Trends in U.S. Trade and Comparative Advantage

WILLIAM H. BRANSON* Princeton University

and HELEN B. JUNZ*

Board of Governorsof the Federal Reserve System

Trends and

in U.S. Trade Comparative Advantage

IN RECENTYEARS,THESHRINKINGU.S. tradebalancehas drawna good dealof attentionandcausedsomeconcernhereandabroad.Thebalanceon merchandisetradereacheda peakof $6.8billionin 1964,andthenshrank to about$650millionin 1968and1969.Thisreductionwasdueto someextentto the excessdemandin theUnitedStatesin 1966-68,andtheensuing inflation.But,as some observershavepointedout, the inflationaryboom couldexplainonlypartof thestory.'Theysuggestedthatthe deterioration was the resultmainlyof longer-termtrendsin the basicU.S. competitive position.Thisviewhasgainedmoreprominenceastheincreasein theU.S. tradesurplusto $2.1billionin 1970wasfollowedby a deficitinthefirsthalf of 1971despitethe slowdownin domesticeconomicactivity.Thus,therecessionhasnotbeenaccompaniedby animprovemenitn thetradebalance,

* We wish to thank Betty L. Barker,BarbaraR. Lowrey, Kathryn A. Morisse, NicholasMonoyios,and, especially,RaymondD. Hill for assistance.Besidesacknowledgingassistancefromthe Brookingspanel,we arealso indebtedto BenjaminJ. Cohen, KeithL. R. Pavitt,and staffmembersof the Boardof Governorsof the FederalReserve Systemfor commentson an earlierdraft.The views expressedin this paperare those of the authors,and do not necessarilyreflectthose of the Boardof Governors.

1. See, for example, Michael Boretsky, "Concernsabout the Present American Positionin InternationalTrade"(paperpresentedat the NationalAcademyof Engineering Symposium on Technology and International Trade, October 14-15, 1970; processed).

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mainlybecauseimportshavecontinuedto risewellbeyondtheirusualrelation to the growthin grossnationalproduct(GNP).

In anattemptto illuminatesomeof theuncertaintiecsoncerningtheU.S. tradepositionthispaperpresentsan analyticaldescriptionof U.S. tradein manufacturedgoods,drawingon ourongoingresearchintothesetopics.It is organizedaroundthreequestions:Whathavebeenthelong-termtrends in U.S. tradeby commoditygroups?How hasthe U.S. tradeperformance in the 1960scomparedwiththatof othermajorindustriacl ountries?What is the sourceof currentU.S. comparativeadvantagein trade?

The firstsectiondrawson the tradedatabrokendownby the end-use categoriesemployedby the Officeof BusinessEconomics(OBE)to review trendsin U.S. tradefrom1925to 1970,by sevenmajorend-useaggregates. The secondextendsthe analysisof the U.S. aggregates,drawingon the data publishedby the Organisationfor EconomicCo-operationand Development(OECD)on tradeamongthemajorindustrializedcountriesand on nationalGNP datain orderto compareU.S. output,demand,andtrade by majorend-usecategorieswiththose of otherindustrialcountriesin the 1960s.The thirdsectionturnsto disaggregateddataon tradein manufacturedgoods,reviewingtrendsin disaggregatedOBEend-usegroupsto observepatternsin tradeat the three-and four-digitlevel.The finalsection studiesthesourceof U.S. comparativeadvantagein a cross-sectionof U.S. trade by two- and three-digitstandardinternationaltrade classification (SITC)categories;

Long-termTrendsin U.S. Tradeby End-useCategories

A usefulperspectiveon developmentsin U.S. tradecan be obtainedby reviewingitslonger-runtrendsby end-usecommoditycategoriesT. heOBE dataontradearebrokendownunderfivesummarycategories:foods,feeds, andbeverages(0); industrialsuppliesandmaterials(1); capitalgoods(2); automotiveproducts(3); andconsumergoods(4).2Thissectionconsiders theseaggregateend-usecategories.Selectedthree-andfour-digitcategories areexaminedbelowto observemoredetailedmovementsin trade.

