ANALYSIS OF GLOBAL TRADE IMBALANCES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000500010001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: March 14, 2012
• Sequence Number: 1
• Publication Date: April 29, 1987
• Content Type: MEMO

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t~
DATE S- ./ _ 7 F I CONF, I' ENT I AL
- Central Intelligence Agency
DOC NO ~~' ~ ~ ZpO ZS LE
P&PD
2 9 APR 1987
MEMORANDUM FOR: See Attached Distribution
SUBJECT: Analysis of Global Trade Imbalances
One of our analysts has just completed an analysis of global
trade imbalances that I believe you may find useful. Its chief
finding is that on the volume side, the adjustment of world. trade
flows is underway and, even with no further policy or currency
changes, the US deficit and key foreign surpluses may be
approaching a turnaround. Should you have questions, you should
address them to
Chief, Economics Division
Global Issues
Attachment:
Global Trade and the US Dollar
GI M 87-20075, April 1987,
CONFIDENTIAL
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CONFJDENTIAL
SUBJECT: Analysis of Global Trade Imbalances
OGI/ECD/I (28, April 87)
Distribution:
1 - Deane Hoffman, NIO/ECON
1 - Michael Driggs, White House
1 - Roger Griffin, Treasury
1 - William Barreda, Treasury
1 - Byron Jackson, Co
Stephen Farrar, NSC
1 - Alexander H. Platt, NSC
1 - Ann Hollick, State
I - John J. St. John, State
1 - DD/OEA
1 - C/OEA/SAD
1 - C/OEA/NAD/JB
1 - C/OEA/CD/EAB
1 - C/OEA/CD/T&TB
1 - C/EURA/WE
1 - C/EURA/EIA/REI
1 - C/OGI/TID/CF
1 - DA/DDCI
1 Ex/Dir
1 - DDI
1 - DDI/PES
1 - DD/OGI, D/OGI
1 - CPAS/ISS
3 - OGI/EXS/PG
5 - CPAS/IMC/CB
1 - C/OGI/ECD
3 - C/OGI/ECD/T
CONFIDENTIAL
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
28 April 1987
Global Trade and the US Dollar
Summary
Global trade imbalances have reached record levels despite
the continuing depreciation of the US dollar against other major
currencies. The US trade deficit hit a record $149 billion last
year, while trade surpluses in West Germany, Japan, and Taiwan
reached all-time highs. Signs of a possible turnaround in
underlying trade patterns have begun to appear, however. Several
factors could work against this optimisite outlook. Continued
sluggishness in Japan's and West Germany'.s domestic economies;
continued US consumer preferences for foreign imports, despite
higher import prices; and the threat of increased protectionism
could partially offset the positive impact of the depreciation of
the dollar on global trade patterns. 25X1
This memorandum was prepared by International Trade 25X1
Branch, Office of Global ommen s y be directed to the
author 25X1
GI M 87-20075
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GLOBAL TRADE AND THE US DOLLAR
Global trade imbalances have reached record. levels. Last year
the US deficit was the highest ever, as were the trade surpluses in
Japan, West Germany, and Taiwan. This trend has persisted into 1987:
recent data indicate that the US trade deficit in February was the
second highest monthly deficit on record. Although conventional
economic wisdom indicates that: the decline of the US dollar should
narrow the trade deficit and reduce the surpluses being run by major
US trading partners, such improvement has not been realized. The
depreciation of the dollar has, however, begun to alter underlying
trends in export and import prices and volumes for the US and its
Trade and Exchange Rate Trends, 1983-84
Trade data indicates that the US trade deficit nearly doubled
during 1983-84. Import volume surged throughout the period as the
rapid appreciation of the dollar in 1983 and 1984 reduced dollar
import prices. This price drop, coupled with strong US economic
growth, fueled the rapid growth of import volume. Concurrently,
export earnings showed little change, as the dollar's appreciation
raised US export prices and made US exports less competitive in world
mn rlrot a
Major US trading partners reaped the benefits of a rising dollar
and strong US economic growth--Japan, France, Canada, South Korea, and
Taiwan all recorded improvement in their trade balances during
1983-84. The rising dollar allowed foreign exporters to raise export
prices (measured in domestic currency), and higher US demand for
foreign goods boosted export volume. On the other hand, import prices
(also measured in domestic currency) rose sharply as a result of the
dollar's appreciation, depressing the demand for imported goods in
Western Europe and the Far Eastern NICs. Individually, Japan's trade
surplus jumped $26 billion during 1983-84, while Canada recorded a
gain of nearly $2 billion. France recorded an $11 billion decline in
its trade deficit, and South Korea's trade deficit narrowed $1.5
billion over the period.
