Dollar, American ; International trade ; Developing countries

Ramon Moreno

English

Research Papers in Economics

FRBSF
August 15, 1986 WEEKLY LETTER
The NICs, the Dollar and u.s. Imports
The dollar's sharp depreciation against the cur-
rencies of our major industrial trading partners
has not extended to the currencies of the "newly
industrialized countries" (NICs). As a result, the
NICs may increase their exports to the u.s. and
thereby reduce the size of the improvement in
the u.S. trade balance that would otherwise take
place in response to the depreciation of the dol-
lar. This Letter discusses the growing importance
of NICs in U.s. trade and the reasons their
exports to the u.s. may continue to grow.
The dollar and the trade deficit
Measured against the currencies ofthe major
industrial countries, the dollar depreciated 27
percent between February 1985 and March
1986. In seeming contradiction, the u.s. trade
deficit grew from an annualized $100 biIIion in
the first quarter of 1985 to $146 billion in the
first quarter of 1986, and increased further in the
second quarter. This is a matter of concern as
the adverse performance ofthe external sector
subtracted 0.7 percentage points from the 1985
growth ofthe real gross national product (GNP)
- now estimated at 2.9 percent.
Although the magnitude of the deterioration in
the trade balance is disturbing, the pattern is
familiar. A depreciation can be expected to
induce a deterioration in the trade balance for
several months before a switch in expenditures
away from more expensive foreign goods to
domestic products results in a trade balance
improvement. The declining and then rising pat-
tern in net export revenue is called the "J"
curve, since it follows the letter Jin shape over
time. In the short run, the volume of imports falls
by less than the rise in import prices caused by a
dollar depreciation ...,.- raising the total dollar
value of imports.
While the lag in the response ofthe trade bal-
ance to changes in the dollar's value is
expected, the improvement in net exports as a
result ofthe current dollar depreciation has been
slower than in the past. For example, based on
historical experience, many forecasting models
underpredicted the first quarter 1986 trade defi-
cit by large margins. Difficulties in explaining
the behavior of net exports and GNP growth
complicate the task of policymakers in determin-
ing appropriate responses to the continuing
trade imbalance. For example, a better under-
standing ofthe reasons for the persistence ofthe
U.S. trade deficit may shed light on whether a
further depreciation ofthe dollar is necessary, or
if policy should be geared toward stimulating
U.S. economic growth in other ways.
One possible reason for the delayed improve-
ment in net exports is that as the dollar depreci-
ates against the currencies of our industrial
trading partners, some u.s. customers may shift
their imports from industrial countries to newly
industrializing countries (NICs) and thereby
reduce the favorable impact ofthe depreciating
dollar on total imports and the aggregate trade
balance. NICs in this article mean Hong Kong,
Singapore, South Korea and Taiwan, although·
the process described here may apply to other
developing countries, such as Brazil andMex-
ico. For simplicity, discussion is limited to the
import side of the u.S. trade account.
Importance of NICs in u.s. imports
The possibility that u.s. imports might shift to
NIC-s is only of concern if the NICs are suffi-
ciently "important" in U.s. trade, that is, if a
large increase in their exports to the u.s. would
have a significant effect on U.S. imports. The
data certainly bears out the importance ofNICs
in total U.S. imports.
NIC exports to the u.S. in 1985 totalled $42 bil-
lion, or 11 percent oftotal U.s. imports. As early
as 1980, NICs as a group comprised the third
largest exporter to the U.s. after Japan and Can-
ada. In addition, out of a total 1985 u.s. trade
deficit of $124 billion, the u.s. trade deficitwith
NICs amounted to $25 billion...,.- second only to
the $50 billion trade deficit with Japan, and
exceeding the u.s. trade deficits with the Euro-
pean Economic Community (EEC) and Canada
($22 billion each).FRBSF
Between 1981 and 1985, the volume of NIC
exports to the u.s. grew at an average annual
rate exceeding 17 percent. If NICs maintain this
growth rate in 1986, they would tend to increase
U.s. imports by approximately 1.9 percent
(which would tend to reduce the growth of u.s.
real GNP by Vs of a percent. Ofcourse, u.s.
exports to NICs would offset this contractionary
effect).
