International trade ; Federal Reserve District, 12th ; Balance of payments ; Economic conditions - West (U.S.) ; Dollar, American

Carolyn Sherwood-Call

English

Research Papers in Economics

FRBSF
May 1, 1987 WEEKLY LETTER
Trade and the Western Economy
Since early 1985, when the u.s. dollar began
declining in value against the currencies of
many of our trading partners, economists have
expected the trade deficit to shrink and thereby
to stimulate the national economy. For the
Twelfth Federal Reserve District (Alaska, Ari-
zona, California, Hawaii, Idaho, Nevada,
Oregon, Utah, and Washington), an improve-
ment in the trade balance is no less important.
Most forecasts of these states' economies, like
forecasts of the national economy, anticipate
that a turnaround in international trade will stim-
ulate economic growth this year.
This Letter argues that the trade balance is on the
verge of turning around despite recent large
monthly deficits. Moreover, because a large pro-
portion.of the products that pass through Twelfth
District ports are traded with Japan, against
whose currency the depreciation of the dollar
hasbeen particularly pronounced, there is
greater evidence of a current turnaround in the
West's trade balance than in the balance of the
rest of the nation.
Importance of western ports
Trade through western ports represents a large
proportion of total U.S. trade. In 1985, 24 per-
cent of u.s. exports and imports passed through
ports in Customs Districts located in the Twelfth
Federal Reserve District. These Customs Districts
include, in approximate order of their impor-
tance, Los Angeles, San Francisco, Seattle, Port-
land, San Diego, Nogales (Arizona), Honolulu,
and Anchorage. By comparison, the nine west-
ern states of the Twelfth District account for
about 18 percent of u.s. population, employ-
ment, and personal income.
The West's easy access to the increasingly
important Pacific trade routes renders the region
a more and more critical component of the
nation's international trade picture. Customs
District data do, however, overstate the signifi-
cance of international trade in the western econ-
omy since not all products exported from West
coast ports are produced in the West and not all
f
imports that come through those ports are pur-
chased by westerners. Los Angeles, for example,
is an important trans-shipment point for products
from Asia destined for the middle of the country.
Trade patterns in the West
In many respects, trade patterns in the West dif-
fer from those of the U.S. Because of the West's
proximity to the Far East, products that pass
through western Customs Districts are much
more likely to be traded with Pacific Basin
nations than are American traded goods gener-
ally. In 1985,21.0 percent ofthe dollar volume
of western trade was with Japan, compared to
16.5 percent for the u.s. Other Pacific Basin
countries that accounted for more than one per-
cent of western trade volume include Taiwan,
Korea, Australia, Hong Kong, Singapore, the
People's Republic of China, and Malaysia.
By the same token, a smaller proportion of west-
ern trade, compared to u.s trade, involves Euro-
pean countries. West Germany accounts for 2.1
percent of western trade compared with 5.3 per-
cent for the U.S., while the United Kingdom
accounts for 1.8 percent of western and 4.7 per-
cent of national trading volume. Canada and
Mexico also are less important trading partners
for the West than for the nation. Canada
accounts for 20.3 percent ofu.s. trading vol-
ume, but only 3.1 percent ofthe trade through
Pacific ports. Mexico provides 5.7 percent of
u.s. trade activity, but only 2.4 percent of west-
ern trade.
Another difference in trade patterns is that west-
ern ports serve a more diffused range of trading
partners. While the top ten trading partners of
the u.s. accounted for 57 percent of all U.S.
trade volume during 1985, the top ten western
trading partners accounted for only 44 percent
of all trade through western ports.
The mix of products traded through western
ports also differs from the product mix for the
nation. For example, while 24 percent of u.s.
imports entered the country through westernFRBSF
ports during 1985, those ports accounted for 50
percent of all imports of office machinery and
35 percent of motor vehicle imports. Western
ports are relatively unimportant in terms of
petroleum imports, accounting for only 7 per-
cent of the u.s. total. These divergences
between the u.S. and the West are consistent
with differences in the countries of origin for
these important products. Asia, with relatively
easy access to West Coast ports, is an important
source of office machinery and cars, while most
petroleum products come from the Middle East,
for which gulf and eastern ports provide better
access to the u.s. market.
On the export side, the western ports accounted
for large proportions of u.s. exports of such
products as office machinery (32 percent), elec-