2. U.S. Departmentof Commerce,Officeof BusinessEconomics, U.S. Exportsand ImportsClassifiedby OBEEnd-UseCommodityCategories,1923-1968,A Supplementto the Surveyof CurrentBusiness(1970).

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INITIAL ASSUMPTIONS AND HYPOTHESES

Two basic questionsarisein analyzingand presentingthe OBE data: How shouldthe databe disaggregated-intermsof both categoriesto be usedanddegreeof detail?Andhowshouldexportsandimportsbe related to eachother?

To a largeextent,the answerto the firstquestioninvolvesthe way the OBEorganizesthe data.Thisdisaggregationmakessenseif the courseof tradein subcategoriesis moresimilarwithinmajorcategoriesthanacross majorcategoriesT. husa decisionwasmadeto disaggregatew, ithintheenduseframeworka, s faras possibleto seewhethersimilartradepatternsobtainwithin,anddissimilarpatternsacross, categories.

The secondquestioncalledfor focus on tradebalancesby commodity groups.Thisfocus,of course,doesnot suggestthatallcategories"should" showsurpluses,or that categoriesshowinglargeand growingdeficitsdisplay"weakness"thatnecessarilyshouldbe correctedby policyaction.The net balanceof paymentsshouldbe in equilibriumon whateverbasis is thoughtappropriatew, hilewithinit some itemsshow deficits,and others surplusesF. urthermoret,hebasicnotionof comparativeadvantageimplies that the UnitedStatesshouldbe a net importerof some goods and a net exporterof others.

Butevenatthefinestlevelof statisticadl isaggregationthatis availablei,t appearsthatmostgoodsaresubjectto two-waytrade.Thereby,thenotion of comparativeadvantagebecomesthe propositionthat the United States shouldbeanet exporterof goodsinwhichithasa comparativaedvantagewhetherit derivesfromresourceendowmentt,echnologicaladvantage,or educationembodiedin humancapital-and a net importerof goods in whichit is at a disadvantage.T3husit is naturalto focuson net exportsby commoditygroupin an analysisthat attemptsto revealsomethingabout movementsin U.S. comparativeadvantageandtrade.4

3. Strictlyspeaking,in a list of commoditiesorderedfrom those with maximumnet exports to those with maximum net imports, the United States has a comparative advantagein producingthe goods higheron the list relativeto those lower on the list.

4. Disaggregationof the end-use data in an analysisfocusing on net exports runs into the problemthat, beyond the two-digitlevel, exportand importcategoriesdo not match.Thisarisesbecausea majorcriterionthe OBEusedfor creatingsubcategorieswas the contributionof an itemto the valuetotal in its majorcategory,and thiscriterionwas

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TRENDS IN AGGREGATE END-USE CATEGORIES

Table1 showsnet exportsfor sevenmajorexportend-usecategoriesfor theyears1925-70,excludingthewaryears1941-45.In thetable,totalnonagriculturailndustriasl uppliesandmaterialsweredisaggregatedinto three parts:fuelsandlubricantsc; hemicals;anda residualcomponent.Thisdisaggregationis necessaryfor two reasons.Fuels and lubricantsincludeas majorsubcategoriecsrudepetroleumandsemifinishedpetroleumproducts andnaturalgas,inwhichtradeisheavilyinfluencedbothbynaturalresource advantagesand by governmentpolicies.Chemicalsare shownseparately becausethey are the only three-digitcategoryamongnonagriculturailndustrialsuppliesandmaterialsto showa surplusconsistentlysinceWorld War II.

Agriculturagloods. From1925to 1959,theU.S. tradebalancein agriculturalgoodstypicallyfluctuatedintherangefroma surplusof $1billionto a deficitof $1billion.Thenfrom1960through1967,agriculturatlradeshowed surplusesin the rangefrom$0.7billionto $1.7billion.Since1967,the surplushasbeenconsiderablysmaller-between$100millionand$500million. Thus, between1964 and 1970,a substantialdeteriorationtook place in tradein agriculturagl oods as the surplusfell from $1.7 billion to $0.5 billion.

