THE UNITED STATES IN THE WORLD ECONOMY: ELEMENTS OF STRENGTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00176R001400060001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 132
• Document Creation Date: December 20, 2016
• Document Release Date: May 7, 2007
• Sequence Number: 1
• Publication Date: May 21, 1982
• Content Type: REPORT

Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
CONFIDENTIAL
21 May 1982
MEMORANDUM FOR: Holders of NIC Memorandum 82-10006 --
"The United States in the World Economy:
Elements of Strength"
SUBJECT Erratum
Please make the following correction on page 19, Figure 1-3:
Reverse the legend labels on the bottom chart (dark colors
represent productivity, light colors represent wages).
2O&
CONFIDENTIAL
 Approved For Release 2007/05/07: CIA-R DP85T00176R001400060001-5
CONFIDENTIAL
21 May 1982
MEMORANDUM FOR: Holders of NIC Memorandum 82-10006 --
"The United States in the World Economy:
Elements of Strength"
SUBJECT Erratum
Please make the following correction on page 19, Figure 1-3:
Reverse the legend labels on the bottom chart (dark colors
represent productivity, light colors represent wages).
2O
CONFIDENTIAL
 Approved For Release*2007705107 : CIA-RDP85TO0176R001400060001-5
National - Confidential
Intelligence
Council
r
1
I
The United States in the
World Economy:
Elements of Strength
National Intelligence Council
Memorandum
Confidential
NIC M 82-10006
May 1982
250
 Approved For Release 2007/05/07: CIA-R DP)85T00176R001400060001-5
National Security Unauthorized Disclosure
InfI ~rmation Subject to Criminal Sanctions
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
11
I
1
National
Intelligence
Council
The United States in the
World Economy:
Elements of Strength
National Intelligence Council
Memorandum
Information available as of 4 May 1982
was used in the preparation of this report.
This Memorandum was prepared within the
National Intelligence Council. The material presented
in part B was reviewed by CIA's Directorate of
Intelligence. Comments are welcome and may be
addressed to the authors, Hans Heymann, Jr.,
National cer at Large!
andi nalytic Groups--j
Confidential
NIC M 82-10006
May 1982
annrnx,crl Pnr P Ianca )nn7/n /n7 - C.IA-RD1P86TO0176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
1
The United States in the
World Economy:
Elements of Strength
Preface This paper examines the performance of the United States in the world
economy in the past decade and looks beyond the present recession toward
the mid-1980s. Part A provides the broad perspective. Part B presents a
collection of annotated graphic materials supporting the propositions of
part A and providing a fuller record of the US 1970s performance. The
overall picture that emerges is considerably more encouraging than the
gloomy perceptions now gaining wide currency even among well-informed
observers. In particular, the paper challenges the assertions often made
that:
? The United States is steadily losing its competitive edge in worldwide and
key export markets.
? The downward trend in US productivity growth is a firmly embedded
phenomenon.
? Japan's recent dramatic high-technology accomplishments foreshadow
the end of US technological preeminence.
Not surprisingly, these and other assertions attesting to the steady erosion
of America's economic strength tend to gain maximum momentum when
the economy is in the trough of a business cycle. Worrisome signals emitted
by adverse economic indicators-rising unemployment, widening deficits,
negative growth-tend to focus attention on present transitory troubles and
mask the significance of more favorable longer term trends. In this
atmosphere, observers and forecasters tend to put the most gloomy
interpretation on what has transpired. "The US economy lost its elan
during the 1970s," proclaims one prognosticator. "Productivity increases,
economic growth and international competitiveness all dropped like
stones." Productivity gains certainly did diminish and economic growth
slacked off, but these developments hardly add up to a loss of elan. On the
contrary, a more careful look at the historic record reveals a relatively
robust US performance in the past decade and a more favorable prospect
for the mid-1980s than is generally assumed.
t
iii Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Contents
Preface
Part A: Overview I
Part B: The 1970s Record 11
Key Findings 11
1. Overall Economic Position 13
World GNP 14
Industrial Countries: Economic Power Shifts 16
Major Industrial Countries: Employment,
Productivity, and Wages 18
Purchasing Power per Capita 20
w
II. Competitiveness in World Trade 23
Industrial Countries: Current Account Trends 24
Industrial Countries: Current Account Positions 26
Industrial Countries: Current Account Balances,
1980 28
Industrial Countries: Trade Balances, 1980 30
US Trade Balances in Major Commodities 32
World Exports 34
Volume of Industrial Country and LDC Exports 36
Volume of Exports of Manufactures 38
t
Industrial Countries: Share of World Market
for Manufactures 40
Industrial Countries: Share of EC Market
for Manufactures 42
Industrial Countries: Share of Japanese Market
for Manufactures 44
Industrial Countries: Share of OPEC Market
for Manufactures 46
Industrial Countries: Share of Non-OPEC LDC
Market for Manufactures 48
Industrial Countries: Share of NIC Market
for Manufactures 50
US Share of NIC Markets for Manufactures 52
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Concentration of Exports of Manufactures 90
Impact of Japanese Exports of Manufactures 96
United States: The Growing Importance of the
Service Sector 100
Selected US Service Industries: Share of
Foreign Revenues 106
United States: Major Changes in the "Service"
Account Balance 108
Confidential vi
Industrial Countries: Share of Communist World
Market for Manufactures 54
Industrial Countries: Share of US Market for
Manufactures 56
Major Changes in US Share of Industrial Country
Exports of Manufactures 58
III. Impact of Flexible Exchange Rates 61
US Balance in Manufactures and Exchange
Rate Changes 62
United States: Volume of Exports of Manufactures 64
LDC Share of Industrial Country Imports
of Manufactures 78
Major LDC Exporters of Manufactures to the
Industrial World 80
Industrial Countries: Imports of Manufactures
From LDCs 82
VI. US Trade Frictions With Japan 87
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
US "Service" Account Balance With Selected
Partners 110
Industrial Countries: Major Changes in the "Service"
Balance 112
VIII. Direct Investment Flows 115
United States: Cumulative Direct Investment Abroad 116
I
Cumulative Foreign Direct Investment in the
United States 118
US Share of Industrial-Country Direct
Investment Flows 120
Industrial Countries: Changing Pattern of Foreign
Direct Investment 122
IX. Military and Aid Burden 125
Industrial Countries: The Military and Aid Burden 126
f
t
vii Confidential
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
The United States in the
World Economy:
Elements of Strength
I
t
Part A: Overview In taking a retrospective look at the troubled decade of the 1970s we would
be badly misled if we failed to take into account the exceptional nature of
the halcyon decades of the 1950s and '60s that preceded it. Those were
decades of extraordinary postwar growth during which the badly mauled
economies of Western Europe and Japan were restored to their proper
place in the world economy, closing the economic gap with the United
States. The high-growth momentum of those decades could not have been
sustained much longer in any event. A slowing was already apparent in the
United States after 1966. But the two OPEC shockwaves of the 1970s put
an extraheavy damper on the performance of all the big capitalist
economies. Real growth fell and inflation and unemployment rose in all of
them.
Seen against this backdrop, the US economic performance-relative to
that of other industrial countries-remained surprisingly strong through-
out the 1970s.
Some highlights of the US performance may help put the US economic
posture in better perspective.
1
Relative Growth
? US growth in real output during the 1970s exceeded or at least matched
that of all other industrial countries except Japan. Although the growth
rate of all of the OECD countries slumped during the decade, that of the
United States declined less steeply, thus enabling it to hold onto its 40-
percent share of the industrial countries' collective GNP.
? The sharp appreciation of foreign currencies against the dollar in the
1970s created the exchange-rate illusion that other industrial countries
were still gaining on the United States. In fact, the exchange rates were
merely catching up with the real changes that had occurred earlier. In
real terms, the United States maintained its relative economic power
position through the 1970s.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Employment and Productivity
? The United States achieved its economic gains by putting people to work
rather than increasing their productivity. Unlike Western Europe and
Japan, where employment grew very little, the United States had to cope
with a massive influx of new entrants into the labor force as the children
of the 1950s "baby boom" shot into the labor market. It also moved from
a position of having one of the lowest proportions of females employed in
the late 1960s to having the highest proportion by the late 1970s. Finally,
the United States absorbed the largest rise in immigrant workers. Almost
19 million new jobs were created-a net increase in the employed labor
force of 23 percent. US firms, therefore, not facing the tighter labor
situation and not benefiting from the greater capital availability in other
industrial countries, often found it more profitable to hire more workers
than to invest in labor-saving equipment.
? In sharp contrast, West European firms, in the face of a much tighter la-
bor market and higher wage costs, placed greater emphasis on labor-
saving capital investments. The results in terms of improved productivity
were much better. Public pressure for higher wages and social welfare
benefits, however, pushed up real wages beyond the productivity gains,
undercutting Western Europe's international competitiveness. Europe
also has been slower than either the United States or Japan to move out
of mechanically based into electronically based technologies.
? Japan, through a high rate of investment and a remarkably adept
technology development strategy, was able to achieve productivity
growth rapid enough to accommodate a large boost in real wages without
impairing its international competitiveness. The move toward greater
labor-saving investments also reflected a significant decline in new
entrants into Japan's labor force. This labor trend was the opposite of
those that took place in the United States and Western Europe.
Export Performance
? Value versus Volume: In value terms (undeflated US dollars) total world
exports doubled in the 1950s and doubled again in the 1960s, but
increased sixfold in the 1970s. The US share of world exports, measured
in this way, declined modestly in the 1950s and '60s, and fell sharply in
the '70s. But again, exchange rate and price movements (dramatic
changes in the value of the dollar, the huge jump in oil prices) convey a
blurred image. In physical volume, the US share of world exports
increased slightly in the 1970s-not enough to cover higher oil prices, but
enough to maintain the US share of the industrial world's exports in
terms of realistic exchange rates.
Approved For Release 2007/05/07: CIA-R DP85T00176R0014000600[11-5
v
1
1
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
? Looking at manufactures alone, we see that the volume of US exports
climbed almost as rapidly as that of Japan and faster than that of the
United States' European competitors for the decade as a whole. The US
share of OECD exports of manufactures thus was actually higher in 1980
than at the beginning of the 1970s.
? The US share of exports of manufactures, measured in volume terms,
was higher in 1980 than at the beginning of the 1970s in all markets-
Japan, Western Europe, the less developed countries (LDCs), and the
Communist countries. In the OPEC countries, the shares of the United
States, West Germany, France, and the United Kingdom all fell slightly,
while Japan's and Italy's gained. The United States did particularly well
in the rapidly growing markets of the newly industrializing countries
(NICs)-Mexico, Brazil, South Korea, Taiwan, Hong Kong, and
Singapore.
? The influence of shifts in exchange rates, however, made the US export
performance in manufactures highly erratic during the decade, with
exports growing rapidly during periods of a depreciating dollar (1971-74
and 1977-80) and exports actually declining in a period of dollar
appreciation (1974-77). The upswing in the value of the dollar beginning
in late 1980 is now again having an adverse effect on US exports. The
continuing strength of the dollar in 1982 augurs badly for US export
competitiveness for the next year or so, until the cycle reverses again.
? The structure of US trade differs significantly from that of US partners
in the OECD. Manufactures are far less important to the United States
than they are to Europe and Japan in balancing the trade account. The
United States has had an increasingly favorable position in foodstuffs
since 1973 and has run a near balance in raw materials, while most other
developed countries have large deficits in these two categories. The US
deficit in fuels is moderated by the country's large domestic energy
resources and by some $5 billion in coal exports.
? Service transactions, moreover, represent a far more significant factor in
balancing the US current account than is the case for any other country.
In recent years, large US trade deficits have been more than offset by
even larger surpluses on service account. The spectacular increase in
income from overseas investments (double the corresponding payments to
foreigners investing in the United States) and the crucial role that
services now play in balancing the US current account constitute a
widely underappreciated area of US competitive strength.