tronic machinery (51 percent), aircraft and
spacecraft (54 percent), and petroleum (43 per-
cent). These figures reflect both the West's
importance in making these products and Asia's
importance as a market for them.
Impact of the declining dollar
These differences in trade patterns suggest that
the declining foreign exchange value of the u.s.
dollarmay have affected the western and u.S.
economies differently. For example, the dif-
ferences in importance of various trading part-
ners could cause divergences between the u.s.
and western experiences since the value of the
dollar has fluctuated in varying degrees and
even in different directions against different
currencies.
Between the first quarter of 1985, when the dol-
lar began its decline, and the second quarter of
1986 (the latest period for which inflation data
are available for all relevant countries), the dol-
lar fell in real terms by 33 percent against the
Japanese yen and 28 to 29 percent against the
West German mark, French franc, Italian lire,
and British pound. However, it fell (in real
terms) by much smaller percentages against the
Australian and Hong Kong dollars, remained sta-
ble against the Canadian dollar and Taiwan new
dollar, and rose against the Mexican peso,
Korean won, and Singapore dollar. Exchange
rate data unadjusted for inflation suggest that the
value of the dollar stabilized during the second
half of 1986 and has fallen, particularly against
the yen, during early 1987.
To compare the impact of the dollar's declining
value on the West with that on the U.s., we cal-
culated trade-weighted indices of the dollar that
use only the ten most important trading partners
of the West (Japan, Taiwan, Korea, Canada,
Mexico, Australia, West Germany, Hong Kong,
Singapore, and the United Kingdom) and of the
u.s. (a similar list that excludes Australia and
Singapore and includes France and Italy).
Because Japanese trade is more important in the
West than it is nationally, whereas trade with
Canada and Mexico is less important, the value
of the dollar has fallen more when calculated
using trade weights for western ports than when
calculated using national trade weights. Specifi-
cally, the trade-weighted value of the dollar fell
14 percent for the U.S. and 18 percent for the
West on an inflation-adjusted basis between the
first quarter of 1985 and the second quarter of
1986.
Current trade situation
Because the two indices indicate that the dollar
has declined more for the West than it has for
the nation, we might expect that the trade bal-
ance for western Customs Districts, adjusted for
inflation, would have improved more than the
trade balance for the nation. However, the fac-
tors that have slowed improvement nationally
have affected the West as well.
For example, import price increases attributable
to the reduced value ofthe dollar have been
slow to materialize when compared to past epi-
sodes of dollar depreciation. In addition, the
u.S. dollar actually has increased in value
against the currencies of many "newly indus-
trialized countries," or NICs, including par-
ticularly Mexico, Korea, and Singapore. More
generally, because many trading contracts cover
periods of a year or more, changes in relative
prices cannot be incorporated immediately into
business transactions.
The chart shows the relationships between infla-
tion-adjusted bilateral trade-weighted exchange
rates and inflation-adjusted trade balances for
the u.s. and for the eight western Customs
Districts.
Generally, the western and u.s. lines trace simi-
lar paths over the time period shown. The trade-
weighted dollar shows more short-term volatilityREAL NET EXPORTS AND THE DOLLAR"
Both series show that the trade balance tended
to deteriorate as the valueof the dollar rose,
although with a substantial lag. The dollar began
its sharp increase in value in early 1981, but
noticeable deterioration in the two trade bal-
ances was not evident until mid-1983. The delay
was partly due to a normal one-year lag in for-
eign exchange effects, and partly to relatively
slow income growth in the u.s. that restrained
u.S. demand for imported products.
Aturnaround in the offing?
Although the aggregate data do not provide con-
vincing evidence that the trade balance has
begun to improve, there are reasons to expect
that both the western states and the u.S. will
benefit from an improved trade balance during
1987 and that the western states may lead the
natio~. In particular, the dollar has depreciated
more relative to the currencies of western trad-
ing partners than against those of the nation's
partners, therefore any impact ought to be
stronger in the West than in the nation.
In addition, exports of many products important
to the economies of western states already have
shown substantial improvement. During the sec-
ond half of 1986, the value of exports rose more
than five percent for a diverse range of products
that included aircraft and spacecraft; electronic
components; automatic data processing equip-
