U.S. trade outlook - World Trade Outlook

The improvement in the U.S. trade balance is expected to continue.

The 1988 improvement in the U.S. trade balance is expected to continue in the months ahead but at a more modest rate. The sharp $32 billion reduction in the deficit in 1988, to $120 billion (Customs value imports), ended a seven-year trend of worsening trade balances. U.S. exports are expected to slow from their 27 percent rate of growth last year but still post strong gains in 1989. Import growth may moderate further if there is any slowing in the economy.

Positive developments in non-oil trade should more than offset expected additional oil imports. The manufactures trade deficit is expected to continue to improve, and the surplus in agricultural products should improve slightly in 1989.

The improvement in the 1988 trade deficit reflected several factors, but was in large part due to the delayed 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 37 percent by the end of 1988, even though the dollar strengthened during the latter part of the year. The depreciation has contributed to substantial improvement in the international price competitiveness of U.S. goods. Foreign economic activity-an estimated 4 percent in the OECD countries-also was more robust than expected last year, adding to the demand for U.S. goods.

The continued but more modest expansion in U.S. exports forecast for 1989 is based on prospects for a slowdown in growth in the economies of our major trading partners abroad. Real economic growth in the industrial countries is expected to be in the 3.0 to 3.5 percent range. Largely responsible for this moderate slowdown will be an anticipated return of investment growth to a more measured rate in 1989 after its unusual strength in 1988. Taiwan and Korea-relatively large U.S. export markets-are likely to experience a slowdown from their recent double-digit growth rates.

Another reason for the slowdown in export growth is the stability of the U.S. dollar. Although the exchange rate value of the dollar fell during the first part of 1988, gains during the second half of the year resulted in the dollar's being at about the same level at the beginning and at the end of 1988. This factor, combined with the largest increase in export prices-7 percent for the year as a whole-in several years, means that U.S. exports probably lost price competitiveness in world markets, although usually a lag occurs before this is reflected in a loss of export orders.

The continued growth abroad should sustain slower but still substantial growth in U.S. exports of manufactured goods and other nonagricultural products-the category of exports most dependent on levels of foreign economic activity. In addition, agricultural exports are projected to rise somewhat but at a slower rate than in 1988.

Exports to the industrial countries should continue to expand in 1989. Although lower than in 1988, economic activity in most of these countries is expected to be good, increasing demand for imports.

The European Community and Japan are expected to have the brightest prospects for U.S. exports this year. Exports to the United Kingdom and other oil-producing nations are expected to pick up because of these countries' higher earnings from oil exports. The economy of Canada-our largest trading partner-is expected to be less robust than most of the other industrial nations.

Exports to the developing countries grew 31 percent in 1988, the sharpest increase since the LDC debt crisis drastically cut U.S. exports to many countries. Shipments to most 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 nearly 50 percent in 1988; as these countries open up their markets, they are expected to become even better customers for U.S. suppliers of products and services.

Exports to the Soviet Union and China grew quite strongly in 1988, and shipments to Eastern Europe also were higher. The outlook for exports to these countries in 1989 will depend largely on their buying plans for agricultural products.

U.S. import growth slowed to 8 percent in 1988, following an 11 percent increase the previous year, despite an upturn in U.S. economic activity. In real terms, imports expanded only 3 percent, about the same as in 1987. Total imports were held down by the decline in the value of petroleum imports resulting from declining prices for most of the year. This year's performance will largely depend on the level of U.S. economic growth and the value of the dollar. A slight deceleration expected in the pace of economic activity could lead to a small decrease in import growth, especially in manufactures imports. The recent strengthening in the dollar's value could encourage import growth during 1989.

Imports ftom developing countries slowed markedly in 1988, particularly from the OPEC countries and from the newly industrialized countries. The growth in imports from the European Community was reduced to 5 percent in 1988, but imports from Japan, which slowed markedly in 1987, grew 6 percent last year, despite the huge jump in the yen's value. Imports from Canada also rose much faster than in 1987. Increases are expected from the oilproducing countries next year; imports from the remaining lesser developed countries may decelerate in 1989.

