Favorable trends in U.S. trade expected to continue in 1990

Favorable Trends in U.S. Trade Expected to Continue in 1990

The improvement in the U.S. trade balance which occurred last year is expected to continue in the months ahead. The trade deficit decreased by nearly $10 billion in 1989 to $109 billion. However, greater uncertainties this year than usual regarding U.S. and foreign economic growth and exchange rates make precise estimates difficult. Improvement in the trade balance in 1990 could be slowed by the effect on U.S. trade of the net appreciation of the dollar over the last two years against most major currencies. Of particular concern is the greater than 25 percent rise of the dollar against the Japanese yen in the last 15 months. These exchange rate changes may affect U.S. trade in late 1990.

As of April 1990, U.S. exports are projected to rise more rapidly during the year than imports, mainly because foreign economies are now expected to grow faster than the U.S. economy, albeit at a slower rate than in 1989. Thus, demand abroad for U.S. goods should expand more rapidly than our domestic demand rises for foreign goods. Further, the net effect of relative price behavior on our trade balance is also expected to be positive. The dollar strengthened 3 percent in 1989 on a trade-weighted basis against the currencies of 10 industrial countries, tending to make nonpetroleum imports slightly cheaper and thus lowering the value of imports. Possibly beginning late in the year, the dollar's rise would be expected to adversely affect export volume by making exports more expensive in foreign markets, and result in some increase in import volume because imported goods would be cheaper.

U.S. Exports To Grow

The continued expansion in U.S. exports, particularly manufactured and other non-agricultural goods, forecast for 1990 is based on prospects for some acceleration of economic growth in our major trading partners abroad, particularly in the latter half of the year, following the slowdown in the middle of 1989. Growth is expected to be especially strong in the newly industrialized countries of Asia (NICs), particularly South Korea.

Many U.S. companies are working to take advantage of new export opportunities which will be available when the European Community members participate in the EC92 internal market unification program. In addition, export markets are opening up in countries of Eastern Europe which were formerly closed to many Western goods. The outlook for U.S. exports to Japan is more uncertain now, since the extent to which the huge drop in the Japanese stock market and the recent depreciation of the yen will affect Japan's economic growth, and ability to import is not known. Exports to Canada, our largest export market, grew 10 percent last year and will probably grow even faster in 1990 as a result of the U.S.-Canada Free Trade Agreement, which is gradually making trade between the two countries less restrictive.

Imports Continue at Same Pace

U.S. import growth in 1990 is projected to remain moderate if, as expected, U.S. economic activity grows at the modest rate indicated by most forecasts. A comparatively moderate expansion in imports of manufactured goods and other industrial products is currently foreseen. The outlook for oil imports indicates a further rise in value this year due to greater import volume, while prices apparently are stabilizing.

A major sector influencing the overall U.S. trade position in 1990 will be trade in manufactured goods. Last year, exports of manufactured goods increased 13 percent, more than twice the rate of growth of manufactures imports, resulting in a $16 billion reduction in the manufactures trade deficit from $106 billion in 1988 to $90 billion in 1989. If current expectations materialize, this deficit will shrink further in 1990, although the improvement will not be as large as that recorded last year.

On the export side, demand for U.S. manufactured products could be somewhat dampened by slower growth abroad early in 1990. Taken as a group, the economies of Canada, the major European OECD countries, and Japan are expected to grow at less than the rate of last year. These seven countries absorb nearly three-fifths of U.S. manufactures exports. Nevertheless, manufactured exports will expand in value and export prospects will improve if, as expected, business activity in many of our major markets accelerates later in the year. In addition, lower U.S. export price levels produced by past dollar depreciations are expected to continue to boost U.S. exports and to out-weigh the tendency for the 1989 dollar appreciation to reduce export potential during most of 1990.

U.S. demand for manufactures imports, on the other hand, is expected to remain comparatively restrained as the U.S. economy continues its moderate expansion. Movement of these imports will be largely governed by changes in the rate of U.S. economic growth during the year. With GNP expected to gain momentum later in the year, imports may respond by accelerating toward year-end.

The large positive shift in the manufactures trade deficit last year reflected, to a great extent, the rapid growth of capital goods exports. This category comprises about half of the manufactures export total and has historically been the mainstay of the growth in manufactures exports. Last year, capital goods exports expanded by $15 billion, reflecting strong sales abroad of many types of machinery and rapid growth in aircraft exports, despite an end-of-year strike at one of the major aircraft exporting companies. In the year ahead, continued gains can be expected in machinery exports, particularly in such products as construction machinery and special industrial machinery, for which U.S. manufacturers are well established in foreign markets. Aircraft exports are also projected to increase strongly, reflecting large foreign orders for commercial transports to replace older and less fuel efficient planes. Exports of computers and related equipment, however, are expected to be below last year's level because of intensifying competition from more foreign producers and the fact that many foreign markets are now being served by U.S. subsidiaries located overseas.

