III. Structural Interdependence with the Developing Economies

During the 1970s the U.S. and the developing economies, es¬ pecially those which are rapidly growing and industrializing, have developed a kind of "structural interdependence." U.S. trade re¬ flects a trend toward increasing specialization in production of capital goods, chemicals, and agricultural products, in exchange for imports of fuel, autos, and consumer goods. These trends are documented in Branson (1980).
In its trade with developing countries, the U.S. is experiencing rapid¬ ly growing exports of capital goods and imports of consumer goods. As the developing countries industrialize, they import U.S. capital goods. In 1980 the U.S. surplus on trade in capital goods reacnea approximately $45 billion. In exchange, the U.S. imports final consumer goods. This interchange is an example of comparative advantage at work, making the two sets of economies structurally
130
Critical Issues & Decisions
complementary, or interdependent. The result is increasing ef¬ ficiency, in general, but if the process moves too quickly it can generate significant adjustment costs.
The composition of U.S. trade is summarized in subsection A below. Subsection B below examines the growth in capital goods exports to developing countries, and subsection C looks at U.S. consumer goods imports. Subsection D briefly discusses the implica¬ tions for specialization, adjustment costs, and policy.
A. The Composition of U.S. Trade
At the end of World War II, the pattern of U.S. trade was dis¬ torted by radical reduction of industrial capacity in the other major advanced countries. Trade in consumer goods provides a good ex¬ ample of this distortion. In every year from 1925 to 1938 the U.S. was a net importer of consumer goods. But in 1946 the U.S. emerged from the war as a net exporter, and in 1947 the surplus on consumer goods was $1 billion. As industrial capacity was rebuilt in Europe and Japan, the surplus shrank steadily, and in 1959 the U.S. again became a net importer, with a deficit in consumer goods that has grown steadily since then. This pattern typifies what we see in the long-run data on the composition of trade. During the years since 1950 the composition of U.S. trade has moved back toward its longer-run base of comparative advantage. By the mid-1960s we see growing surpluses in trade in capital goods, chemicals, and agricul¬ ture, and deficits in consumer goods and nonagricultural industrial supplies and materials. Trade in automotive products switched from surplus to deficit in 1968.
The U.S. trade position in 1980 is summarized in Table 8. There we see U.S. trade in 1979 and in the third quarter of 1980 (annual rate) by major categories.
The surpluses in capital goods and chemicals have grown since the period just after World War II. These are clear areas of comparative advantage. The deficit on consumer goods we already have discussed; that on autos has existed since 1968. The deficit on petroleum and the agricultural surplus both became major elements around 1974.
In 1979, the $58 billion deficit on trade in petroleum was sub¬ stantially offset by surpluses of $18 billion in agriculture and
131
Critical Issues & Decisions
TABLE 8
U.S. TRADE, 1979-80 ($ billions, annual rates)
Category
Exports
1979
Imports
Balance
1980 III
Exports Imports
Balance
Total
185.0
211.5
-26.5
228.1
236.5
- 8.4
Agricultural
35.4
17.4
18.0
43.8
18.2
25.6
Nonagricultural
149.6
194.1
-44.5
184.3
218.3
-34.0
Nonagricultural
Industrial supplies and materials
51.4
109.9
-58.5
62.2
121.5
-59.3
Petroleum
2.0
60.0
-58.0
2.7
69.1
-56.4
Chemicals
14.5
4.5
10.0
17.7
4.9
12.8
Capital Goods
58.2
24.6
32.9
77.6
30.0
47.6
Autos
17.4
25.6
- 8.2
16.5
28.1
-11.6
Consumer goods
12.6
30.6
-18.0
16.0
34.3
-18.3
Military
3.0
3.0
2.9
-
2.9
Other
7.0
3.4
3.6
9.1
4.4
4.7
Source: Survey of Current Business, 12/80
Critical Issues & Decisions
$13.5 billion in nonpetroleum manufactures, leaving a net trade deficit of $26.5 billion. In the third quarter of 1980, the petroleum deficit was $56.4 billion, but the agricultural surplus was $25.6 billion and the manufactures surplus was $22.4 billion, leaving a net deficit of $8.4 billion.
Thus, the petroleum deficit is largely offset by surpluses in agri¬ culture and manufacturing. Within manufacturing there is a clear division by comparative advantage, with a very large and growing surplus in capital goods and smaller but significant deficits on con¬ sumer goods and autos and a surplus in chemicals.
The U.S. economy has responded to the oil price increase, which generated a $56 billion deficit by 1980, by expanding its trade sur¬ pluses along its lines of comparative advantage. The degree of adjust¬ ment is indeed quite remarkable; by 1980 we could nearly balance trade overall, with a $56 billion oil deficit. The movement in the real exchange rate helped, improving the U.S. competitive position.
B. U.S. Exports of Capital Goods to Developing Countries
A striking development in U.S. trade in the 1970s was the accel¬ eration of growth in capital goods exports and the surplus in trade in capital goods, which reached $45 billion by 1980. During the mid- 1970s, U.S. exports of capital goods to oil exporters and to industri¬ alizing developing countries made a quantum jump. [Branson (1980), p. 220] Growth in capital goods exports to these countries con¬ tinues to increase and should provide an area of strength for U.S. trade in the 1980s. Rapid growth in manufacturing capacity in the developing countries is clearly good for the exercise of U.S. compara¬ tive advantage in capital goods.
Table 9 presents data on U.S. exports of capital goods, in constant 1979 dollars. We see rapid growth in spurts throughout the period since 1965. The period 1965-72 saw fairly steady growth from $13.6 billion to $24 billion (1979 dollars). Then came a jump in three years to $43.5 billion in 1975, a pause until 1977, then another jump to $57.6 billion in 1979.
The data for exports to the developing countries show differing patterns of growth since the 1970s. We see a doubling of U.S. ex¬ ports to Latin America in 1972-75, a pause, and another jump in
133
TABLE 9: U.S. EXPORTS OF CAPITAL GOODS (TOTAL) (1979 $ MILLION)1
Critical Issues & Decisions
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Critical Issues & Decisions
1977-79. The major period of growth in exports to the Near East ended in 1976. The growth in South Asia has been irregular, with a surge in 1976-79. Southeast Asia resembles Latin America, with a jump in 1972-75, a pause, and another jump in 1977-79. Exports to Africa peaked in 1976. The general impression is that exports of capital goods to the Near East and Africa follow jumps in the oil price, and that exports to Latin America and South and Southeast Asia are tied to growth in manufacturing output in those areas. In 1970, exports to the developing areas shown in Table 9 were 30 percent of total capital goods exports; in 1973 this share was 32 percent, and by 1979 it was up to 41 percent.
Table 10 gives the growth rate summary for total capital goods. Let us focus on the period 1973-79. During those years, U.S. real GNP grew at an annual rate of 2.8 percent. Total capital goods exports grew at 10.4 percent. The share of LDC exports was rising over the period. As we run across the columns in Table 10 for 1973- 79, we see that exports of capital goods to each developing country area except Africa grew faster than the total. Thus, in the 1970s capital goods exports grew much faster than total U.S. demand, and the share of the developing countries as a market for capital goods exports grew. Growth in manufacturing capacity in the de¬ veloping countries, based significantly on international borrowing, appeared as demand for exports of capital goods in the U.S.