Growth in NIC exports
Further increases in NIC exports to the u.s. may
occur in spite ofthe sharp depreciation of the
dollarfor two reasons: (1) improvements in the
productive capacity of NICs, which underlie a
strong trend in the growth oftheir exports to the
U.s., and (2) a dollar that has generally not
depreciated against the currencies ofthe NICs
(See chart). The trade-weighted index ofthe dol-
lar,bywhich we commonly measure the dollar's
strength, contains onlythe currencies of indus-
trial countries. As a result, itdoes not show that
u.s. imports from NICs have become cheaper
than u.s. imports from industrial countries.
Factors other than exchange rates may also be
responsible for the growth in NIC exports as
those exports to the u.S. have grown even when
NIC currencies were not depreciating against the
dollar. One such factor may be the change in
the productive capacity of NICs.
A 1978 Federal Reserve Board study found that
the growth in the productive capacity (Le., the
full employment output) ofJapan and other
industrial countries in the 1960s was important
in explaining the growth of u.s. imports at the
time. In particular, changes in productive capac-
ity helped explain theentry ofJapan into u.s.
markets in the 1960s - a development not well
captured by historical data on the response of
u.S. demand for imports to changes in exchange
rates or u.s. income growth.
Similarly, the growth in the productive capacity
of NICs could cause an increase in NIC exports
to the u.s. not fully reflected in measures of u.s.
import demand. The rapid growth of capital for-
mationin NICs, which is an indicator of
increases in NICproductive capacity, is consis-
tent with this hypothesis. Between 1976 and
1983, the average annual real growth of gross
fixed capital formation was 14 percent in South
Korea, 12 percent in Singapore, 11 percent in
Hong Kong, and 6 percent in Taiwan. The last
figure reflects a slowdown in Taiwan's invest-
ment since 1981 that came in the wake of an
impressive 14 percent average real growth in
capital formation between 1978 and 1980. In
contrast, comparable growth rates for the three
largest u.s. industrial trading partners were 0.6
percent for Canada, 3.9 percent for Japan, and
2.2 percent for West Germany.
Substitutability of NIC exports ,
Apart from the impetus provided by increased
productive capacity, the growth of NIC exports
to the U.s. could receive a further boost if u.s.
demand for NIC products increases as the dollar
depreciates against the currencies of indus-
trialized countries (while staying steady with
respect to NICs). The importance ofthis effect
will depend on how well NIC exports can be
substituted for those of industrial countries.
One indicator ofthe substitutability of NIC
exports for those of industrial countries is the
extent to which NICs have penetrated those sec-
tors ofthe U.S. market that previously were
dominated by industrial countries. As a proxy for
the NICs, we will examine the performance of
EastAsian (excluding Japan) exporters to the
U.s., for which disaggregated data are more
readily available.
The share of East Asian exporters in U.s. non-
agricultural imports (excluding fuel) rose nearly
4 percentage points to 17 percent between 1976
and 1985 - compared to 1985 shares of 21
percent for the EEC and 25 percent for Japan.
For manufactured goods, the share of East Asian
exporters rose from 9.4 percent in 1976 to 13
percent in 1985, reflecting gains in iron and
steel, among other exports. Over the same
period, Japan's share fell from 23 percent to 17
percent, while the EEC's share rose from 20 to
22 percent.
u.s. imports of machinery and transport equip-
menttotalled $142 billion in 1985 (compared to
$32 billion in 1976), of which over 11 percent
came from East Asian exporters - up from
nearly 8 percent in 1976. Increased East Asian
exports of office machinery and automatic data-
processing machines and telecommunications
and sound-producing apparatus explain a sig-
nificant portion ofthis increase. While the gains
of NICs in machinery and transport equipmentU.S. Dollar Exchange Rate Since 1980
(Monthly averages)
1980 = 100
180
Industrial
Countries
160
140
120
100
80 L...~-L~~.l..-~--'-~~-'---~--'-~~-'---~_
1980 1981 1982 1983 1984 1985 1986
do not match the increase in Japan's share of 9
percentage points (to 39 percent) over the same
period, there is significant growth potential for
East Asian exporters in this sector, which
includes the automobile market recently entered
by South Korea. In contrast, the EEC share in the
machinery and transport equipment sector