3 Confidential
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
In sum, the United States' overall trade performance in the 1970s was
highly creditable:
? Its current account position was strongly positive. Over the past 12 years,
the I Tnited States earned far more than it paid out in its current
international transactions (goods, services, return on capital investea
abroad, and private remittances). In fact, its cumulative surpluses for the
entire period topped $60 billion, more than those of any other industrial
country.
? Japan, alone among the industrial countries, performed better than the
concentrated in a very few commodity categories. Only five categories-
rnad mntnr vehicles. steel, consumer electronics, industrial machinery,
and ships-make up more than half of its exports. It is precisely tms con-
'
s
centration that contributes to-and also limits-the scope of Japan
success.
Challenges of the 1980s
The Crucial US Role
The vigor and durability of the coming global upturn will hinge to a large
extent on what happens in the United States-partly because of its
enormous weight in the global economy, but also because it is the only in-
dustrial country with a major stimulative program in place. Neither the
West Europeans nor the Japanese are willing or able to provide the engine
of growth they did during earlier upswings, and the LDCs and the
Communist countries no longer offer the growth markets they did in the
1970s.
From a psychological point of view, then, the industrial world and many
LDCs are increasingly looking to the United States for global economic
leadership. They appreciate that a strong US recovery is a prerequisite to
their own recovery. Especially if accompanied by lower inflation and
interest rates, a US resurgence will benefit them both directly and
indirectly through its stimulation of commodity markets and growth in
LDC import demand. Their expectations, however, will be greatly frus-
trated if-as is quite likely-their recovery is less vigorous and lags
significantly behind that of the United States. Nevertheless, given their
current mood, the Europeans are much less inclined to be leaders than they
were just a few years ago. The ingrained attitudes of the Japanese continue
to prevent them from playing a role in global economic affairs that even be-
gins to match their economic prowess.
1 4
Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
t
t
Industrial Countries: Factors Posing Economic Adjustment Problems
Technological Jet engines
Innovations Numerically controlled machine tools
Petrochemicals
Synthetic fibers
New Western Europe
Competitors
Problems Postwar reconstruction
Inherited From
Previous Era Postcolonial LDCs
Profligacy: high energy costs,
inflation, budgetary
burdens
US productivity slippage
West European
industrial revamp
1
Demographic Labor turns scarce
Trends
US Major Halting spread of Soviet empire
National Europe
New entrants diminish (US, WE)
Third World
Sharing of defense burden
Protection of Persian Gulf oil
u
5 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
All this raises the question of whether the United States is equipped to
meet the challenge. There is no doubt that the US economy, like those of
all industrial countries, is confronted with powerful forces of structural
change as pervasive as those it faced in the past decade, although quite dif-
ferent. Rapid advances in technology, sweeping shifts in consumer demand,
major alterations in patterns of energy use, and significant reversals in
demographic trends are all part of the dynamic process to which industrial
societies must continually adjust. A display of the changing nature of these
issues since World War II and a glimpse at the future is shown in figure A.
In this adjustment process, those who stand to benefit from change are
forever at odds with those who stand to lose. The former seek to alter the
rules and structures, while the latter want to preserve the status quo. The
problem for government is how to make the needed structural adjustments
politically palatable while minimizing their socially disruptive
consequences.
Many Roads to Adjustment
The way a society adjusts to secular change is much less a matter of its
conscious choice than a function of its cultural-institutional makeup. There
is no right way or wrong way, no single magic formula of social
organization for coping successfully with change. For the most part, we are
talking not about an "industrial strategy" but about a set of entrenched
conditions. It may be tempting to single out some particular set of policies
or approaches on some facet of a country's institutions and to present these
as success indicators or exemplars for other countries to emulate. But such
single elements do not typically stand on their own when removed from
their indigenous social context; nor do these elements lend themselves
readily to modification through social engineering. This does not mean that
government policies and actions cannot significantily stimulate or retard
the adjustment process. Indeed, such policies have both intended and
unintended effects. What it does mean is that their effects are conditioned
by the particular social setting in which they operate.
Among the elements often cited as "explaining" a country's industrial
dynamism and successful adjustment to change are such things as the way
government interacts with the private sector, the manner in which industry
is structured, the emphasis put on welfarism, and the amplitude of the
consumer savings rate. But the evidence on the separate or collective
impact of these and other elements is by no means clear. All that can be
said is that industrial societies differ in their institutions, approaches, and
policies in these matters. When they do try to replicate each other's
solutions, they often find that what is good for one is not necessarily
Confidential 6
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
appropriate for the other. While the long-term trend toward international-
ization of production may well narrow the differences among countries, the
differences are likely to remain substantial for some time.
The differences range over a wide spectrum. Some examples:
? Role of Government. Involvement of government with the private sector is
pervasive in Japan and significant in Western Europe, but quite limited
in the United States. Similarly, cooperative interaction among big
government, big business, and big labor is extensive in Japan and well de-
veloped in most West European states, while in the United States the re-
lationship among the three groups has been traditionally adversarial.
Hostility, however, is beginning to break down, with the growing
awareness in the United States that a community of interest exists among
them.
? Industrial Organization. US industrial advances and technological gains
depend far more on innovations by small and medium-size firms than in
Japan, where huge, well-established conglomerates seek to play the same
role.
? Emphasis on Welfarism. Both Europe and Japan are more inclined than
the United States toward preserving internal social stability-for exam-
ple, by providing income maintenance-and toward cushioning their
industries against disruptive change-by cartelizing or nationalizing
enterprises in distress, for instance. European countries work mainly
through regulation, such as laws that restrain layoffs, while Japan
adheres to less formal practices, such as the institution of "lifetime
employment." Japan's pursuit of social stability policies has also been an
important factor in insulating the Japanese domestic market from foreign
competition.
? Methods of Investment Financing. US firms are heavily dependent for
investment capital on corporate profits and equity financing, while other
industrial countries-most notably Japan-rely more on a high rate of
debt financing as a source of investment funds. Whether the notoriously
low US rate of private saving has become a serious impediment to future
US growth, as is now widely claimed, is not clear. Historically, the US
savings rate has always been very low, and has not declined in recent
years.
These divergent institutional approaches and practices do not add up to any
coherent explanation of why industrial countries differ in the degree and
quality of their economic dynamism and adaptability. It seems, rather, that
7 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
the variations among them are attributable to some quite fundamental
factors. For the United States, its very high degree of flexibility rests on a
uniquely broad-based economy, a great diversity of political institutions,
and a relatively unimpeded flow of labor, capital, and know-how. Japan's
adaptability springs largely from its social homogeneity, which permits a
strong consensus among interest groups. European countries vary consider-
ably from one to the other, but collectively their societies exhibit less
resilience and greater resistance to change, largely as a matter of social
culture and tradition, including lingering class hostilities and broad
adherence to socialist principles.
The fact that the US economy exhibited great adaptability in coping with
change during the difficult decade of the 1970s should give some comfort
that it will adjust equally well to the stresses of the 1980s. This is not to un-
derrate the seriousness of some of these stresses-boosting US productivity
growth and improving the direction and efficiency of investment are no
small matters-but it is merely to point out that an adjustment mechanism
of proven effectiveness does exist. This much-touted adjustment process,
however-like the "unseen hand" of the market place-is invisible and
unpredictable. Confidence in its efficacy, thus, is essentially an act of faith.
For economists and public policy activists, however, faith is a rather shaky
foundation. Fortunately, there are other, more tangible factors at work that
bolster the proposition that the US economy should be doing quite well by
the mid-1980s.
US Economic Resurgence
The high degree of flexibility and resilience that characterizes the US
economy will be bolstered by a number of developments that should help to
enhance the level of economic activity. Among these are:
? In the important energy area, the United States has an enviably rich
resource endowment. Although their exploitation was a divisive issue in
the 1970s, the US ability to tap these resources with unprecedented
intensity is a great asset. Already, as a result of technological break-
throughs in exploration and extraction and record drilling rates, the
decade-long decline of the nation's oil reserves has been arrested and,
since 1980, reversed. Also, given its relatively high per capita energy use,
the United States has great potential for futher conservation gains. If soft
oil markets and sagging prices persist, these favorable developments will
Confidential 8
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
be slowed, but real energy costs are likely to remain high enough to
maintain the momentum of development of abundant US coal resources
and of conservation.
? Capital spending, long repressed by uncertainties about future market
demand, should surge once the economy turns up and interest rates
decline. The tax incentives already in place could even lead to a capital
spending boom.
? The present attractiveness of the US economy toforeign investors is
likely to outlast a decline in interest rates. European apprehensions about
political instability, stimulated especially by events in Poland and
concern over domestic economic weaknesses, are likely to sustain the
present large flow of equity capital to the United States. The Japanese,
for their part, are already beginning to invest increasingly in the
establishment of plants in the United States to assure market access in
the event of US trade actions. The continued flow of foreign investment
capital into the United States will benefit the US economy not only
through job creation but also through increased competition and en-
hanced absorption of innovations in technology and management.
? Demographic trends will induce the US economy to place greater
emphasis on labor saving rather than the job creation it pursued in the
1970s. A shrinkage of new entrants into the labor force is already under
way and will persist through the decade. Because this decline comes
earlier and is more pronounced in the United States than in Europe, the
United States will be in a better position to reduce unemployment and in-
crease productivity. Gains in productivity will also result from this
demographic trend because the average worker will be more experienced.
? The service sector, which now accounts for more than 70 percent of the
US labor force and for almost 90 percent of its growth, is a highly
dynamic factor both in the US and in the world economy. Indeed, a
service transformation is taking place in the US economy, in which a new
set of linkages is being established through the growth of "integrative
services" that interconnect firms, units of firms, and industries at
different stages of production or in different locations. The distinction
between goods and service industries is increasingly breaking down, as
the two aspects merge with each other. The most dramatic expansion is
now taking place in this integrative part of the service sector, which
combines high technology with management/marketing know-how. In
9 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
this "information economy," which marries computers and communica-
tions and which includes "software" of all types and a great variety of fi-
nancial and diagnostic services, the United States is uniquely strong. It
should be able to take excellent advantage in the 1980s of the lead it al-
ready enjoys in this rapidly expanding global market.
? The US performance on thefrontiers of technology should continue to be
highly creditable, even though its earlier across-the-board preeminence
has been at least selectively whittled away as Western Europe and Japan
have narrowed the technology gap. But the challenge mounted by
America's major industrial competitors is not overwhelming. The re-
markable Japanese technology drive in some well-selected areas has
forced US high-technology industry-which had long felt secure in its
dominance-to take foreign competition seriously. Major US firms are
now developing strategies to capture leading positions in new areas and to
regain market shares where they have slipped. The Japanese, for their
part, will find it increasingly difficult to move from imitating, improving
on, and applying the inventions of others to creating epoch-making
developments of their own that make possible whole new industries. They
will undoubtedly continue to add to the number of product lines in which
they excel, but they will find it hard to move from concentration on a rel-
atively few areas to expansion across the much broader spectrum of
technological activity that characterizes the US economy. Finally, a
major stumblingblock for Japan will be the tough problem of moving
from innovation in discrete areas of production to the integration of
hardware and software into a customer-tailored service package. The 64k
RAM chip success story, for example, may have been dramatic as a
single accomplishment, but it represents only a speck on the large canvas
of the computer-based knowledge industry.
onfidential 10
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
The United States in the
World Economy:
Elements of Strength
Part B: Key Findings
The 1970s Record The dramatic changes in the global economy since the early 1970s and the
market reactions to them have significant implications for US interests in
the 1980s. Some key changes are:
? The US economic position within the industrial world stabilized during
the 1970s after declining for two decades. (Section I, page 13)
? During the 1970s the United States did quite well in competing for
international markets. It ran a larger cumulative current account surplus
than any other developed country; it did exceedingly well in selling
services and agricultural products; it even improved somewhat its share
of industrial country exports of manufactures. (Section II, page 23)
? The introduction of flexible exchange rates in the early 1970s has created
a highly cyclical pattern in the international competitiveness of US
manufactures that reverses about every three years. The period of
"noncompetitiveness" now beginning is more a reflection of this cyclical
pattern than of fundamental factors. (Section III, page 61)
? The role of less developed countries (LDCs) in the foreign trade of the
United States and other industrial countries increased substantially in
the 1970s. For the United States this shift resulted from increased trade
with members of OPEC and with the newly industrializing countries
(NICs); for the other industrial countries the shift was dominated more
by OPEC trade. (Section IV, page 69)
? During the 1970s the LDC (mainly NIC) share of the US import market
for manufactures jumped dramatically in a dozen or so product lines.