The Falling Dollar and Growing Trade Imbalances, 1985-86
Although the dollar began to depreciate against other major
currencies in early 1985, the decline had little impact on global
trade balances because of the lag in the response of trade volumes to
changes in trade prices. As a result, US imports continued to rise,
though at a slower pace than in earlier years, and exports remained
depressed. Western European trade balances continued to improve, with
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France's trade deficit declining and West Germany's trade surplus
reaching a new high. Japan's trade surplus jumped $13 billion, and
Taiwan recorded a gain of $2 billion.
Signs of a turnaround in underlying trade trends began to appear
in the last half of 1986.
--US export earnings showed signs of recovery, as volumes
increased at a 7 percent annual rate after mid-1986. Import
prices started to rise in the last half of the year, leading to
a drop in import volume in the fourth quarter of 1986 following
three years of sharp gains.
--Changing trends also were evident in Western Europe and Japan.
Import prices plunged in 1986--in part because of the drop in
the dollar--and import volumes showed marked increases. The
dollar's decline also raised the relative prices of European
and Japanese goods in foreign markets, reducing export volumes
and forcing foreign exporters to cut the domestic-currency
prices of their exports in an attempt to maintain
competitiveness. As a result, West Germany's trade surplus,.
measured in domestic currency, declined in the fourth quarter
of 1986, and Japan's surplus showed no change.. In both
countries, early 1987 trends indicated an uptick in the
Has the Bottom been Reached?
Private forecasts for 1987 indicate that the continuing decline
of the dollar will have a more noticeable impact on trade trends. US
import prices are forecast to increase, sharply reducing the growth of
import volume. The dollar's decline will increase the competitiveness
of US exports, boosting export volume and allowing exporters to raise
their prices slightly. The forecasts indicate that the impact of the
depreciation will not be sufficient to actually reduce the trade
deficit, but will hod the increase well below those of the previous
three years. ~
The dollar's decline also will have a dramatic impact on tha 1Q 7
The depreciation of the dollar shout ly reduce their
import prices, measured in domestic currency units, and fuel continued
increases in import volume. Their exports will continue to become
less competitive, leading to sharp cutbacks in the growth of export
volume and depressed export prices. The trade balances, as measured
in US dollars, are forecast to increase, but the gains will be much
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smaller than in previous years. When measured in domestic currency
units, however, the trade surpluses for Japan and West Germany are
forecast to sh
b
t
ow su
s
antial declines, while the trade balance gains
for South Ko
rea and Taiwan will be far smaller than in 1986.
A Cautiously Optimistic Outlook
We believe that beyond this year world trade imbalances will ease
as the impact of the past depreciation of the dollar becomes stronger.
We believe this outcome will occur even if the dollar falls no
further. Should it continue to slide, the initial impacts on trade
imbalances will be adverse, due to the price changes leading volume
ad ustments, but the eventual turnaround will be even more pronounced.
However, several factors could work against this outlook. The
exchange rate is not the. only factor affecting trade flows, nor is it
the most powerful. Real GNP growth and consumer preferences also play
important roles. Domestic demand in Japan and West Germany remains
sluggish, depressing import demand in these countries and reducing the
impact of the dollar's decline on their large trade surpluses.
Consumers in the United States continue to show a preference for
foreign goods despite increased prices for many of these products.
Should this trend continue, US import demand would remain strong,
partially offsetting the positive impact of depreciation. of the dollar
on the US trade deficit. Finally, increased protectionism--at a time
when trade patterns are finally beginning to change--could be
counterproductive, further increasing trade tensions and inviting
retaliatory action by trading partners.
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THE SLOW ADJUSTMENT OF TRADE FLOWS TO EXCHANGE RATE CHANGES
The slow response of world trade balances to the decline of the
dollar is puzzling at first glance. A depreciation of the US dollar
raises US import prices and lowers import prices in foreign
countries--curbing the growth of US import volume and boosting import
demand in our major trading partners. US export prices decline and
foreign export prices increase, making US exports more competitive in
world markets. As a result, the US trade deficit should fall and the
large trade surpluses of major US trading partners should be reduced.
While an exchange rate depreciation immediat
l
f
e
y a
fects export
and import prices, the same is not true for export and import volumes,
however. Businessmen and consumers must first recognize that a
depreciation is occurring and that export and import prices are
changing. Decisions regarding new orders and use of existing
inventories must be made in response to these changing conditions.
Finally, goods must be produced and delivered once these decisions are
made. Because orders are often placed well in advance of delivery,
the lag time between a change in the exchange rate and an actual
change in trade flows can be quite substantial.