FuelsandlubricantsT. radein fuelsandlubricantsconsistentlyshoweda smallsurplusfrom1925through1940.At theendof thewar,exportsjumped beyondthe prewarexperience,and then maintaineda fairly flat trend, aroundwhich,however,largeswingsoccurred.On the otherhand,just afterthe war,importspickedup at theprewarlevel,but grewrapidlythereafter.Thusin fuelandlubricantsw, hatbeganas a substantiaslurplusin the late 1940sbecamea balancein themid-1950sanda steadilygrowingdeficit in the 1960s.Thispatternis frequentlyseenin industriasluppliesandmaterialsandin consumergoods.

ChemicalsA. differentpatternappearsin chemicals(includingfertilizers but excludingmedicinalpreparations)F. rom 1925to 1937tradein these productsroughlybalanced.Thenin 1938-40a smallbut growingsurplus appeared.Afterthe war, exportsstartedoff substantiallyaboveimports,

appliedseparatelyon the export and importsides. In disaggregatingbeyond the twodigit level, therefore,the analysishere basicallyfollows the export end-usecategories, assigning import categories to the relevant export groups. For a discussion of the rationaleand structureof the end-use groupings,see U.S. Exportsand Imports,pp. vii-xviii.

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whichwereroughlyat theirprewarlevel, then grewsubstantiallyfaster thanimportsthroughouthe period1946-70,althoughimportspickedup distinctlyin thelate 1960s.

Other nonagriculturalindustrialsupplies and materials. The category of otherindustrialsuppliesandmaterials,as shownin Table 1, is a heterogeneousgroupof products,as can be seenin Table7. Most of themhave showndeficitsthroughoutheperiod1925-70.Someof themoreinteresting subcategoriews illbediscussedinthesectionondisaggregatetdradepatterns.

Capitalgoods. Capitalgoods have had a surplusin everyyear of the period1925-70.As is apparentin Figure1, importswereveryflatbefore WorldWarII, varyingin therangeof $10millionto $40million,whileexportsgenerallywerein the $400 millionto $600 millionrange.Afterthe war,capitalgoodsexportsshowedthetypicalbumpin thelate 1940s,yieldinga muchhighersurplusthanin theprewaryears.Thatsurplushasgrown rapidlyandremarkablyconsistentlyto thepresent,exceeding$10billionin 1970.

Consumegroods. Consumergoods (excludingfood and beverages)describea patterncompletelydifferenftromthatof capitalgoods,asFigures1 and2 confirm.BeforeWorldWarII, theUnitedStatestypicallywas a net importerof consumergoodsby a smallmargin.Immediatelyafterthewar, a sizablesurplusemergedas exportsquadrupledfromaround$250million to $1billion.Afterthispostwarbulgedisappearede,xportsgrewslowlybut steadily.Importsof consumergoods,on the otherhand,haveexpandedat an increasinglyrapidpace,overtakingexportsin 1959.Withthe exception of a slightdecreasein 1961,the deficithas increasedeversince.

The plot of consumergoodstradein Figure2 suggeststwo generalizations.First,oncethe postwarbulgein consumergoodsexportshad disappearedandtheirregularlydecliningsurplusdwindledaway,thedeficitgrew steadily,not settlingat one level as it had beforethe war. Second,the growthin the deficitwas not a resultsimplyof excessdemandin the late 1960s.The datarevealit in the shrinkageof the surplusbeginningin the early 1950s.

Automotivperoducts.In automotiveproducts,the United Stateshad a surpluseveryyearuntil 1968,but sincethenhas had an increasingdeficit. Therewasa smallbutsteadysurplusbeforeWorldWarII, followinga patternquitesimilarto thatof capitalgoods(seeFigure1).Afterthe warthe familiarexportbulgeappearedb, utwaseliminatedby the early1950s.Exportsgrewerraticallyfrom1953to 1962,and at a smoothlyincreasingrate

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