declined over 3 percentage points between
1976 and 1985 to 19.5 percent.
Meeting increased demand
The increased substitutability of East Asian
exports for those ofthe industrial countries
implies that the demand for East Asian products
may increase significantly eVen as the dollar
depreciates. While the fast growth in productive
capacity discussed previously will enhance the
ability of East Asian economies to increase their
exports to the U.s., their ability to meet
increased demand also depends on the extent to
which they have re-oriented their export produc-
tion structure to compete more directly with
industrial countries.
The extent ofthis re-orientation is suggested by
the composition of East Asian exports to the
u.s. Nonagricultural exports to the u.s. were
88 percent oftotal East Asian exports in 1985 -
up from 68 percent in 1976, in contrast to a 4
percentage point decline in the EEC's share to 86
percent. More significantly, the share of machin-
ery and transport equipment in total East Asian
exports nearly doubled to 30 percent between
1976 and 1985, while in Japan's case, it
increased 20 percentage points to 76 percent.
Over the same period, the share ofthis sector in
total EEC exports to the u.s. increased over one
percentage point to 40 percent. As East Asian
exporters include a number of less developed
countries, these trends understate the extent to
which NICs themselves have transformed their
export structure.
Conclusion
Standard explanations for the behavior of u.s.
imports focus on two key variables: (1) changes
in the value of the dollar, which affect the com-
petitiveness of U.s. products, and (2) U.s.
income growth, which tends to increase domes-
tic spending and overall demand for imports.
The preceding discussion suggests that the grow-
ing penetration of NICs in U.s. markets provides
an additional impetus to U.s. import growth that
may not be captured in the standard analysis. In
particular, NICs now appear able to delay and,
to some extent, reduce the improvement in the
U.S. trade balance that would otherwise have
already resulted from the present dollar
depreciation.
Not withstanding its increased importance to the
overall u.s. trade balance, u.s. trade with NICs
is still not large enough to offset fully the
expected decline in imports from industrial
countries. That is, given the substantial dollar
depreciation in relation to the currencies of
industrial countries, and continuing efforts to
reduce U.S. domestic spending, asignificant
reduction in total U.S. imports can still be
expected in the coming months.
Ramon Moreno
Opinionsexpressed in this newsletterdo not necessarily reflect theviews ofthemanagementof the Federal Reserve BankofSan
Francisco,orofthe Board ofGovernorsofthe Federal Reserve System.
Editorialcommentsmay beaddressedtotheeditor(GregoryTong) ortotheauthor..••FreecopiesofFederal Reservepublications
can be obtained from the Public Information Department, Federal Reserve Bank ofSan Francisco, P.O. Box 7702,San Francisco
94120. Phone (415) 974-2246.uo~6u!ysom yo~n U060JO 0POI\0U
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
7/23/86
Change
from
7/16/86
Change from 7/24/85
Dollar PercenF
Loans, Leases and Investments1 2 199,407 -1,377 5,756 2.9
Loans and Leases1 6 181,683 -1,414 6,329 3.6
Commercial and Industrial 50,989 - 278 - 514 - 0.9
Real estate 66,901 - 63 3,120 4.8
Loans to Individuals 39,322 60 3,024 8.3
Leases 5,516 24 112 2.0
U. S. Treasury and Agency Securities2 10,340 - 12 - 1,106 - 9.6
Other Securities2 7,383 49 532 7.7
Total Deposits 202,702 -4,608 7,638 3.9
Demand Deposits 49,548 -4,301 5,035 11.3
Demand Deposits Adjusted3 35,106 -1,053 5,327 17.8
OtherTransaction Balances4 16,328 - 166 2,739 20.1
Total Non-Transaction Balances6 136,827 - 140 - 133 0.0
MoneyMarket Deposit
Accounts-Total 46,919 - 227 2,035 4.5
Time Deposits in Amounts of
$100,000 or more 35,374 250 - 2,359 - 6.2
Other Liabilities for Borrowed MoneyS 23,075 -1,698 316 1.3
Two Week Averages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+)jDeficiency(-l
Borrowings
Netfree reserves (+ljNet borrowed(~)
Period ended
7/14/86
6
23
17
Period ended
6/30/86
123
80
43
1 Includes loss reserves, unearned income, excludes interbankloans
2 Excludes trading account securities
3 Excludes U.S. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
S Includes borrowingvia FRB, TT&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percent change

The NICs, the dollar and U.S. imports

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The NICs, the dollar and U.S. imports

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