The first effect of a dollar depreciation therefore will be to
raise US import expenditures, because the price of imports will rise
while import volumes will remain unchanged, leading to a deterioration
of the trade balance. As time passes, the quantity adjustments take
place, whereby US import volumes are depressed while exports become
more attractive to foreign buyers, and the trade balance will begin to
improve. This process is described by economists as the "J-curve"
effect, and academic studies have indicated that for manufactured
goods the response of trade flows to exchange rate changes can stretch
out over four or five years. As a result, the lack of a significant
response of world trade balances to the dollar's depreciation during
1985-86 Should not he ~;..-
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Hey Trading Countries:
Selected Trade Trends
UNITED STATES
1983
1984
1985
1986
Trade Balance($bil)
-57.6
-107.8
-132.2
-148.9
Export Volume(pct chg) -6.4
6.8
-1.8
1.6
Import Volume(pct chg) 10.4
23.9
8.7
11.3
Export Pricea (pet chg) 1.1
1.3
-0.8
-2.7
Import Pricea(pet chg) -4.1
1.8
-2.5
-3.7
Trade Balance ($bil) 31.5
44.3
56.0
82.6
Trade Balance (tr yen) 7.5
10.5
13.4
1.3.6
Export Volume (pet chg) 8.7
16.0
3.7
-1.7
Import Volume (pet chg) 1.2
10.8
-0.2
13.0
Export Price (pet chg) -6.7
-0.4
0.0
-14.5
Import Price (pet chg) -9.2
-2.7
-3.9
-34.7
Export Priceb (pet chg) -2.2
-0.4
-0.4
21.0
Import Priceb (pet chg) -4.8
-2.2
-3.7
-7.6
Exchange Rate 237.5
(yen/US$)
237.5
238.5
168.5
Trade Balance ($bil) 21.5
22.0
28.7
54.9
Trade Balance (bil DM) 54.9
62.7
84.4
1.19.4
Export Volume(pct chg) -0.3
9.1
5.9
-0.6
Import Volume(pct chg) 4.0
5..2
4.2
10.2
Export Price (pet chg) 1.4
3.5
3.9
-1.2
Import Price (pet chg) -0.3
5.9
2.6
-17.7
Export Priceb (pet chg) -3.6
-7.1
0.3
34.4
Import Priceb (pet chg) -5.2
-4.9
-0.9
11.6
Exchange rate 2.55
2.85
2.94
2.17
(DM/US$)
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FRANCE 1.983
1984
1985
1986
Trade Balance ($bil) -8.8
-4.7
-4.5
-2.2
Trade Balance(bilFranc)-67.1
-41.1
-40.5
-15.2
Export Volume (pet chg) 3.4
5.3
2.8
-2.1
Import Volume (pet chg) -1.9
2.3
4.1
7.2
Export Price (pet chg)
10.1
11.8
4.7
-4.4
Import Price (pet chg)
7.8
10.4
2.0
-13.4
Export Priceb (pet chg)
-5.1
-2.4
1.7
24.1
Import Priceb (pet chg
-7.1
-3.7
-0.9
12.4
Exchange Rate
(francs/US$)
Trade Balance ($bil)
-1.3
-5.9
-2.3
-1.2.7
Trade Balance(bil pds)
-0.9
-4.4
-1.8
-8.7
Export Volume (pet chg)
0'.6
8.7
7.3
3.3
Import Volume (pet chg)
7.7
9.5
5.3
7.7
Export Price (pet chg)
7.8
8.1.
5.4
-4.7
Import Price (pet chg)
8.2
9.2
3.7
-7.6
Export Priceb (pet chg)
b
-6.9
-4.9
2.7
7.9
Import Price
(pet chg)
-6.8
-3.8
1.0
4.6
Exchange Rate
0.66
0.75
0.77
0.68
(pounds/US $)
Trade Balance ($ bil)
-3.2
-6.0
-6.9
-1.6
Trade Balance(tr Lira)
-4.9
-10.6
-13.2
-2.4
Export Volume(pct chg)
5.2
6.5
7.5
-1.6
Import Volume(pct chg)
1.4
9.0
8.8
5.8
Export Price(pct chg)
5.7
9.6
8.1
-1.9
Import Price(pct chg)
3.3
11.3
7.4
-8.5
Export Priceb (pet chg) -6.0
b
-5.2
-0.4
25.6
(pet chg) -8.1
Import Price
-3.7
-1.1
17.0
Exchange Rate 1519
1757
1909
1491.
