U.S. trade outlook

The EXPORT NOW program of the Commerce Department will be a plus in the trade picture.

The U.S. trade balance should improve sharply in 1988. Based on current projections, the 1988 trade deficit could reasonably be as much as $20-30 billion smaller than in 1987. Positive developments in non-oil trade are expected to more than offset expected additional oil imports. In addition, the Department of Commerce has recently launched the EXPORT NOW program, an intensive export awareness campaign undertaken in cooperation with other government agencies and the private sector designed to capitalize on the enhanced economic climate for exporting.

The turnaround in the trade deficit in current dollars began at the end of 1987. For the first time in six years, the export growth rate kept up with the import pace, as both grew by 11 percent in 1987. In real (constant) dollars, however, the turnaround began about a year earlier. The trade deficit in real terms was largest in the third quarter of 1986, and declined in 1987. Real exports increased at about the same rate as current dollar exports in 1987, following declines the previous two years, while real imports expanded only 2 percent. The growth in real exports could expand in 1988 to a 20-25 percent rate, while import growth may slow even further.

The turnaround in the trade deficit reflected several factors, but was in large part due to the effects of the declining exchange rate value of the U.S. dollar. From its peak in February 1985, the value of the dollar, weighted by trade with 10 industrial countries, fell 36 percent by the end of 1987. U.S. export prices, which should become more competitive in world markets with a depreciating dollar, were little changed in 1987.

Current exporters are likely to find that additional product lines have become competitive in old and new foreign markets. Many companies that have not been exporting undoubtedly will now find exporting highly profitable. Moreover, global economic conditions support expectations that the dollar will remain at competitive levels for a long time. U.S. firms need to move promptly to exploit this new opportunity to realize their export sales and profit potential.

Import prices, on the other hand, are expected to increase when the dollar declines, making foreign goods less competitive in U.S. markets. In 1987, import prices increased 7 percent, following two years of sharp declines.

U.S. exports grew more rapidly in 1987 than in any year since 1980. Exports totaled $253 billion in 1987, 11 percent above previous-year levels. Forecasts of even greater export increases in 1988 are based on continued improvement in U.S. export price competitiveness, resulting from the lower-valued dollar, and some pickup in economic activity abroad.

The export expansion in 1987 was broadly based, with exports to all major world areas increasing. Exports to the industrial countries in 1988 should continue to expand. Industrial activity in most of these countries is expected to be as strong or stronger than in 1987, increasing demand for imports. The Japanese economy is forecast to pick up from the 1987 level, even as it relies more on domestic demand and less on the foreign sector for growth. European and Canadian economic growth may be about the same as in 1987.

Exports to the developing countries grew 16 percent in 1987, following sharp declines in most years since 1982. Shipments to the oil-exporting developing countries moved upward as oil prices firmed from their low point in 1986. Exports to Mexico were particularly strong, increasing by more than $2 billion in 1987. Shipments to other developing nations will expand further this year, reflecting improved economic conditions and external debt positions in many countries. Exports to the newly industrialized countries of Asia-Hong Kong, South Korea, Singapore, and Taiwan--grew by more than 30 percent, and these countries are expected to continue to provide expanding markets.

Exports to the Soviet Union and China grew sharply following declines in 1986, but shipments to Eastern Europe were lower. The outlook for exports to these countries in 1988 will depend largely on their buying plans for agricultural products.

The fall in the value of the dollar has resulted in a significant increase in the cost of imported goods. This will hold down a wide range of imports, particularly goods from Japan and Western Europe. Imports from the East Asian NICs, however, will be little affected because these countries' currencies have moved closely with the dollar's value. Although many foreign manufacturers have cut profit margins rather than pass through the full cost of the declining dollar, prices for many imported goods have risen sharply since the dollar was at its high. Prices of imported automobiles and parts, including those from Canada, have risen 35 percent from the beginning of 1985 to the end of 1987. Import prices of consumer nondurables rose 29 percent and capital goods 13 percent during the same period.

In contrast to the economic outlook abroad, the U.S. economy is projected to slow from the 2.9 percent increase in real GNP recorded in both 1986 and 1987, further lessening the demand for imported goods. The growth in imports from Japan decelerated to 3 percent 'in 1987, and imports from Western Europe slowed to 7 percent. These trends are expected to continue in 1988. Imports from Canada rose 4 percent, following a small decline in 1986. The largest import increases in 1987 came from the developing countries. Although continued increases are expected from the oil-producing countries, imports from the remaining LDCs may decelerate in 1988.