(Section V, page 77)
? Intense trade frictions between Japan and its trade partners persisted
throughout the 1970s, mainly because of the manner by which that
country achieved its exceptionally large trade surpluses in manufactures.
Its export surges were heavily concentrated in a few product lines, and its
imports of manufactures remained at a low level. Throughout the decade
the United States bought relatively more NIC and Japanese products
roved For Release 2007/05/Q7 CIA-R-DP85T00.176R00.14Q0060001,-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
than other industrial countries, thereby absorbing more of the brunt of
the export onslaughts and more of the benefits of increased competition,
especially for the consumer. (Section VI, page 87)
? Service sector transactions have become the most dynamic and important
element of the US economy and its international economic relations; they
are also the least understood. (Section VII, page 99)
? For the United States, foreign direct investment became a two-way flow
in the 1970s, after two decades during which US firms were investing
heavily abroad and the flow into the United States was minimal. (Section
VIII, page 115)
? The United States, more than 35 years after World War II, still carries
by far the major economic burden of industrial country military defense
and assistance to LDCs. (Section IX, page 125)
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5 I
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
1. Overall Economic The US economic position within the industrial world stabilized during the
Position 1970s after declining for two decades.
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
World GNP ? In placing the US position in the world economy in perspective, we first
look at the changing alignment among three often-used categories:
- The First World: market-dominated industrial countries.
- The Second World: centrally planned Communist countries.
- The Third World: less developed countries.
? From 1950 to the early 1970s, each group's share changed little.
? In the 1970s, the LDC share jumped dramatically, reflecting mainly the
huge increase in oil earnings by OPEC members and other major oil-
exporting countries.
? The LDC rise also resulted from the emergence of the newly industrializ-
ing countries (NICs)-South Korea, Taiwan, Hong Kong, Singapore,
Brazil, and Mexico.
? The Communist countries had the largest loss during the 1970s, mainly
because of the comparatively sharp economic slowdown in the USSR and
Eastern Europe toward the end of the decade.
? Although the industrial countries' share slipped somewhat, their over-
whelming importance in generating global economic activity remains
intact.
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5 I
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
I
Figure I-1
Communist
Countries
Industrial
Countries
I
1 -1 25X
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
I
Industrial Countries:
Economic Power Shifts
? The US share of the economic output of industrial countries fell sharply
from 1950 through the early 1970s, and thereafter stabilized.
? The largest US loss occurred in the 1950s, reflecting mainly the recovery
of war-torn Europe and Japan. The momentum of this catch-up lasted
well into the 1960s although the changes in relative GNP shares slowed
considerably.
? During the 1970s the US share changed little.
? The gains of the EC Nine came entirely in the 1950s; after that the
group's proportion declined slightly as the share of the United Kingdom
and West Germany fell somewhat.
? Japan's largest gains came during the 1960s when its economic growth
pace topped an extraordinary 10 percent a year. Japan's share increased
slightly in the 1970s as its economy continued to grow somewhat faster
than that of other industrial countries.
r
I !
Approved For Release 2007/05/07: CIA-R DP85T00176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure 1-2
Industrial Countries: Economic Power Shifts
100
Other
90
80
Japan
7777
-
70
ECa
60
50
40
30
United States
20
10
1950 60 70 73 80
aPrincipally the United Kingdom, West Germany, and France.
17 Confidential
 C _ nfidential
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Miajor Industrial Although the differences among industrial countries in economic growth
Countries: rates narrowed during the 1970s, the manner by which each achieved its
E+ployment, economic gains varied considerably. Much depended on each country's
Productivity, and particular circumstances and its political-economic institutions:
W$ges
? In the United States many of the economic gains were attributable to
putting people to work rather than increasing productivity. The United
States was coping with a substantial rise in jobseekers (those born at the
tail end of the postwar "baby boom"), a large jump in female workers,
and a major influx of immigrants, especially from Hispanic countries.
Because labor was relatively cheap, many US firms found it more
profitable to increase output by hiring more workers than by investing in
new plant and equipment.
? In Western Europe the emphasis clearly was on increased productivity.
The region faced a much slower rise in the size of the working-age
population, and had much less of an increase in female participation in
the labor force than the United States. In addition, the number of
"guest" workers declined after 1973. Even so, not enough new jobs were
credited to keep unemployment from climbing sharply. By 1980 most
European countries had jobless rates that matched those of the United
States, while in the early 1970s European unemployment had hovered at
a low level. West European firms focused so heavily on labor-saving
capital investments because of considerable union and public agitation
for much higher wages and greater social-welfare benefits. In fact, real
wages were pushed up, well beyond the gains in productivity. Until
recently, this factor helped boost economic growth, but it is now
undercutting the region's ability to grow and its international competi-
tiveness. The Europeans also have been slower than either the United
States or Japan to move from mechanically to electronically based
technologies.
? In Japan rapid technological improvements, coupled with forward-
looking management, brought a rapid rise in productivity. This permitted
large increases in real wages over the years. The demographic pressure
for creation of new jobs in Japan was much less than in the United
States, and the Japanese even reduced the female participation rate in
the 1970s. In addition, the Japanese labor force contains few foreign
workers. For much of the decade, the Japanese even feared labor
stringencies, a factor that gave emphasis to increased investments in
labor-saving equipment.
Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure 1-3
Major Industrial Countries: Employment, Productivity, and
Wages, 1971-80
Ol Productivity
Wages
Real Wages and
Productivity (Real
GNP per Employee)
I
United Japan West France United Italy
States Germany Kingdom
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
Purchasing Power ? The changing economic structure among industrial countries can be seen
per Capita clearly in studies by Irving B. Kravis, who has developed the most
commonly used method for comparing changes in per capita purchasing
power.
? All industrial countries shown in the figure (except the United Kingdom)
closed the purchasing-power gap with the United States dramatically
during the 1950s and 1960s, and since then the changes have been
relatively small.
? West German and French purchasing power reached 80 to 85 percent of
the US level in 1979. Many of the West German gains occurred in the
1950s, whereas the French improvements were achieved mainly in the
1960s.
? Japan, Belgium, and the Netherlands have climbed to about 70 percent
of the US level. The Japanese showed spectacular gains vis-a-vis the
United States during the 1950s and 1960s, and their per capita
purchasing power surpassed that in many European countries. The Low
Countries made their greatest progress in closing the gap with the United
States in the 1960s.
? The United Kingdom and Italy are now near about 60 percent of the US
level in terms of the purchasing power of the average citizen. The UK
level in 1979 was the same as in 1950, with the small gains made in the
1960s lost in the 1970s. Italy's comparative level has stagnated since
1970 after that country made great strides in the 1950s and 1960s. The
slack in Italian performance may be overstated because the country most
likely has 'a larger (and perhaps more robust) unrecorded "underground"
economy than do other major industrial nations.
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
Purchasing Power per Capita
West Germany
45
73
82
81
85
France
51
62
76
78
80
Japan
18
32
62
67
70
Belgium
54
58
70
72
70
Netherlands
54
63
73
72
68
United Kingdom
62
66
65
65
61
Italy
33
48
59
58
57
21 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
II. Competitiveness in During the 1970s the United States did quite well in competing for
World Trade international markets. It ran a larger cumulative current account surplus
than any other developed country; it did exceedingly well selling services
and agricultural products; it even improved somewhat its share of indus-
trial country exports of manufactures.
=__.a rouged For Release 200.Z1.0:5LQZ;_C1A-RDP85T00.176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Industrial Countries: The most comprehensive and telling measure of an industrial country's
Current Account economic strength in international markets is its balance on current
Trends transactions-merchandise, services, return on capital invested abroad,
and salaries earned abroad. As we point out in section VII dealing with
services, these several current account categories have become highly
intertwined and thus become increasingly complex and meaningless if
looked at separately.
? The United States and other industrial countries, as a group, usually run
current account surpluses. These surpluses create the capital flows the
LDCs need to finance development efforts. By the early 1970s the
industrial country surpluses reached some $15 billion a year. This normal
surplus situation was distorted after 1973 because the huge oil price
increases temporarily led to large current account deficits for the
industrial world and made OPEC a major source of capital for LDCs.
? From the early 1950s through the middle 1960s, the United States ran
fairly large surpluses while the other industrial countries had deficits;
thus, the United States was providing capital to help the LDCs develop
and to assist other countries of the industrial world in restoring their
economies. As these other industrial countries improved their economic
strength, they too began to run current account surpluses.
? By the late 1960s, the US current account position began to deteriorate
sharply, reflecting the continuing competitive losses to other industrial
countries. In this regard, it became clear that the dollar was overvalued.
? Since the realignment of the key world currencies against the dollar and
introduction of floating exchange rates in the early 1970s, the US current
account position and those of other countries have moved in cyclical
rather than a secular fashion, reflecting ongoing exchange rate changes
and the sudden rises in oil prices. The impact of exchange rates is
discussed more fully in section III.
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure II-1
Industrial Countries: Current Account Trends'
vim' --itlF
-40 1961 65 70 75 80
aincludes goods, services, and private transfers.
Data for 1981 are estimated.
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? Since 1970 the United States has earned far more than it paid out in cur-
Current Account rent international transactions, despite the jump in oil imports. In fact,
Positions since then the cumulative US current account surplus has topped $60
billion, more than that of any other industrial country.
? These cumulative numbers hide considerable swings in current account
balances. The United States, for example, ran large deficits in 1972 and
again in 1977 and 1978, while achieving large surpluses from 1973 to
1976 and again in 1980 and 1981.
? Among the industrial countries, only the United Kingdom has encoun-
tered a pronounced fundamental change in its overall current account
position. By the late 1970s the huge North Sea oil discovery allowed the
United Kingdom to run large surpluses on a rather consistent basis.
1
t
11
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
1
6
2
1
3
3
-3
7
2
1
1
4
1973
10
0
7
0
-I
-1
9
-4
13
-5
-7
-7
1975
22
0
7
1
-3
0
1976
9
4
7
-5
0
-3
1977
-10
11
8
-2
2
3
1978
-9
18
13
5
5
8
1979
7
-8
-2
3
3
6
1980
10
-9
-8
-6
11
-9
1981 b
13
6
-1
-6
17
-7
64
33
50
-13
33
-2
a Includes goods, services, and private transfers.
b Preliminary.
Approved For Release 2007/05/07: CIA-R DP85T00176R001400060001_
0
0
0
-2
-5
-4
-4
-4
-4
-2
-6
-30
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? The comparatively favorable US current account position relies heavily
Current Account on service transactions.
Balances, 1980
? In recent years, the United States has had the largest trade deficit among
industrial countries but has achieved by far the largest surplus on the
service account.
? France, Italy, and the United Kingdom essentially follow the US pattern.
? Japan, West Germany, and Canada usually run trade surpluses and
service deficits.
Confidential 28
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5 I
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
Figure 11-3
Current Account Balance of Industrial Countries, 1980:
Trade Versus Services
Tradea
Services and Private Transfers
Total
United States Japan West Germany France United Kingdom Italy
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? The current account positions of industrial countries vary widely in
Trade Balances, 1980 composition, reflecting the nature of .each nation's physical resources and
how it decided historically to concentrate its efforts.