As with exports, imports of capital goods were also strong in 1989, particularly general industrial machinery, power generating machinery, and computer equipment. These arrivals should continue to grow, but at a somewhat slower rate than last year.

Exports of Consumer Goods Pick Up

Exports of consumer goods quickened their pace in 1989, particularly clothing, footwear, furniture, and other consumer durables. Exports of consumer products may continue rapid growth in 1990, due to easier trading arrangements between the United States and our two largest markets - Canada and Mexico. Imports of consumer items continued to slow from high growth rates in mid-decade, growing only 7 percent in 1989. Arrivals of clothing and consumer goods contributed a large share of the increase. Imports of consumer durables are expected to slow in 1990, partially resulting from the decline in domestic construction activity.

Automotive exports were flat in 1989, and are expected to continue at about the same level in 1990. Automotive imports, on the other hand, fell in value as well as quantity in 1989, and are expected to drop again in 1990. The depreciation of the dollar from its early 1985 peak has been the biggest single factor in declining sales of imported cars during the late 1980s, pushing the cost of imported automobiles significantly higher. The import share of the U.S. auto market fell from a peak of 29 percent in 1988 to 28 percent in 1989. The share is expected to be about the same in 1990, but it will be a share of a smaller market.

The trade surplus in advanced technology products fell to $25 billion in 1989, from record 1988 levels, as exports grew 6 percent while imports rose by nearly 15 percent. Advanced technology products comprised about one-sixth of total U.S. trade in 1989.

Agricultural Surplus To

Remain Unchanged

Agricultural exports will not be a strong contributor to U.S. export growth in 1990. Last year, both the volume and average prices of agricultural exports rose about 4 percent, despite a sharp slide in prices throughout the year, resulting in a value increase of 8 percent to $41 billion. Continuing price declines, coupled with moderate volume growth, will result in no more than a small increase in value in 1990, ending the upswing which began in 1986.

In general, demand abroad for U.S. farm products is expected to remain strong, but prices of most major products are projected to decline, partly as a result of the 1985 Farm Act, which was designed to increase worldwide competitiveness in the agricultural sector. The opening of new markets in Eastern Europe, and increased shipments to the USSR, Mexico, and the Pacific Rim countries, will boost exports.

Wheat exports are expected to decline in both volume and price in 1990 because of lower domestic production and an unexpectedly large South American crop. Corn shipments, however, are forecast to expand sharply and prices to firm due to limited competing supplies. Increased exports to Mexico, Korea, Japan, and Eastern European countries are likely, as many countries raise imports and curtail exports in order to boost domestic consumption. Soybean shipments are expected to rise sharply in volume, but the value will fall from last year because of lower prices resulting from abundant worldwide supplies. Cotton exports are forecast to advance from very high 1989 levels because of strong foreign demand, competitive U.S. prices, and reduced supplies in two major competitor countries - China and Pakistan. Some gains are expected in other export commodities, such as tobacco and meat, but losses are expected in sales of rice and animal feeds.

Imports of agricultural products are expected to remain at the record levels reached last year, reflecting the impact of the December freeze in Texas and Florida. Demand for fruit, fruit juice, and vegetable imports has risen above previous expectations, and increased arrivals are expected from Brazil, which had record orange production, and Mexico. These increases will be somewhat offset by a falloff in the value of coffee entries, although volume will rise, because of lower prices which followed the collapse of an international coffee agreement Cocoa and rubber imports are expected to decline in both value and quantity.

Oil Bill to Grow Again

Higher volumes will again boost U.S. payments for imported petroleum and products in 1990, but the increase should be less than in 1989. Last year, volume averaged 8.0 million barrels per day (mmbd), up from 7.4 mmbd in 1988. Oil prices, which showed unexpected strength last year, should average about the same as the $16.80 per barrel in 1989. The sharp volume and price increases in 1989 led to a $10 billion increase in the value of petroleum imports to $49 billion.

Domestic demand for petroleum products is expected to be at about the same level as in the previous two years, but import volume is expected to increase further because of the continued falloff in U.S. oil production. Domestic production began to decline in 1986, because of falling oil prices, and in 1989 reached the lowest level in 26 years, 7.6 mmbd. The United States imported 46 percent of the oil it consumed last year, up sharply from 32 percent in 1985 and only slightly below the record 48 percent in 1977. U.S. dependence on foreign oil could well surpass 50 percent in 1990 or the year after.