On the export side, demand for U.S. manufactured products will be somewhat dampened by slower foreign growth. However, past depreciation of the dollar is expected to continue to boost U.S. exports despite the appreciation of the dollar in late 1988. Growth in manufactures exports, which last year accounted for almost 80 percent of total U.S. exports, will be paced by transportation equipment. Aircraft exports are projected to increase strongly, reflecting large foreign orders for commercial transports to replace older and less fuel-efficient planes. Exports of automotive products are expected to be strong, Automotive exports to Canada, the primary market for U.S. cars, trucks, and auto parts, will probably grow at less than the 10 percent rate recorded in 1988, reflecting the slight falloff expected in U.S. and Canadian automotive sales.

Machinery exports are also expected to expand. After sizeable 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,

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, steel, and nonferrous metals 'in particular are expected to increase further in 1989 as demand abroad is stimulated by the continued growth in foreign industrial output.

U.S. demand for manufactured imports, on the other hand, is expected to remain comparatively restrained. The level of these imports, which increased only 11 percent in 1988, will be largely governed by the pace of U.S. economic activity. Automotive imports are expected to decline slightly, following a 3 percent increase in 1988, due to the effects of the dollar depreciation and stepped-up domestic assembly of former imports. Non-Canadian passenger car imports declined in value, as well as volume, in 1988 for the first time since 1975. Cars from Japan fell 7 percent in value in 1988, and those from the European Community were down 18 percent, but the quantity of cars declined more sharply. Further declines are expected in 1989. Automotive imports from Canada, which grew in 1988 in response to the rise in U.S. auto sales, are expected to decline slightly in 1989. Imports of cars from other countries, such as South Korea, remained about the same in 1988 and may continue at about the same level in 1989. Auto parts imports, however, increased sharply and are expected to expand again.

Imports of consumer goods, which expanded by 11 percent in 1988, 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 goods such as apparel and consumer electronics.

Capital goods imports expanded by 20 percent in 1988, buoyed by large purchases of computers, electrical machinery, and other equipment. These arrivals are expected to slow somewhat in 1989.

Besides manufactures trade, the other large component of the 1988 total merchandise trade deficit was mineral fuels, which will continue to be a significant factor this year. The 1988 deficit in mineral fuels was $33 billion, nearly $4 billion less than in 1987.

Imports of petroleum and products fell to $39 billion last year, down from $42 billion in 1987. Unlike 1988, when oil volume rose 10 percent and average prices fell $3 per gallon, the key developments in the petroleum import situation this year will be increases in both volume and price. The volume of petroleum imports increased to 7.5 million barrels per day in 1988, the highest import volume since 1979. Another half million barrel per day increase is expected in 1989, reflecting some growth in U.S. petroleum demand and a further decline in U.S. domestic production from last year's 23year low. The average price per barrel of imported petroleum fell in 1988 to $14.12 from $17.12 the previous year. Although some price rise is expected in 1989, the magnitude is uncertain. World oil prices will depend on the level of world production and, particularly, on 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 1988.

Agricultural exports posted a 29 percent increase to total $38 billion in 1988 and are expected to expand further in 1989. Demand for U.S. farm products is expected to remain strong, and prices of most major products are projected to increase, Key factors in the surge in the value of farm shipments include higher prices caused by the severe drought last summer and also shortages in competing countries such as Argentina and Venezuela.

The largest export increases are expected in wheat and corn. With world stocks declining, prices for these commodities are expected to rise again this year. The U.S.S.R. and China are expected to account for most of the increased shipments.

Agricultural imports, on the other hand, are expected to remain at about the same $23 billion level as in 1988, barring any unexpected shortages abroad. Coffee and cocoa imports declined slightly last year, but these movements were offset by increases in fruits and crude rubber. Sugar imports were unchanged. Forecasts for 1989 include similar trends, with offsetting movements, resulting in no net change in agricultural imports.

The trade surplus in agricultural products, which had been declining until last year, is forecast to increase from $16 billion in 1988 to about $18 billion on the strength of rising exports.

Beginning with January 1989 trade data, the Bureau of the Census will report imports mainly on a Customs value basis (excluding insurance and freight charges). Exports remain valued free alongside ship (f.a.s.).

COPYRIGHT 1989 U.S. Government Printing Office
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