? The efficient exploitation of an abundant material resource base, com-
bined with a large surplus in service transactions, allows the United
States to achieve a current account balance with a much smaller surplus
in manufactures than do most other developed countries.
? The United States has a favorable position in foodstuffs and raw
materials, while most developed countries have large deficits in these two
categories.
? The US deficit in fuels in 1980 would have been worse if it were not for
$5 billion in coal sales.
? In comparison with the United States, Japan and West Germany are
heavily dependent on manufacturing trade to balance current account
flows.
? Italy finds itself in a position somewhat similar to those of Japan and
West Germany, but it also has a service surplus.
? France is more like the United States, depending more on agriculture
and services.
? The United Kingdom's position is also similar to that of the United
States, except for fuels.
1
 Approved For Release 2007/05/07: CIA-RDP85TOO176ROO1400060001-5
Confidential
Industrial Countries: Trade Balances, 1980 a
Billion Dollars
United
States
Japan
European
Community
West
Germany
France
United
Kingdom
Italy
Foodstuffs
19
-15
-18
-13
4
- 8
- 7
Raw materia
ls
3
-24
-37
-11
-5
-6
-11
Fuels
-74
-69
-105
-35
-31
-1
-23
Manufactur
es
20
99
99
64
9
11
21
Other
-I
NEGL
2
-2
-I
1
NEGL
Total
-33
-10
-58
6
-23
-4
-20
1 :1
For Release 2007/05/07: CIA-RDP85TOO176RO01400060001-5
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
US Trade Balances in ? The large US surpluses in foodstuffs began in 1973.
Major Commodities
? The United States usually has run a small deficit in raw materials,
although it achieved a small surplus in 1980.
? The US deficits in fuels followed a pattern similar to that in other
industrial countries, with large increases following the two jumps in
OPEC oil prices.
? The US balance in manufactures has been highly erratic, following a
pattern (as demonstrated in section III) driven largely by the changing in-
ternational value of the dollar.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure 11-5
US Trade Balances in Major Commodities'
Manufactures
1
-80 1970 71 72 73 74 75 76 77 78 79 80
aimports c.i.f.
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
World Exports ? When looked at in value terms, the US share of world exports declined
slightly in the 1950s and 1960s. The rising EC and Japanese share just
about offset a decline in the LDC proportion caused by the sharp fall in
raw-material prices from the exceptionally high levels of the Korean war
years.
? In the 1970s the US share dropped markedly because of dramatic
changes in the international value of the dollar and the huge jump in oil
prices.
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5 I
 1
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
World Exports
West Germany
3
9
11
10
Japan
1
3
6
7
Less developed countries
33
23
19
27
of which
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Vol~nme of Industrial
Country and LDC
Exports
Confidential
? A different picture of the changing trade patterns emerges when
exchange rates and price movements are excluded. In terms of the
volume of trade, US market losses were mainly in the 1950s and 1960s.
During these years, Western Europe and Japan rebuilt their economies
and greatly narrowed the technological gap with the United States. In
contrast, during the 1970s the US share of world exports actually
increased slightly.
? EC exports, measured in volume terms, grew much faster than those of
the United States in the 1950s, somewhat faster in the 1960s, and slower
in the 1970s.
? Japanese exports rose at three times the US pace through the 1950s and
1960s, and has since grown slightly faster.
? The volume of sales by non-OPEC LDCs increased little during the
1950s because their exports of raw materials were artificially high in the
early part of the decade as a result of the Korean war boom. Their
exports remained slow in the 1960s, but by the 1970s picked up
significantly because of the surge in the exports of manufactures.
? OPEC sales increased at near the pace of the global volume of exports
from the 1950s to the early 1970s and have fallen since then because the
large jumps in oil prices hurt sales. In addition, the petrodollar windfall
greatly reduced the incentives of oil-exporting countries to sell commod-
ities other than oil.
I
1
1
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure 11-7
Volume of Industrial Country and LDC Exports
Industrial
Countries
Average
1
1950s
Japan
I,
West Germany
7777777
7~
Italy
France
United States
United Kingdom
Total
OPEC
Non-OPEC
1960s
Japan
West Germany
Italy
France
United States
United Kingdom
Total
OPEC
Non-OPEC
1970s
Japan
United States
France
M
MUM
Italy
United Kingdom
7- M
West Germany
Total
OPEC
Non-OPEC
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Volume of Exports ? Like that of total exports, the volume of US exports of manufactures in
of Manufactures the 1970s climbed almost as rapidly as Japan's and faster than those of
Confidential 38
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
I
1
Figure 11-8
Japan
United States
France
Italy
West Germany
Canada
United Kingdom
Industrial Countries: Volume of Exports of Manufactures, 1971-80
r
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Industrial Countries:
Share of World
Market for
? The US share of OECD exports of manufactures, measured in volume
terms, was higher in 1980 than at the beginning of the 1970s.
? Like the United States, the Japanese pushed up their market share about
2 percentage points in the 1970s, and in 1980 the shares of both countries
reached near their highest level during the 10-year span.
? The Europeans, as a whole, saw their market share slipping, with West
Germany, the United Kingdom, and Sweden absorbing the largest losses.
France and Italy had the best performance among the European
industrial nations.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure 11-9
Industrial Countries:
Share of World Market for Manufactures
Percent of total
industrial country exports,
measured in volume terms
United States 15.1 14.8 16.2 17.2 17.6 15.9 15.3 16.0 16.2 17.4
Japan 12.4 12.1 11.4 11.9 13.0 14.1 15.1 14.5 13.5 15.3
Germany 21.2 21.4 21.7 22.0 19.5 21.2 19.8 19.2 19.5 19.3
France 8.9 9.3 9.1 9.2 9.7 9.3 9.7 9.8 10.2 9.7
United Kingdom 9.4 8.4 8.2 7.8 8.3 7.7 8.0 7.6 7.3 7.0
Italy 6.9 7.2 7.0 6.8 7.2 7.4 7.6 8.2 8.4 7.7
Canada 4.1 4.1 4.0 3.6 3.7 3.8 4.1 4.3 4.3 4.0
Netherlands 4.8 4.9 5.0 4.8 4.7 4.8 4.6 4.4 4.5 4.4
Sweden 3.6 3.4 3.5 3.4 3.4 3.0 2.9 2.9 3.0 2.7
Belgium/ Luxembourg 5.5 5.9 5.8 5.4 5.2 5.3 5.2 5.2 5.1 4.9
Switzerland 3.3 3.2 3.1 2.9 2.9 2.8 3.0 3.0 2.9 2.8
Austria 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.8 1.9
Denmark 1.2 1.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1 1.1
Norway 0.9 1.1 1.2 1.0 1.0 0.9 0.9 0.9 0.8 0.7
Finland 1.2 1.3 1.2 1.1 1.1 1.1 1.1 1.2 1.2 1.2
1
I
41 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Industrial Countries: ? Patterns similar to the global trends occurred in the EC market.
Share of EC
Market for
Manufactures
Confidential
 i
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries:
Share of EC Export Mar
ket fo
r Ma
nufact
ures
Percent of total
industrial country exports,
measured in volume terms
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
United States
Japan
9.5
8.7
9.5
10.1
10.0
8.8
8.7
9.3
9.5
11.0
G
3.1
3.6
3.5
3.4
3.8
4.2
4.7
4.6
4.3
5.2
ermany
Franc
25.8
25.4
25.7
26.2
23.6
26.0
24.2
23.0
23.5
23.5
e
United Ki
d
12.1
12.7
12.4
12.8
13.0
12.0
12.7
13.1
13.2
12.6
ng
om
Italy
6.6
6.2
6.4
6.8
7.3
7.1
7.7
7.4
7.4
7.1.
Canada
9.2
9.5
9.0
8.5
9.4
9.8
10.0
10.8
10.8
9.8
Netherlands
0.7
0.7
0.7
0.7
0.7
0.6
0.6
0.6
0.7
0.8
Sweden
8.3
8.2
8.2
8.3
8.3
8.2
7.8
7.3
7.7
7.6
Belgium/Luxembo
4.4
3.9
4.1
4.0
3.9
3.5
3.5
3.5
3.5
3.3
urg
S
it
l
d
11.1
11.9
11.4
10.7
11.1
11.4
11.0
10.9
10.3
9.8
w
zer
an
A
t
i
3.9
3.7
3.5
3.5
3.6
3.4
3.7
3.8
3.6
3.6
us
r
a
Denmark
1.9
1.9
1.9
1.9
1.9
2.0
2.2
2.4
2.5
2.6
N
1.1
1.1
1.1
1.1
1.2
1.1
1.0
1.1
1.1
1.2
orway
Finland
1.2
1.3
1.2
1.2
1.4
1.0
1.0
1.2
0.8
0.8
I
1.2
1.2
1.2
1.1
1.0
1.0
1.0
1.1
1.1
1.1
43 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Industrial Countries: ? In the Japanese market, the US share remained both large and rather
Share of Japanese constant, with a particularly good showing in 1980.
Market for
Manufactures ? West Germany and Switzerland have seen their market shares slip
considerably since 1977.
1
Confidential 44
1
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Industrial Countries:
Share of Japanese Market for Manufactures
Percent of total
industrial country exports,
measured in volume terms
United States
53.0
52.5
51.4
53.2
53.3
51.8
50.3
51.6
53.7
57.5
Japan
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Germany
16.9
16.8
16.6
16.2
14.1
16.6
16.2
15.5
15.1
13.6
France
4.4
5.5
5.3
4.9
5.3
5.2
5.5
5.3
5.7
6.3
United Kingdom
8.5
7.2
7.2
7.3
8.3
7.1
8.3
7.1
6.0
5.4
Italy
3.3
3.7
4.6
4.1
4.6
4.9
4.8
5.4
5.7
4.4
Canada
1.4
1.4
1.4
1.6
1.7
1.9
1.9
2.0
1.9
2.5
Netherlands
1.3
1.3
1.4
1.4
1.5
1.6
1.9
1.7
1.5
1.3
Sweden
2.2
1.9
2.1
2.0
2.1
2.0
2.1
2.2
2.1
1.9
Belgium/ Luxembourg
1.4
1.6
1.8
1.6
1.1
1.0
1.0
1.0
0.7
0.7
Switzerland
5.7
6.0
5.9
5.4
5.6
5.3
5.3
5.2
4.9
4.1
Austria
0.5
0.7
0.7
0.6
0.6
0.5
0.5
0.6
0.8
0.9
Denmark
0.7
0.7
0.8
0.8
0.8
0.9
0.8
0.8
0.8
0.8
0.4-
0.4
0.4
0.4
0.5
0.6
0.6
0.4
0.5
0.4
0.1
0.3
0.5
0.6
0.4
0.6
0.7
1.1
0.6
0.3
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Industrial Countries: ? The US share of OPEC markets has slid somewhat since 1976.
Share of OPEC
Market for ? Much of the US decline in 1980 reflects the loss of the Iranian market.
Manufactures
? The Japanese and the Italians have improved their market positions
significantly.
? The United Kingdom, France, and West Germany lost in this market.