ment; wood products such as lumber and wood-
pulp; vegetables, fruits, and nuts; cotton; and
measuring and scientific instruments.
Some of these improvements, including those for
wood products and nuts, are directly related to
the reduced value of the dollar, which has
improved the products' competitiveness on
world markets. Other improvements are more
closely tied to developments in particular .indus-
tries or commodity markets. For example, the
value of cotton exports grew largely because the
1985 farm bill led to substantial acreage reduc-
tions and consequently to higher prices, par"
ticularly for California's premium quality cotton.
In summary, the modest extent to which the
trade balance has turned around thus far sug-
gests further improvement in 1987. Weste.rn..
exporters have particular reason to be optimistic
since the trade-weighted value of the dollar has
declined even more for the West than it hasJor
the nation, and exports of some western prod-
ucts already have improved substantially.
Carolyn Sherwood-Call
Likewise, an improvement in the trade balance
can occur with a lag. Neither series exhibits sub-
stantial improvement in the trade balance as yet
from the depreciation of the past two years, but
both provide preliminary indications that deteri-
oration in the trade balance may have been
arrested.
125
120
115
110
105
100
95
90
85
80
Dollar Index
.....
..• ~.......
1.1 '\'
."'.tf1I\. .""', ··.......:r ~
........ ~"' _oJ \
i,v'V \
:•••~I \ ,
trade weig.~tS) /,,'v ''''.
l ". I \, l-,··..I./ ·",••l \.
.;::cis Ooii'ar US Net " '1 (US trade weights) Exports'" ....-.
-4,000
2,000
o
-2,000
In comparison, neither series exhibits a signifi-
cant trend in its trade balance until 1982, when
deterioration began. The western trade data indi-
cate that the sharper increase in the value of the
dollar caused the trade balance to deteriorate
more than was true for the u.S. Both trade bal-
ance series exhibit substantial volatility as it was
not at all unusual to see one- or two-quarter
aberrations from longer term trends. The quar-
terly volatility appears to have been greater for
the West than for the nation.
and wider swings for the West than for the
nation during the period. Between the fourth
quarter of 1978 and the first quarter of 1985
when it reached its peak, the western dollar
index rose 48 percent while the u.s. index rose
39 percent. Since that peak, the western index
has fallen by 18 percent while the u.s. index
has fallen only 14 percent. These differences
reflect the relatively greater importance ofJapan
to the western index and Canada to the u.S.
index.
Millions of 1982 $
-6,000
-8,000
-10,000
-12,000 1978 1979 1980 1981 1982 1983 1984 1985 1986
Weights based on the ten largest trading partners.
** Eight Western Customs Districts: L~s Angeles, San
Francisco; Seattle, Portland, San Diego, Nogales, Honolulu,
and Anchorage.
*** For comparison, US Net Exportsare divided by
three.
Opinionsexpressed in this newsletterdo not necessarily reflect theviews ofthemanagementof the federal Reserve Bank ofSan
francisco, orofthe Board ofGovernorsofthe federal Reserve System. . . .
Editorialcommentsmaybeaddressedtotheeditor(GregoryTong) ortotheauthor....FreecopiesofFederal Reserve pubhca~lons
can beobtained from the Public Information Departmen~Federal Reserve Bank of San FranCISco, P.O. Box 7702, San FranCISco
94120. Phone (415) 974-2246.uo~6U!4S0m 4o~n U060JO 0pOA0U
040PI !!omoH O!UJoJ!l0) ouozPl;) o~soll;)
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
4/1/87
Change
from
3/25/87
Change from4/2/86
Dollar Percent!
Loans, Leases and Investments1 2 205,835 2,176 1,674 0.8
Loans and Leases1 6 184,419 1,838 - 1,034 - 0.5
Commercial and Industrial 54,300 519 400 0.7
Real estate 68,054 232 1,682 2.5
Loans to Individuals 37,038 - 90 - 3,599 - 8.8
Leases 5,440 - 10 - 211 - 3.7
U.S. Treasury and Agency Securities2 14,301 342 3,494 32.3
Other Securities2 7,115 - 4 - 786 - 9.9
Total Deposits 213,691 8,271 7,061 3.4
Demand Deposits 57,778 7,038 6,004 11.5
Demand Deposits Adjusted3 38,253 2,314 3,532 10.1
OtherTransaction Balances4 20,072 713 3,858 23.7
Total Non-Transaction Balances6 135,842 521 - 2,801 - 2.0
MoneyMarket Deposit
Accounts-Total 46,615 316 197 0.4
Time Deposits in Amounts of
$100,000 ormore 32,180 - 88 - 5,732 - 15.1
Other Liabilities for Borrowed MoneyS 23,247 404 - 5,458 - 19.0
Two Week Averages'
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+)/Deficiency(-)
Borrowings
Netfree reserves (+l/Netborrowed(- 1
Period ended
3/23/87
87
11
77
Period ended
3/9/87
91
18
72
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U.S. government and depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
S Includes borrowing via FRB, IT&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percent change

Trade and the Western economy

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Trade and the Western economy

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