Oil import prices rose 20 percent in 1989, to $16.80 per barrel, because of increased demand caused by unusually cold weather in Europe and the United States and also because of growing world demand, particularly in fast growing countries of the Far East, such as South Korea and Taiwan. Although OPEC production is expected to increase, these factors will continue to affect world oil prices, as will concerns about other energy production shortfalls. Nevertheless, prices are expected to remain at about the 1989 level, perhaps easing somewhat in the second half of the year.

The continued increase in the volume of oil imports, coupled with little change in prices, is expected to swell the value of oil imports by $3-5 billion in 1990. If OPEC agreements or other factors cause a reduction in output growth this year, prices could rise, making the total oil bill even higher.

Table : Top 25 U.S. Markets U.S. Domestic and Foreign Merchandise

            Exports, 1989
           (f.a.s. Value)
                        $billions
    Total Exports           364.4
 1. Canada                   78.6
 2. Japan                    44.6
 3. Mexico                   25.0
 4. United Kingdom           20.9
 5. West Germany             16.9
 6. South Korea              13.5
 7. France                   11.6
 8. Netherlands              11.4
 9. Taiwan                   11.3
10. Belgium-Luxembourg        8.7
11. Australia                 8.3
12. Singapore                 7.4
13. Italy                     7.2
14. Hong Kong                 6.3
15. China                     5.8
16. Switzerland               4.9
17. Brazil                    4.8
18. Spain                     4.8
19. USSR                      4.3
20. Saudi Arabia              3.6
21. Sweden                    3.1
22. Venezuela                 3.0
23. Malaysia                  2.9
24. Israel                    2.8
25. Egypt                     2.6

Table : Leading U.S. Suppliers U.S. General Merchandise Imports, 1989 (Customs value)

                        $ billions
    Total Imports           472.9
 1. Japan                    93.6
 2. Canada                   88.2
 3. Mexico                   27.2
 4. West Germany             24.8
 5. Taiwan                   24.3
 6. South Korea              19.7
 7. United Kingdom           18.2
 8. France                   13.0
 9. China                    12.0
10. Italy                    11.9
11. Hong Kong                 9.7
12. Singapore                 9.0
13. Brazil                    8.4
14. Saudi Arabia              7.2
15. Venezuela                 6.8
17. Sweden                    4.9
18. Netherlands               4.8
19. Malaysia                  4.7
20. Switzerland               4.7
21. Belgium-Luxembourg        4.6
22. Thailand                  4.4
23. Australia                 3.9
24. Indonesia                 3.5
25. Spain                     3.3

Table : U.S. Trade Balances, 1989 Listing of U.S. Merchandise Trade Balances General Imports, Customs Value; Domestic and Foreign Exports, f.a.s. Value

U.S. Surplus                            U.S. Deficit
Positions                                 Positions       $ billions
                           $ billions   Total             -108.6
 1. Netherlands                +6.6     1. Japan           -49.0
 2. Australia                  +4.4     2. Taiwan          -13.0
 3. Belgium-Luxembourg         +4.1     3. Canada           -9.6
 4. USSR                       +3.6     4. West Germany     -8.0
 5. United Kingdom             +2.6     5. South Korea      -6.3
 6. Egypt                      +2.4     6. China            -6.2
 7. Spain                      +1.5     7. Nigeria          -4.7
 8. Ireland                    +0.9     8. Italy            -4.7
 9. United Arab Emirates       +0.7     9. Venezuela        -3.8
10. Turkey                     +0.6    10. Saudi Arabia     -3.6
11. Pakistan                   +0.6    11. Brazil           -3.6
12. Jamaica                    +0.5    12. Hong Kong        -3.4
13. Panama                     +0.5    13. Indonesia        -2.3
14. Bahrain                    +0.4    14. Mexico           -2.2
15. Jordan                     +0.4    15. Thailand         -2.1
16. Bermuda                    +0.3    16. Malaysia         -1.9
17. Bahamas                    +0.3    17. Angola           -1.8
18. Morocco                    +0.3    18. Sweden           -1.8
19. El Salvador                +0.3    19. Singapore        -1.6
20. French Guiana              +0.3    20. France           -1.4
21. Greece                     +0.2    21. Iraq             -1.2
22. Switzerland                +0.2    22. Algeria          -1.1
23. Leeward & Windward Is      +0.2    23. Norway           -1.0
24. Netherlands Antilles       +0.2    24. Philippines      -0.9
25. Cayman Islands             +0.2    25. India            -0.9

COPYRIGHT 1990 U.S. Government Printing Office
COPYRIGHT 2004 Gale Group