Confidential 46
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Percent of total
industrial country exports,
measured in volume terms
Industrial C
Share of OP
ountries:
EC Market fo
r Ma
nufact
ures
United States
19.8
19.8
19.5
19.6
20.8
20.4
18.6
19.4
19.4
18.3
Japan
17.4
18.1
18.3
20.0
21.0
19.6
21.0
20.3
21.3
24.2
Germany
16.1
16.5
17.1
18.1
16.6
18.3
17.6
17.0
15.3
14.1
France
12.7
11.3
11.6
12.2
11.2
10.1
9.9
9.2
11.0
10.5
United Kingdo
m
13.8
12.1
11.3
9.5
10.1
9.9
10.4
10.6
8.4
8.7
Italy
7.9
8.9
8.9
8.9
8.5
8.9
9.9
10.6
11.5
11.1
Canada
1.5
1.7
1.3
1.3
1.5
1.6
1.5
1.8
1.9
1.6
Netherlands
2.6
3.0
2.7
2.1
2.1
2.5
2.1
2.3
2.1
2.3
Sweden
1.6
1.6
1.6
1.6
1.7
2.0
1.6
1.7
2.0
1.8
Belgium/ Luxe
mbourg
2.0
2.6
3.1
2.4
2.4
2.2
2.5
2.6
2.6
2.3
Switzerland
2.5
2.4
2.5
2.3
2.0
2.2
2.6
2.5
2.4
2.3
Austria
0.7
0.8
0.8
0.8
0.8
1.1
0.8
0.8
0.8
1.1
Denmark
0.6
0.6
0.6
0.6
0.6
0.5
0.5
0.5
0.5
0.5
Norway
0.3
0.3
0.3
0.2
0.3
0.3
0.4
0.3
0.3
0.4
Finland
0.4
0.4
0.4
0.4
0.2
0.4
0.4
0.4
0.5
0.5
Approved For ReleaS 20f17/fl1;lft7 ? ('IA-RnPRcTnn17FRnn1Annnnnnn1
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Industrial Countries: ? The United States did very well in the non-OPEC LDC markets,
Share of Non-OPEC although the movements have been erratic.
LDC Market for
Manufactures ? The Japanese about held their own, while the major losers have been the
Europeans, especially West Germany and the United Kingdom.
Confidential 48
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Industrial Countries:
Share of Non-OPEC LDC
Mar
ket fo
r Man
ufact
ures
Percent of total
industrial country exports,
measured in volume terms
United States
22.4
23.2
25.8
27.4
27.2
25.3
23.8
25.4
28.3
31.2
Japan
27.8
27.0
27.7
26.8
27.3
30.0
31.2
29.9
27.6
28.4
Germany
12.6
12.2
12.1
13.2
10.8
12.0
10.7
10.2
10.4
9.7
France
9.0
9.5
8.7
8.1
9.6
9.9
10.5
9.9
10.2
8.9
United Kingdom
11.4
9.9
8.6
7.6
8.5
7.7
7.9
7.9
7.0
6.2
Italy
4.4
4.8
4.1
4.5
4.7
4.3
4.5
5.0
5.1
4.8
Canada
1.5
1.6
1.3
1.4
1.5
1.4
1.4
1.4
1.6
1.9
Netherlands
2.0
2.3
2.1
2.0
2.2
1.9
1.9
1.9
1.8
1.6
Sweden
1.9
2.2
2.0
2.0
1.9
1.8
1.7
1.9
1.6
1.5
Belgium/ Luxembourg
1.9
1.9
1.8
2.0
1.8
1.5
1.5
1.6
1.5
1.6
Switzerland
2.8
2.7
2.5
2.3
2.2
2.1
2.3
2.3
2.3
2.0
Austria
0.6
0.6
0.5
0.5
0.6
0.6
0.6
0.6
0.7
0.6
Denmark
0.7
0.8
0.8
0.7
0.7
0.5
0.6
0.5
0.5
0.5
Norway
0.5
0.9
1.5
1.1
0.8
0.9
1.1
0.9
1.0
0.6
Finland
0.4
0.4
0.5
0.5
0.3
0.3
0.3
0.4
0.4
0.4
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
I
Industrial Countries: ? In the dynamic markets of the newly industrializing countries (NICs)-a
Share of NIC subgroup of non-OPEC LDCs-the United States did particularly well.
Market for
Manufactures ? The Japanese share peaked in 1977 and has since fallen off.
? All European countries did poorly in these markets.
Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
t
f
Industrial Countries:
Share of NIC Market for Manufactures
Percent of total
industrial country exports,
measured in volume terms
29.6
11.5
3.8
31.6
35.2
37.0
37.1
35.2
32.2
32.5
35.9
39.9
11.9
11.3
12.5
9.9
10.0
8.2
8.3
8.7
7.8
3.2
3.1
2.8
3.8
3.6
3.6
3.7
3.5
3.0
3.0
2.7
2.8
3.4
2.8
2.5
3.0
2.5
2.2
1.2
1.1
1.2
1.5
1.3
1.3
1.1
1.2
1.8
1.5
1.4
1.3
1.1
1.0
1.1
1.1
1.1
0.9
1.8
1.7
1.6
1.8
1.5
1.1
1.1
1.0
1.1
1.2
1.0
1.6
1.2
0.9
0.8
0.9
0.9
1.2
3.0
3.0
2.5
2.4
2.5
2.5
2.4
2.4
2.1
0.5
0.3
0.3
0.4
0.4
0.3
0.3
0.3
0.3
0.5
0.4
0.4
0.3
0.3
0.3
0.3
0.3
0.2
0.4
0.3
0.3
0.3
0.3
0.8
0.4
0.5
0.2
0.5
0.5
0.3
0.2
0.2
0.2
0.3
0.3
0.2
Italy 3.1
Canada 1.1
Netherlands 1.6
Sweden 1.8
Belgium/ Luxembourg 1.3
Switzerland 3.4
Austria 0.5
Denmark 0.6
Norway 0.2
0.5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
US Share of NIC ? A closer look at the NIC markets shows significant US gains in each.
Markets for
Manufactures ? In the fast-growing Mexican market of the late 1970s, the United States
even increased its already large market share.
Confidential 52
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
US Share of NIC
Market for Manufactures
Percent of total
industrial country exports,
measured in volume terms
World 15.1
Newly industrializing 29.6
countries
Hong Kong
South Korea
Taiwan
Singapore
14.8
16.2
17.2
17.6
15.9
15.3
16.0
16.2
17.4
31.6
35.2
37.0
37.1
35.2
32.2
32.5
35.9
39.9
62.3
67.1
68.1
67.3
67.4
67.1
67.6
70.6
70.8
32.8
36.2
35.4
35.7
35.8
36.1
35.5
36.1
40.7
16.1
19.5
21.2
19.4
18.7
17.2
16.6
18.4
19.6
15.7
18.0
17.5
18.2
18.0
15.2
16.4
18.5
22.4
20.7
24.6
28.5
29.6
26.9
26.0
24.6
26.5
30.7
22.5
28.8
30.3
27.5
25.5
26.2
27.7
32.0
30.2
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Industrial Countries: ? The US share of the Communist world market has remained at about the
Share of Communist same low level, with sales to China replacing those to European
World Market for Communist countries toward the end of the 1970s.
Manufactures
? Japan has steadily increased its market share since the mid-1970s; so
have Canada and Finland, on a small scale.
? The Italians and the French were the major losers.
I
Confidential . 54
Approved For Release 2007/05/07: CIA-RDP85Tnn17ERnn1annnPnnn1-c
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries:
Share of Communist World Market for Manufactures
Percent of total
industrial country exports,
measured in volume terms
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
United States
4.4
3.8
5.2
5.0
4.7
4.3
3.4
3.5
4.7
5.3
Japan
17.5
16.6
15.2
17.1
18.9
18.6
19.5
20.7
20.6
23.9
Germany
22.8
27.4
30.2
30.2
26.6
28.2
26.2
26.1
25.9
23.5
France
11.9
10.5
9.6
8.5
11.0
11.3
10.7
10.3
11.1
10.0
United Kingdom
8.1
7.0
6.5
5.1
5.3
4.8
5.3
5.0
5.3
4.9
Italy
10.6
9.0
8.6
8.8
8.7
8.5
8.9
8.7
8.1
7.1
Canada
0.3
0.3
0.2
0.3
0.5
0.5
0.5
0.9
1.3
1.4
Netherlands
2.5
2.6
2.6
3.0
3.0
2.5
2.6
2.8
2.9
2.9
Sweden
4.1
3.4
3.7
3.7
4.0
3.1
2.9
2.8
2.9
2.5
Belgium/Luxembourg
2.3
2.7
3.5
3.8
3.2
2.9
2.8
3.0
2.6
2.7
Switzerland
3.7
3.9
3.9
3.4
3.2
3.3
3.7
3.4
3.1
2.9
Austria
5.1
5.1
4.7
4.9
4.5
4.8
5.2
5.2
5.4
5.3
Denmark
1.6
1.4
1.0
1.1
1.1
1.0
1.2
0.9
0.8
0.7
Norway
0.6
0.9
0.7
0.9
1.0
0.7
1.1
1.0
0.5
0.6
Finland
4.5
5.4
4.5
4.2
4.5
5.5
6.1
5.9
4.9
6.4
55 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? Japan made the largest gains in the US market.
Share of US Market
for Manufactures ? The major losers were the Europeans, especially West Germany in the
first half of the 1970s, and Belgium, Sweden, and the United Kingdom in
the latter half.
Confidential 56
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
I
Industrial Countries:
Share of US Market for
Manu
factur
es
Percent of total
industrial country exports,
measured in volume terms
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Japan
30.3
29.5
25.7
26.6
28.3
33.2
33.9
32.8
32.1
36.4
Germany
16.8
16.5
17.1
16.8
13.3
12.5
12.6
12.4
12.5
12.5
France
4.1
4.3
4.2
5.1
4.6
4.6
4.
55.1
4.9
4.6
United Kingdom
7.5
7.4
8.0
7.4
7.9
7.2
6.3
6.2
5.8
5.6
Italy
5.3
5.7
5.2
5.1
5.2
4.7
4.5
5.2
5.2
4.1
Canada
25.4
25.8
28.8
27.8
30.9
29.8
29.7
30.0
31.1
28.6
Netherlands
1.5
1 7
1 7
1) 1
1 6
1 5
, 6
. 5
.-
.-
bweaen
2.2
2.3
2.2
2.1
2.2
1.6
1.6
1.9
1.9
1.7
Belgium/ Luxembourg
2.8
2.7
2.8
3.1
2.2
1.6
1.6
1.5
1.3
1.2
2.2
2.3
2.3
2.1
2.1
2.0
1.9
2.0
1.9
2.1
0.5
0.6
0.6
0.6
0.4
0.4
0.5
0.5
0.4
0.4
0.5
0.5
0.5
0.5
0.6
0.5
0.4
0.4
0.5
0.4
0.2
0.3
0.3
0.4
0.4
0.2
0.2
0.2
0.3
0.3
0.5
0.6
0.5
0.4
0.3
0.3
0.4
0.4
0.5
0.4
57 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Major Changes in US ? A look at various categories of manufactures indicates a mixed picture
Share of Industrial for the United States with both gains and losses.
Country Exports of
Manufactures ? Among the losses there are categories-aircraft, jet engines, tractors,
chemical elements-in which the US share declined from a near
monopoly position to one of considerable dominance.
 t
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Major Changes in US Share of Industrial Country Exports of Manufactures
(More than a 5-percentage-point change in the
US market share between 1970 and 1980)
59 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
I
t
III. Impact of Flexible
Exchange Rates
The introduction of flexible exchange rates in the early 1970s has created a
highly cyclical pattern in the international competitiveness of US manufac-
tures that reverses about every three years. The period of "noncompetitive-
ness" now beginning is more a reflection of this cyclical pattern than of
fundamental factors.
 Confidential
I
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
US Balance in ? The changeover in the early 1970s from a fixed to a flexible exchange
Manufactures and rate regime has had an enormous impact on the trends in US foreign
Exchange Rate trade and those of other industrial countries. The new system was largely
Changes responsible for arresting the long-term erosion in the overall competitive
position of the United States in world markets. It also has created a
cyclical pattern in the trade position of industrial countries. Countries
experiencing short deteriorations or improvements in their trade accounts
soon find that the international value of their currencies is changing in a
way that alters the trend.
? Exchange rate movements have been the major factor behind the erratic
behavior of the US balance of manufactures (as well as US exports of
manufactures in volume terms, and US market shares of industrial
country exports of manufactures), although many factors have an
influence including changing tastes, altered tariff structures, and differ-
ences in economic growth rates between the United States and its foreign
markets.
? As can be seen in the figure, the changes in value of the US dollar have
an impact with a lag of a year or two.
