dollar was trading in mid-August at six-month highs of 1.467 marks and 97.6 yen (chart).
The dollar has been helped by expectations of lower interest rates abroad and the renewed net inflow of foreign capital into U.S. bond and equity markets. Those conditions should continue in coming months.
In fact, the Federal Reserve left short-term interest rates unchanged at its Aug. 22 meeting, holding the federal funds rate at 5.75% as expected. In Germany, meanwhile, a rate cut by the Bundesbank became a surer bet when the M3 money supply took an unexpected drop in July. The important inflation gauge fell 0.4% below its average of 1994's fourth quarter.
At the same time, Japan has liberalized its restrictions on international transactions, in the hopes of aiding its financial system and weakening the yen. Tokyo's moves should help to stimulate Japan's economy, adding more support to U.S. exports. Moreover, the yen's recent deterioration is already equivalent to an interest-rate cut of 1.5 to 2 percentage points by the Bank of Japan, says William Sterling, chief strategist for BEA Associates, a fund-management group.
As long as the dollar stays below 100 yen, it will have only muted effects on U.S.-Japan trade flows. Imports will become a bit more attractive, and exports will come under some price pressure.
The bigger problem is that the consequences of the rising dollar may reinforce the dangerous trend in U.S. trade. As long as imports continue to grow despite slower U.S. growth, the trade deficit will remain a millstone around the expansion's neck.