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WHY AMERICA'S CRAVING FOR IMPORTS IS LIKELY TO GROW
Any way you slice them, the trade numbers are disturbing. The deficit, after declining by 56% between 1987 and 1991, has been rising sharply. So far this year, the trade gap is up more than 50% from its year-ago level.
A widening gap is hardly surprising: America's economy has been expanding for two years, while most of its major trading partners have been mired in recession. Indeed, U.S. exports have proved unexpectedly resilient in recent years, as rising shipments to the emerging economies of Asia and Latin America have helped offset slowing demand from industrial nations. That performance suggests that exports could really take off, once the global economy picks up within the next year or so.
Unfortunately, the import side of the equation is less reassuring. Imports exploded this year, far outpacing domestic demand and now accounting for a record 25% of U.S. purchases of goods. According to Stephen S. Roach of Morgan Stanley & Co., "this new wave of import penetration just wasn't supposed to happen in a period when wage restraint and productivity gains have turned America into a low-cost producer among industrial nations," and when the dollar has sunk below its early-1980s level.
To explain the import deluge, Roach points to an unusual trend: a notable decline in relative import prices. As expected, the onset of dollar weakness in 1986 caused import prices to rise faster than prices of domestically produced goods, helping to narrow the huge trade deficit. But since 1988, he notes, while the dollar has stayed weak, import prices have fallen in relative terms (chart). That is, they have risen less than domestic goods prices.
Two trends, says Roach, are apparently enabling import prices to resist the upward push of dollar weakness. The first is rising computer shipments from offshore facilities established by U.S. multinationals to capitalize on cheap labor. The second is soaring imports of consumer goods from low-wage nations in Asia and Latin America.
Economic theory says these developments should help America's trade performance long-term. Low-cost computers let U.S. companies lift productivity and competitiveness. And imports of consumer goods lift export prospects by raising living standards overseas.
Such future benefits, however, are cold comfort to Americans today. Near- term, the growing price competitiveness of imports is detracting from U.S. output and incomes just when the economy seems to need all the help it can get.GENE KORETZ