? The decline in the value of the US dollar against other major industrial
country currencies in the early 1970s and again in the late 1970s was
largely responsible for the improved US balance of manufactures that
took place a year or so later.
? In contrast, the improvement in the dollar's value from 1973 to 1976
caused the deteriorating trade balance from 1975 to 1978.
? The changes in the value of the dollar, besides altering the competitive-
ness of US goods in world markets, have important domestic implica-
tions. The sharp devaluation of the dollar in the early 1970s, for example,
clearly had an inflationary impact on the United States. Besides the
direct effect of the higher prices paid for foreign goods, many US
manufacturers found they could easily increase domestic prices and still
be competitive.
Confidential 62
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure III-1
US Balance in Manufactures and Exchange Rate Changes
US Balance in Manufactures
Billion $
Value of US Dollara
Index: 1971=100
it
18.
110
IF5-
100
12
90
9
80
6
70
60
5C
3
4C
-9 1970 71 72 73 74
aWeighted average of 14 industrial countries.
1 1
75 76 77 78 79 80 81
63 Confidential
 i Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
United States: ? The changes in the competitiveness of US manufactures have followed a
Volume of Exports distinct pattern since 1970. Every three years the trend in competitive-
of Manufactures ness has reversed.
? Again, this development largely stems from the impact of changes in the
value of the dollar against other major currencies.
Confidential 64
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure 111-2
United States: Volume of Exports of Manufactures
Percentage Point
Change in US Share
of Industrial
Country Exports
 Confidential
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Trends in US Export ? Reflecting the three-year pattern of change, the US competitive edge in
Volume Shares the exports of manufactures began to slip in 1981. The roots of this
change are embedded in the resurgence of the dollar beginning in mid-
1980. By far the most serious problem is the strength of the dollar vis-a-
vis the yen. The appreciation of the dollar against the mark and some
other European currencies since late 1980 has also helped reduce US
price competitiveness.
? The continuing high value of the dollar (through April 1982) does not au-
gur well for US export competition in the next year or so.
Confidential 66
 Figure 111-3
Trends in US Export Volume Shares and the Dollar
US Share of Industrial Country Exports
(Seasonally adjusted and measured in volume terms)
Percent
21.0
20.5
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
18.5 1975 76 77 78 79 80 81
Quarters
Dollar Values
4th Quarter 1976=100
1975 76 77 78 79 80 81
Quarters
67 Confidential
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
IV. Trade Partners The LDC role in the foreign trade of the United States and other industrial
countries increased substantially in the 1970s. For the United States, this
shift resulted from increased trade both with OPEC states and with the
NICs; for the other industrial countries the shift was dominated by trade
with OPEC.
 Confidential
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
United States: Trade ? LDCs accounted for an increasing share of US trade during the 1970s,
Partners reversing the trend of the previous two decades. Oil and manufactures
were the most important commodities represented in this shift.
? Nearly all the change in the past decade reflected increased trade with
the OPEC members and the NICs. In fact, exports to other LDCs fell as
a share of total US exports. On the import side, the increased share of the
other LDCs was due entirely to oil purchases.
Confidential 70
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
71.4 60.5 73.6 52.1
10.8 9.4 14.7 13.0
26.1 24.3 23.1 15.0
13.5 10.8 8.1 7.5
27.8 36.0 25.8 46.8
4.7 8.0 8.3 21.7
10.0 15.4 9.7 14.7
0.8 3.5 0.6 1.1
USSR 0.3 0.7 0.2 0.2
China - 1.7 - 0.5
 Confidential
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Major Shifts Among ? Mexico, Saudi Arabia, and East Asia's "Four Tigers" (South Korea,
US Trade Partners Taiwan, Hong Kong, and Singapore) provided the most dynamic growth
markets for US exports in the 1970s. The "Four Tigers" were especially
important as expanding markets for US manufactures.
? In the case of imports, the largest jumps were with the oil-exporting
countries of Saudi Arabia, Nigeria, Libya (no longer), and Algeria.
? By far the largest inroads into the US import market for manufactures
were made by the "Four Tigers." As we have seen earlier, Japan also did
very well in expanding its US import market share. Other countries that
did particularly well in selling manufactures to the United States were
Mexico and two East Asian countries nearing NIC status-the Philip-
pines and Malaysia.
? At the other end of the spectrum, the Canadian position among major
US trade partners fell substantially in both exports and imports. In the
US market for manufactures, the EC position also slipped badly.
Conf idential 72
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure IV-2
Major Shifts Among US Trade Partners
Total
US Exports to: Mexico
7-1
"Four Tigers"a
Saudi Arabia
China
Japan
EC
Canada
US Imports from: Saudi Arabia
Nigeria
Libya
Algeria
"Four Tigers"
Mexico
Indonesia
Japan
EC
Canada
Manufactures
US Exports to: "Four Tigers"
Saudi Arabia
Mexico
Japan
EC
Canada
US Imports from: "Four Tigers"
K
~,
?
Japan
Mexico
Philippines /Malaysia
EC
Canada
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
,Japan and the EC: ? For Japan and the EC, like the United States, the major change in
Trade Partners foreign trade patterns resulted from the increased role of LDCs. But
almost all the changes in trade, unlike those in the US trade, reflected ex-
changes with OPEC. The Japanese and EC shift toward the NICs was
much smaller than in the US case.
? For Japan, there was a significant reduction in the relative importance of
the US market and a considerable increase in the share of the exports
shipped to the EC. By 1980, however, Japanese sales to the United States
still counted for a very high proportion (25 percent) of Japan's total
exports, a share that is double that of the EC.
? The share of Japanese and EC exports to the Communist countries
changed little during the 1970s while the US share grew from almost
nothing to near 4 percent. The United States' dependence on exports to
the Communist market is about half that of the EC or Japan.
1
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
United States
31.1
24.5
29.5
17.4
EC
9.6
12.8
8.2
5.6
Other
13.9
10.4
17.9
12.2
Less Developed
38.9
45.0
39.1
59.9
OPEC
5.2
14.3
15.1
40.2
NICs
15.0
16.6
5.4
7.0
Other
18.7
14.1
18.6
12.7
Communist
6.5
7.3
5.3
4.9
USSR
1.8
2.1
2.5
1.3
Eastern Europe
0.5
0.6
0.6
0.2
China
2.9
3.9
1.3
3.1
Other
1.3
0.7
0.9
0.3
United States
8.2
5.6
10.6
8.4
Japan
1.2
1.0
1.4
2.4
EC
50.1
52.8
48.8
47.8
Other
21.9
18.8
17.1
15.4
Less Developed
13.4
17.1
18.4
21.8
NICs
2.1
2.2
1.8
2.9
Other
7.9
7.2
8.8
6.0
Communist
5.2
4.7
3.7
4.2
USSR
1.2
1.6
1.3
2.1
Eastern Europe
3.3
2.5
2.0
1.6
China
0.4
0.4
0.3
0.4
Other
0.3
0.1
0.1
0.1
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
V. LDC Exports of During the 1970s the LDCs' (mainly the NICs') share of the US import
Manufactures market for manufactures jumped dramatically in a dozen or so product
lines.
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
LDC Share of ? The LDCs' share of total industrial country imports of manufactures
Industrial Country doubled in the 1970s, reaching 9 percent in 1980. As in the Japanese case
Imports of these sales are heavily concentrated in a few product lines. LDC market
Manufactures shares in some categories of manufactures such as radios and clothing
have risen to nearly 40 percent.
? The LDCs, for at least a decade, have been major suppliers of clothing,
fabrics, leather, plywood, and nonferrous metals.
? In more recent years they have taken a large share of OECD import mar-
kets for consumer electronics, toys, transistors, and watches.
? In the last two years, the LDC penetration of industrial country markets
has been the greatest in watches, radios, ships, televisions, and telecom-
munications equipment.
Confidential 78
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure V-I
LCD Share of Industrial
Country Imports of Manufactures
Radios
Clothing
Toys
Percent of total
industrial country
imports of manufactures
15.1 40.6
24.6 39.5
18.0 35.3 a
Plywood 23.8 22.2
Textile products 14.0 22.1
Cutlery 7.6 20.3
Telecommunications equipment 4.4 19.4 a
Ships 2.5
Phonographs
Furniture
18.7 11.8
4.3 9.2
1.5 8.6
2.9 8.4
Electric power machinery 1.5 8.0,
Electric domestic equipment 0.3 7.2 a
Handtools 1.9 7.2
79 Confidential
 Confidential
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Major LDC Exporters ? A few LDCs account for the bulk of manufactures sold to the industrial
of Manufactures to the world.
Industrial World
? Three countries provide more than half, and nine account for more than
80 percent.
? More than two-thirds of LDC shipments of manufactures come from
East Asian countries.
? Only the top dozen or so LDCs are likely to have much of an impact on
world markets in the 1980s. Although the sales of manufactures of a
number of other countries are rising rapidly, they each now sell less than
a half billion dollars' worth of manufactures to industrial countries.
Confidential 80
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure V-2
Major LDC Exporters of Manufactures to the
Industrial World
\
Value of Exports
Billion US $
Region
Percent of Total
Less than n 0.5
12
O S-1
Th ailand, Argentina,
Pakistan, Tunisia,
Iran
6
1-3
India, Malaysia,
Philippines
10
3-5
Mexico, Singapore,
Brazil
17
10-15
Taiwan, Hong Kong,
South Korea
55
1 1
586564 5-82
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? US purchases of LDC manufactures are large when measured either by
Imports of the actual or relative level.
Manufactures
From LDCs ? The United States buys almost half of the LDC exports of manufactures
sold to industrial countries and has done so for more than a decade.
? The ratio of US imports from LDCs to US GNP tops that of any other
developed country.
? Japan, France, and Italy buy relatively few manufactures from LDCs.
? The much greater relative penetration of the US market for manufac-
tures by both the NICs and Japan reflects its larger size and easier
access.
? Although the United States thus absorbs the brunt of the export
onslaughts, it also benefits from increased competition. Consumers
obtained less expensive and sometimes better quality goods. The competi-
tive challenge also forced a more rapid (although painful) restructuring of
US industry, especially in comparison with Western Europe.
Confidential 82
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure V-3
Industrial Countries' Imports of Manufactures From LDCs
As a Share of GNP
United States
Japan
EC
United Kingdom
West Germany
Italy
France
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
US, Imports of ? LDC penetration of the US import market for manufactures is much
Manufactures higher than the industrial country average and has been for years.
? In 10 important product lines, the LDCs have captured 40 percent of US
imports.
? The LDC market share jumped significantly in all the illustrated product
lines in the 1970s, except for fabrics and transistors-product categories
that were already high in 1970.
? Commodity categories with less than a 20-percent market share in 1980
but whose share has increased markedly since the mid-1970s include
pumps, plastics, and metalworking machinery.
? Altogether, the NICs accounted for 80 percent of US imports of
manufactures from the LDCs in 1980, as compared with a 60-percent
average for the other industrial countries. The NIC share of US imports
from LDCs was near 95 percent in the case of all shown products except
fabrics, clothing, and transistors. The bulk of US transistor imports come
from the ASEAN countries of Malaysia, the Philippines, and Thailand.
Confidential 84
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
Figure V-4
Percent of imports
of manufactures
11.9
22.9
51.5
83.6
62.4
73.6
Footwear
13.3
61.8
Radios
21.3
51.5
Ships
17.8
48.7
Watches
3.0
44.6
Domestic electrical equipment
1.3
35.5
Furniture
9.9
35.1
Other Categories Where Share Has
Risen Rapidly Since Mid-1970s
Pumps
1.3
17.9
I
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
VI. Trade Frictions Intense frictions between Japan and its trade partners persisted throughout
With Japan the 1970s, mainly because of the manner by which that country achieved
its exceptionally large trade surpluses in manufactures. Its export surges
were heavily concentrated in a few product lines, and its imports of
manufactures remained at a low level. Throughout the decade the United
States bought relatively more NIC and Japanese products than other
industrial countries, thereby absorbing more of the brunt of the export
onslaughts and more of the benefits of increased competition, especially for
the consumer.