Growth in manufactures exports, which last year totaled $200 billion and accounted for almost 80 percent of total U.S. exports, will be paced by machinery exports. The price advantage stemming from the depreciation of the dollar should make this equipment especially attractive to foreign buyers. After sizable increases last year, further gains should be recorded in such key products as computers, electric and electronic equipment, internal combustion engines, and general industrial machinery.

Following a 12 percent increase in 1987, another gain, perhaps smaller, is projected for aircraft exports, based on advance orders. Exports of commercial transport aircraft and military aircraft expanded most in 1987, but the dollar decline is helping keep general aviation and helicopter export sales high.

Automotive exports to Canada, the primary market for U.S. cars, trucks, and auto parts, will probably grow at less than the 9 percent rate recorded in 1987, reflecting the continued falloff expected in U.S. and Canadian automotive sales.

Although finished manufactured goods comprise the bulk of U.S. nonagricultural exports, industrial materials and semi-finished goods are also an important component of export sales. Exports such as chemicals, lumber and paper products, and nonferrous metals, in particular, are expected to increase further in 1988 as demand abroad is stimulated by the continued growth in foreign industrial output.

Manufactured imports, on the other hand, are projected to slow from the 9 percent increase recorded last year. Imports of consumer goods, which expanded by over 11 percent in 1987, should show the largest decline in the rate of growth, reflecting the expectation of reduced growth in consumer spending as well as the already recorded price increases in some of these goods.

Automotive imports are expected to show less growth than in 1987 due to the effects of the dollar depreciation and stepped-up domestic assembly of former imports. Passenger car imports from Japan grew by less than I percent in value in 1987, and those from the European Community grew 18 percent, but the quantity of cars brought in actually declined. Further decreases are expected in 1988. Automotive imports from Canada, unchanged the previous three years, are expected to remain at about the same $25 billion-level in 1988. Imports of automotive products from other countries, such as Mexico, Brazil, and South Korea, which increased substantially in 1987, may continue to grow in 1988.

Besides manufactures trade, the other large component of the 1987 total merchandise trade deficit was mineral fuels, which will continue to be a significant factor this year. The 1987 deficit in mineral fuels was $39 billion, $7 billion greater than in 1986.

Imports of petroleum and products grew to $45 billion last year, up from $38 billion in 1986. As in 1987, the key developments in the petroleum import situation will be increases in both volume and price. The volume of petroleum imports increased to 6.8 million barrels per day in 1987, the highest "Import volume since 1980. Another half million-barrel-per-day increase is expected in 1988, reflecting some growth in U.S. petroleum consumption and a further decline in U.S. domestic production from last year's six-year low. The average price per barrel of imported petroleum rose to $18.12 in 1987 from $15.66 the previous year. Although some price rise is expected in 1988, the magnitude is uncertain. World oil prices will depend on the level of world production and, particularly, whether OPEC countries adhere to the output limits they have set.

Exports of mineral fuels, which consist largely of coal and refined petroleum products, are expected to be little changed from their level of $8 billion in 1987.

Agricultural exports posted their first increase in three years in 1987, increasing 10 percent to $29 billion, and are expected to expand further in 1988. Key factors in the turnaround in farm shipments include the depreciation of the dollar and the effects of the 1985 Food Security Act, which have made U.S. products more price-competitive in world markets and discouraged world overproduction. In addition, 1988 agricultural exports should be boosted by smaller global crop supplies, caused by adverse weather and reduced acreage, stronger demand, and higher prices.

The largest export increases are expected in wheat and corn. Sharply lower U.S. wheat loan rates under the 1985 Farm Act have led to adjustments in several exporting countries. Wheat harvests are down 5 percent in Canada and 20 percent in Australia, two principal U.S. competitor countries. World wheat production is below consumption for the first time in seven years. U.S. wheat production is little changed from last year, but exports are expected to increase sharply. Following a 22 percent jump in 1987, corn exports could grow another 10-15 percent in the new crop year due to expanding world demand-especially in Southeast Asia--lower U.S. prices, and reduced supplies in several key exporting countries.

Agricultural imports, on the other hand, are expected to remain at about the same $23 billion-level as in 1987, barring any unexpected shortages abroad. Coffee import prices have fallen sharply now that world production has returned to normal following the weather-related Brazilian shortages in 1985-86. Meat imports rose sharply in 1987, and are expected to increase somewhat further in 1988, but should not reach the level which would trigger import restrictions. Some agricultural imports may fall because of rising prices related to the dollar decline, Wine imports, for example, are expected to drop, although it appears that many foreign producers have cut profits sharply rather than pass through the full effects of the dollar depreciation.

The trade surplus in agricultural products, which has been declining in recent years, is forecast to increase from $6 billion in 1987 to about $9 billion due to rising exports.

COPYRIGHT 1988 U.S. Government Printing Office
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