(Lira/US$)
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Trade Balance($bil)
15.0
16.7
13.3
5.9
Trade Balance (bil/
Canadian Dollars)
18.4
21.7
18.2
8.2
Export Volume (pct chg) 7.8
18.5
4.2
4.8
Import Volume (pet chg)11.1
18.6
6.6
9.7
Export Price (pet chg) 0.1
4.6
1.7
-3.3
Import Price (pet chg) 0.4
6.2
3.2
-1.3
Export Priceb (pet chg) 0.1
-1.1
-3.4
-4.6
Import Priceb (pet chg) 0.4
0.5
-2.2
-2.6
Exchange Rate 1.23
1.30
1.37
1..39
(Canadian$/US$)
Trade Balance ($bil) -1.8
-1.0
0.0
3.4
Trade Balance(tr won) -1.4
-0.8
0.0
2.9
.Export Volume(pct chg) 16.8
15.1
7.7
25.3
Import Volume(pct chg) 1.3.5
15.9
6.2
26.0
Export Price (pet chg) 2.1
7.4
4.0
2.0
Import Price (pet chg) 1.1
5.2
3.4
-1.0.7
Export Priceb (pet chg)-3.9
3.5
-3.7
0.7
Import Priceb (pct chg)-4.8
1.4
4.2
-11.8
Exchange Rate
776
806
870
881
(Won/US$)
Trade Balance ($bil)
6.3
9.2
11.2
15.9
Trade Bal(bil NT$)
252.6
364.7
445.8
601.0
Export Volume(pct chg)
18.6
15.7
5.9
25.9
Import Volume(pct chg)
13.1
2.1
-5.2
39.1
Export Price (pet chg)
-1.9
2.9
-2.8
-2.3
Import Price (pet chg)
-2.4
5.8
-3.9
-10.6
Export Priceb (pet chg) 0.3
4.2
-3.3
3.0
Import Priceb (pet chg)-0.2
7.1.
-4.3
-5.9
Exchange Rate
40.1
39.6
39.8
37.8
(NT/US$)
aIn National Currency units.
bIn US dollars.
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Quarterly Trade Data for 1986 a
1986I
1986II
1986III
_1986IV
Trade Balance (bil$) -34.8
-36.6
-38.8
-38.7
Export Volume (pct chg) 1.9
-2.1
1..5
1.9
Import Volume (pct chg) 0.2
5.3
2.5
-2.2
Export Price (pct chg) -0.2
-1.3
-0.2
0.q
Import Price (pct chg) -1.7
-4.9
0.8
3.8
Trade Balance (bil$) 1.2.4
21.7
24.6
23.9
.Trade Balance (tr Yen). 2.3
3.7
3.8
3.8
Export Volume (pct chg) -4.4
1.5
0.3
-2.3
Import Volume (pct chg) 9.6
15.0
-0.2
-1.7
Export Price (pct chg) -3.7
-4.2
-3.9
2.0
Import Price (pct chg) -11.6
-22.6
-11.5
3.7
Exchange Rate (Yen/US$)187.9
170.1
155.8
160.3
Trade Balance (bil$) 13.0
1.5.1
15.1
11.7
Trade Balance (bil DM) 30.6
34.0
31.4
23.4
Export Volume (pct chg) 1.8
-0.5
-0.2
0.7
Import Volume (pct chg) 0.7
3.4
7.5
0.6
Export Price (pct chg) 0
-1.1
-0.3
0.5
Import Price (pct chg) -2.5
-7.9
-5.7
8.9
Exchange Rate (DM/US$) 2.35
2.25
2.09
2.n1.
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1986I
1986II
1986III
19861V
Trade Balance (bil$) -0.6
0.8
1.1
2.1
Trade Balance(tr Won) -0.5
0.7
0.9
1.8
Export Volume (pct chg) 29.3
21.0
20.4
NA
Import Volume (pct chg) 23.5
15.1
22.3
NA
Export Price (pct chg) 1.3
-0.9
3.1
NA
Import Price (pct chg) -3.9
-8.2
-8.6
NA
Exchange Rate (Won/US$) 887.1
887.0
882.2
869.5
a Data are seasonally adjusted. Changes in export and import
prices and volumes are changes over the previous quarter.
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US Trade Balance:
Accounting for the Deterioration
1983
1984
1985
1st half
1986a
2nd half
1986a
1.st qtr.
1.987a
Balance($bil) -31.7
-57.6
-107.8
-132.2
-71.4
-77.5
-38.2
Change($bil) -4.4
-25.9
-50.2
-24
4
-17
1
-12
2
(over same period
in prey. yr.)
.
.
.
-3.4
Due to changes in ($bil):
Export Volume -24.4
-13.8
14.2
-3.5
0.3
3.3
1.8
Import Volume 12.7.
-24.7
-62.3
-25.5
-20.8
-20.4
-3.9
Export Price 3.0
2.0
3.2
-1.3
-4.0
-2.0
0.3
Import Price 4.3
10.7
-5.4
5.9
7.4
6.9
-1.7
Percentage
changes in:
Export Volume -10.6
-6.4
-6.8
-1.8
0.3
3.2
3.2
Import Volume -5.0
10.4
23.9
8.7
12.5
11.8
4.2
Export Price 1.1
1.1
1.3
-0.8
-3.6
-1.9
0.5
Import Price -1.6
-4.1
1.8
-2.5
-3.9
-3.7
1.9
Thanges are over same period of previous year.
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