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
Importance of Exports ? Although Japan should be expected to run large trade surpluses in
manufactures because of its poor natural resource base, its surpluses
remained exceptionally high throughout the 1970s and were obtained in
ways that have had a highly disruptive impact on the global trading
system.
? As we have seen, the trade problems with Japan have not resulted from
that country's overall export growth or from an increasing domination of
global export markets. Overall export growth in Japan in the 1970s did
not top the expansion rate in the United States by much, and each of the
countries increased its market share to about the same degree.
? Overall, US merchandise exports in 1980 were still nearly twice those of
Japan, and if services are included the US level would certainly be more
than double. Even in terms of manufactures, US exports were some 15
percent greater than those of Japan. Thus, the size and breadth of the US
economy gives the United States a distinct advantage in maintaining its
large share of world markets.
? Measured in relative terms (as compared with GNP), Japanese exports
are about the same as those of the EC (excluding intra-EC trade) and
somewhat higher than those of the United States. Inclusion of services
would make the relative export proportions among the three fairly close.
? It is worth noting that the relative importance of total exports and
exports of manufactures increased much more rapidly for the United
States than for Japan or the EC in the 1970s.
Confidential 88
1
r
ji,
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VI-1
Importance of Exports
Export Level
Billion Sin 1980
Share of GNP
Percent
1970 1980 70 80 70 80
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
sudden loss of jobs and profits.
Concentration of ? In the case of exports, the major frictions with the Japanese reflect their
Exports of heavy concentration on a relatively few product lines and the sudden
Manufactures surges of sales in these product lines. These actions have seriously
disrupted the competing industries abroad because of the significant and
? The concentration of exports by the Japanese can best be seen by
comparing the percentage of their total exports of manufactures account-
ed for by the top five product lines with similar shares for the United
States and the EC.
? In both the world market and in each major market, this Japanese
concentration ratio is 50 percent or more, while the US and EC rates nor-
mally fall below 40 percent.
? At more than 60 percent, the Japanese concentration ratio is most
pronounced in the United States. In fact, three commodities-motor
vehicles, steel, and consumer electronics-account for 55 percent, with
motor vehicles alone near 40 percent.
? These aspects of Japanese export expansion reflect the product develop-
ment and marketing strategies pursued by Japanese firms. Enormous
capital is pumped into new plants and equipment in select product lines
so the industry can quickly secure a large share of the world market. The
resulting rapid increases in productivity obtained through the introduc-
tion of modern equipment and much more efficient production tech-
niques push costs down rather quickly, and allow the Japanese to cut
prices. In addition, by sheltering some domestic industries from foreign
competition, Japanese firms have increased sales in their large home
market, thus, allowing them to quickly develop an international-scale
industry. In one degree or another these strategies were followed in
textiles, steel, cameras, motorcycles, small trucks, automobiles, consumer
electronics, and 64K random access memories (RAMs).
Confidential 90
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VI-2
Concentration of Exports of Manufactures, 1980
Percentage of Manufactures Exports
Represented by the Five Leading Exported Products
t
I
World Market
Japa
n
US
EC
M
US Market
Japan
EC
EC Market
Japan
US
EC
Japanese Market
EC
Us
NMI
I :A
I
91 Confidential
hv+r,r, ,-1 Crr Plc.mcc ,)nn7/nr,rn7 - r.IA-RnPR. Tn0176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Japanese Surges in ? Japanese companies are most aggressive in exporting manufactures when
Export Growth domestic demand falters. They do this by rigorous marketing and by
convincing workers to temporarily accept cuts in real wages.
? Firms in other countries also pursue such recessionary strategies but the
Japanese do so in a much more forceful manner because of their
particular mode of business operations. Japanese companies are much
less able to reduce costs during recessionary periods. Their lifetime
employment practices mean that they cannot easily lay off workers. Their
comparatively high reliance on loan capital rather than equity capital
means they are burdened with continuing high debt servicing payments
and gain little by cutting back dividends.
? The unusually high coincidence of recessionary periods among industrial
countries (1974-75 and 1980-81) made the Japanese export drives even
more politically sensitive. Many countries accused the Japanese of
pursuing export-led growth at the expense of other industrial countries.
Confidential 92
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
f
Figure VI-3
Japanese Surges in Export Growth (Average Annual Rise in
Volume of Exports)
11
t
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Japan: Imports of ? Japanese imports of manufactures are small by any measure.
Manufactures
? They are small relative to the level of other industrial countries in 1980.
They were equal only to those of Switzerland, a country whose economy
is one-tenth that of Japan.
? They are small when equated to Japanese exports of manufactures.
? They are small in the two-way trade among industrial countries. Thus,
Japan has not yet developed the large and fairly even flow of manufac-
tures with other industrial countries that has characterized the growing
interdependence among countries of North America and Western Eu-
rope, and between these regions.
? They are small when measured against GNP. Despite 10 years of
considerable efforts by the United States and the EC to make Japan open
up its market, the ratio of Japanese imports of manufactures to GNP re-
mains near the low level of 1970. In contrast, the United States and the
EC have each greatly increased their relative purchases in the past
? Japan shields its domestic market from foreign competition mainly
through an informal interaction of various interest groups, while tariffs
and other statutory trade restrictions play a minimal role.
? Foreign firms in Japan must deal with (1) an array of restrictions
involving inspections and approvals handled by an ambiguous bureau-
cratic process, (2) informal cartel arrangements among major producers,
and (3) unwritten guidelines under which buyers purchase goods mainly
from Japanese firms. As a result foreigners cannot easily pinpoint where
and how the restrictions are being applied.
Confidential 94
 e
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure VI-4
Japan: Imports of Manufactures
Value in 1980
Billion US S
EC
United States
Japan
Switzerland
Ratio of Exports to
Manufactures, 1980
Percent
EC
Regional Trade in 1980
Billion S
EC from US 134
Japan from US I. 131
US from Japan g
Japan from EC 16
EC from Japan 5
As a Share ofGNP
Percent
 Confidential
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Impact of Japanese ? The United States has taken the brunt of the Japanese export surge. US
Exports of consumers, of course, have benefited from the Japanese price/quality
Manufactures competition.
? Despite the recent rapid rise in Japanese exports to the EC, that group
takes a much smaller amount of such Japanese manufactures relative to
GNP than does the United States. In fact, the EC absorbed in 1980
about the same share of GNP that the United States did in 1970.
? In Italy and France the purchases of Japanese manufactures remain an
especially tiny portion of these countries' GNP.
Confidential 96
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VI-5
Industrial Countries: Imports of Manufactures From Japan
United States
1970
1980
EC
1970
1980
United Kingdom
West Germany
France
Italy
1 -1
586570 5-82
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
VII. Service Sector Service sector transactions have become the most dynamic and important
Transactions element of the US economy and its international economic relations; they
are also the least understood.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
United States: ? The US economy increasingly is dominated by service activities. Service-
The Growing producing industries now account for more than 70 percent of the US la-
Importance of the bor force and in the last decade provided for almost 90 percent of its
Service Sector growth.
? Relative to goods production, however, the service sector has been given
little attention because of the paucity of information on services and the
vague nature of these industries. In the international field for example,
the United States divides "merchandise" trade into 10,000 categories; in
services there are fewer than 10 breakdowns.
? Indeed, the US economy is experiencing a service transformation, in
which a new set of linkages are being established through the growth of
"integrative services" that interconnect firms, units of firms, and indus-
tries at different stages of production or in different locations. The
distinctions between goods and service industries are increasingly break-
ing down, as the two aspects merge with each other. The most dramatic
expansion is now taking place in this integrative part of the service sector
that combines high technology with management/marketing know-how.
This "information economy" marries computers and communications,
which include "software" of all types, and a great variety of financial and
diagnostic services.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VII-1
United States: The Growing Importance of the
Service Sector
Share of Total 100
Employment
Service Share of
Growth in
Employment
O
Service-
Producing
Industries
Goods-
IN Producing
Industriesa
1980
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
US Current Account ? Service transactions have played an increasingly important role in US
Trends current account transactions.
? While the US trade position (on a balance-of-payments basis) has
deteriorated from a yearly average near zero in the first half of the 1970s
to a deficit of some $30 billion per year since then, the service surplus has
climbed steadily, reaching $40 billion in 1981.
Confidential 102
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure VII-2
US Current Account Trends: Trade Versus Services
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential I
US "Service" Account ? Balance-of-payments data on "services" provide a reasonable approxima-
Flows tion of the total transactions. Their coverage of detailed categories,
however, has numerous shortcomings. Most important, sales and receipts
are not available on an industry basis, but rather reflect a hodgepodge of
various types of foreign exchange receipts and outlays. Nonetheless, the
categories shown in the figure, the only consistent set available, do
provide a rudimentary starting point in indicating the types of
transactions:
- Transportation of freight.
- Tourism, including moving people via aircraft and oceangoing
vessels.
- Fees and royalties earned from selling know-how, ideas,
technology, and management services.
- Other private services, including accounting, advertising, construc-
tion, franchising, information, entertainment, insurance, informa-
tion, and leasing.
- Direct investment income earned through the operations of a
company's foreign subsidiaries and branches.
- Interest income on foreign loans and deposits.
- Private transfers, including that portion of salaries earned abroad
and sent home, and the flow of pensions and social security funds to
and from foreign countries.
Military payments, equaling the foreign exchange costs of station-
ing troops overseas, while the receipts reflect sales of military
hardware and related services.
- Interest income (official), including interest payments on govern-
ment securities.
- Other government categories, accounting mainly for foreign ex-
change outlays related to embassies and other government missions
abroad.
1
Approved For Release 2007/05/07: CIA-R DP85T00176R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176ROO1400060001-5
I
t
Figure VII-3 Billion dollars
US "Service" Account Flows, 1980
I
Royalties and fees 6.9 0.8 6.1
Other services 3.5 2.7 0.8
Direct investment income 36.8 9.3 27.5
Interest income 36.5 21.3 15.2
Transfers 1.5 2.6 - 1.1
I
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Selected US Service ? The other private services category contains some of the most dynamic
Industries: Share of and important service sector industries. But, because of the accounting
Foreign Revenues method used in balance-of-payments statistics, the category includes only
a small portion of the actual sales of these industries. For example,
another effort to try to account for the total foreign revenues of the
industries in this category came up with more than $30 billion in 1980.
This compares with less than $4 billion under the balance-of-payments
definition.
? Much of what might be included in the other private service balance-of-
payments category shows up in other service elements such as fees and
royalties, direct investment income, and private transfers. Large revenues
received by these industries also are likely to be included under
merchandise trade. For example, the price of computer hardware often
includes considerable outlays on software.
? Among many private service industries, foreign revenues now provide a
major share of the total revenues. In accounting, advertising, banking,
construction, and motion pictures, foreign revenues account for 30
percent or more.
? While the proportion of revenues derived from foreign sales remained
relatively low in the case of consulting, franchises and information, they
are climbing rapidly and are making an important contribution to
earnings.
Confidential 106
1
t
1
Approved For Release 2007/05/07: CIA-RDP85TOn17PRnn14nnnAnnn1-F
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VII-4
Selected US Service Industries, Share of Foreign
Revenues, 1980
Advertising
Motion picture rental
Accounting ("Big Eight" firms)
Banking
Construction (top 400 firms)
Accounting (all firms)
Leasing, transport and
equipment
Lodging
Information
Consulting
Franchises
Legal services
107 Confidential
A...--,.,--,.i C. r Dalnngn ')nn7/nc/fl7 - f'IA-RnPR1;Tnn171R001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
United States: Major ? All the improvement in the US service position has been attributable to
Changes in the the private sector. Between 1970 and 1980 these private flows improved
"Service" Account $42 billion while official transactions deteriorated $8 billion.
Balance
sale of US financial expertise, technology, and management know-how.
return on US capital but they incorporate substantial earnings from the
? The bulk of the private gains stemmed from net earnings on direct
investments and loans. These two categories do not merely reflect a
? Most of the decline in official transactions resulted from the interest paid
on the increasing amount of US Government securities held by foreign
governments, mainly as part of their foreign exchange assets. Thus, this
US debt held abroad has been essentially "monetized."
troops in Europe and East Asia.
clients-climbed faster than the foreign exchange costs of stationing US
Department of Defense military sales abroad-mainly to Middle East
? The military deficit shrank about $1 billion during the 1970s because
Confidential 108
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VII-5
United States: Major Changes in the "Service"
Account Balance
t
t
Total Direct Interest Royalties Other
Invest- Income and Fees
ment
Income
-15
Total Interest Military Other
(net) Income
586574 5-82
109 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
US "Service" Account
Balance With Selected
Partners
? The United States ran "service" surpluses in 1980 with every country for
which separate records are kept.
fees. In the case of Japan, interest income earnings are the most
concentrated heavily in direct investment income and in royalties and
? The private net service surpluses the United States has with the EC are
and of the interest paid on the US Government debt held by these two.
billion as a consequence of payments for military troops stationed there
? Although the United States has large private-sector surpluses with
Canada, Japan, and the EC, in the latter two cases the overall surpluses
are quite small. This occurs because official net outflows reached $11
financial market.
investment in Japan and the large sums Japanese firms borrow in the US
important. This difference reflects the small amount of US equity
? Overall more than 60 percent of the net interest income inflows came
from LDCs in 1980 as a result of the major role US banks played in recy-
cling petrodollars.
Confidential 110
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
US "Service" Account Balance With Selected Partners, 1980
Total
Direct
Invest-
ment
Interest
Income
Royalties
and Fees
Other
Canada
8.3
8.6
3.9
3.3
0.7
0.7
-0.3
Japan
1.7
4.2
0.1
2.7
0.9
0.5
-2.5
EC
1.4
9.8
7.7
0.8
2.4
-1.1
-8.4
Percent
LDCs and other states
74
48
41
62
25
I
I
I 111 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? Japan's large deterioration on its service account during the 1970s was
Major Changes in the widespread and included a substantial rise in Japanese tourists abroad,
"Service" Balance purchases of a broad spectrum of private services, and increased interest
payments (mainly to US banks) for loans taken out by the Japanese
private sector.
? West Germany's large loss was due almost entirely to its soaring number
of tourists.
? France did well in tourism and other private services, while the gains for
Italy were heavily concentrated in tourism.
? The United Kingdom's gains were from other private services.
? Japan, West Germany, France, and Italy showed a significant jump in
official interest income receipts because of their increased holdings of US
Government securities.
Confidential 112
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VII-7 Billion dollars
Industrial Countries: Major Changes in the "Service" Balance, 1970-80
O
Total Tourism Other Private Official
Private Transfers Interest
Services Income
West Germany -12 -13 - -4 +3
France +6 2 4 -2 +l
United Kingdom +6 - 6 - -
Italy +4 6 - - -
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
t
VIII. Direct For the United States, foreign direct investment became a two-way flow in
Investment the 1970s, after two decades during which US firms were investing heavily
Flows abroad and the flow into the United States was minimal.
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
United States: ? The past decade saw a significant slowing of US investment abroad
Cumulative Direct measured in real terms-excluding price movements and exchange rate
Investment Abroad changes. During the 1970s, such foreign investment climbed roughly 3
percent per year, a rate about half that of the 1950s and 1960s.
? From 1950 to 1980 the portion of US direct investment in Western
Europe rose dramatically. By far the largest investments through 1980
were made in the United Kingdom (manufacturing, petroleum, and
finance), West Germany (manufacturing and petroleum), and Switzer-
land (trade and finance). The most spectacular increases during the 1970s
occurred in the Low Countries and Switzerland.
? The share of US foreign direct investment placed in Canada slipped from
35 percent in 1960 to 21 percent in 1980. In fact, during the 1970s the
real level of US direct investments in Canada changed little, in part
reflecting Ottawa's nationalistic investment policies.
? US investment in Japan climbed rapidly in the 1970s, although by 1980
the total US investment there remained small relative to the size of the
economy. In that year Japan ranked seventh, along with Belgium, in
hosting US investments.
? US direct investment in LDCs also became a less important component
of the total in both the 1960s and the 1970s. This declining share would
have been even sharper if it were not for enormous direct investments
made in the 1970s in Bermuda and a few Caribbean islands associated
with offshore US banking operations.
? Excluding this specialized investment, the only major expansion of US
direct investment in LDCs took place in Brazil, Mexico, and a number of
dynamic East Asian countries. In most other Latin American countries,
there were small gains at best; similar conditions prevailed in Africa and
South Asia. In the Middle East, there was a significant decline, reflecting
the nationalization of the oil industry. For similar reasons, US invest-
ment in petroleum and other minerals throughout the Third World fell
during the 1970s.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Confidential
Figure VIII-I
United States: Cumulative Direct Investment Abroad
Other
Other Developing
Countries
Other Developed
Countries
' 585576'5'62
I
I
117 Confidential
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Confidential
Cumulative Foreign ? Foreign direct investment in the United States accelerated sharply in the
Direct Investment in past decade. These investment inflows jumped about 10 percent a year (in
the United States real terms) in the 1970s, as compared with a 4-percent rise in the previous
decade.
By 1980, cumulative direct investment inflows into the United States
equaled 31 percent of US direct investment abroad, up from only 17
percent in 1970.
Since 1960 about two-thirds of the inflows have come from Western
Europe. Nearly all the countries in the region substantially increased
their investments in the United States in the 1970s, with the Netherlands
moving into first place and replacing the United Kingdom.
? The flow from Canada also picked up in the 1970s but did not climb as
fast as the European inflow. As a consequence, the Canadian share of the
total dropped sharply.
? The Japanese boosted their investment from almost nothing in 1970 to $4
billion in 1980 (6 percent of the total). Much of the Japanese investment
was in trade and service establishments that facilitate. the import of
Japanese manufactures. In contrast, much of the new European invest-
ment was in petroleum and manufacturing.
? The rather large jump in Latin American investments mainly reflects
inflows from the Netherland Antilles.
? By 1980, direct investments by OPEC members had reached only 1
percent of the total inflow, and about half of that was in real estate.
Confidential 118
 Approved For Release 2007/05/07: CIA-RDP85TOO176ROO1400060001-5
Figure VIII-2
Cumulative Foreign Direct Investment in the United States
t
t
Billion $
7 13 65
100
kgam
Other Developing
Other Developing
M 61ft wkq'f
Latin America
90
-Other Developed C
80
Canada
70
60
Other
50
40
----
30
Netherlands
20
United Kingdom
10
1 -1
Countries
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
US Share of ? The US dominance in total direct investments abroad by the 16 largest
Industrial-Country industrial countries has waned since the early 1970s. US multinational
Direct Investment firms now face much stiffer competition from firms headquartered in
Flows West Germany, France, the United Kingdom, the Netherlands, and
Japan.
? An even more dramatic shift has occurred in the US share of total
industrial-country direct investment inflows. In fact, the United States
has become by far the number-one choice of foreign investors.
? A disaggregation of industrial-country direct investment flows shows that
services have been the fastest expanding sector, especially for the United
States, West Germany, and the United Kingdom. Banks and trading
operations have assumed the lead in this growth, followed by advertising,
franchising, tourism, accounting, and consulting.
Confidential 120
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
1
Figure VIII-3
US Share of Industrial-Country Direct Investment Flows
1
A --al Cnr D~InncG 'nn7/n1;/07 ? (,IA-RfPR5Tt10170lR001400060001-5
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Industrial Countries: ? For most industrial countries, there was a dramatic shift in the relation of
Changing Pattern of their direct investment inflows to their outflows in the 1970s.
Foreign Direct
Investment ? We have already seen the growing importance of inflows relative to
outflows in the United States. In fact, the inflows of direct investment in
1981 topped outflows for the first time since records were kept.
? Most continental European countries moved from being small net
importers of direct investment to being significant net exporters.
? The Canadian shift in this direction was even more pronounced. Canada
moved from a major net importer in the early 1970s to a major net
exporter by the end of the decade. This shift was caused by Ottawa's ef-
fort to "Canadianize" foreign firms and its barriers on new foreign
investment inflows, especially in the mineral industries. Meanwhile,
because government policies produced poor investment prospects at
home, many Canadian firms preferred to invest abroad.
? The Japanese became an overwhelming net exporter of direct investment.
Direct investment inflows into Japan remained at a very low level
throughout the 1970s, while that country's investment abroad rose
rapidly. Despite the removal of many statutory barriers to foreign direct
investment in Japan by Tokyo, the Japanese system still stifles new
foreign investment.
Confidential 122
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Figure VIII-4
Industrial Countries: Changing Pattern of Foreign
Direct Investment
United States
West Germany
France
Netherlands
United Kingdom
Japan
Canada
1970-72
1978-80
1970-72
1978-80
586578 5-82
Ar+r+r-al I-nr PaIancG ')nr17/rlti/n7 ? riA-RnPRFTtl017RR001400060001-5
 1
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
IX. Military and The United States, more than 35 years after World War II, still carries by
Aid Burden far the major economic burden of industrial-country military defense and
assistance to LDCs.
125 Confidential
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: ? Although the US military burden (as measured by defense expenditures
The Military and Aid as a share of GNP) declined in the 1970s, it still was much greater than
Burden that carried by other major industrial countries.
? Among most US allies the military burden remained rather constant
through the 1970s after declining during the 1960s.
? In regard to economic assistance to LDCs, other countries did take on an
increasing share of the burden. By 1980, however, the US burden still ap-
proximated that of all the other major industrial powers when contribu-
tions made through voluntary private organizations are included.
? The major exception is West Germany, whose burden was considerably
greater than that of the others in 1980.
? Given their economic prowess, the Japanese carried a strikingly small
burden both in the military and the economic assistance cases.
.1
Confidential 126
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Industrial Countries: The Military and Aid Burden
Military Expenditures as
a Share of GNP (%)
United States
9.2
8.0
5.6
Canada
4.4
2.4
1.8
West Germany
4.0
3.3
3.3
France
6.2
4.0
4.1
United Kingdom
6.2
4.8
5.1
Italy
3.2
2.7
2.4
Japan
0.9
0.8
0.9
Concessional Economic Aid
as a Share of GNP (%)
United States
0.57
0.32 (0.38)
0.27 (0.32)
West Germany
0.43
0.32 (0.36)
0.43 (0.48)
France b
C
0.44 (0.44)
0.36 (0.37)
United Kingdom
0.53
0.42 (0.42)
0.34 (0.36)
Italy
0.15
0.14 (0.14)
0.17 (0.17)
Japan
0.18
0.21 (0.21)
0.32 (0.32)
a Figures in parentheses include assistance provided by nongovernment agencies.
b Excludes aid to departments and territories.
c Not available.
 Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
Approved For Release 2007/05/07: CIA-RDP85TOO176R001400060001-5
 Approved For Release 16n?iY5/07 : CIA-R DP85'T`t50176R001400060001-5
MEMORANDUM FOR: The President
Secretary of State
Secretary of the Treasury
Secretary of Defense
Secretary of Commerce
-__'Secretary States Trade Representative
Assistant to the President for
National Security Affairs
Deputy Secretary of Defense
,Under Secretary of Commerce for
International Trade
' 4U,nder Secretary of Defense for Policy
-Assistant Secretary of State for
Economic and Business Affairs
S.1iB;?7 CT: The United States in the World Economy;
Elements of Strength
This rieei,rora.ndum prepared by the National Intelligence Council celiberately
'takes an upbeat view of the economic performance of the United States for the
last decade and the prospects looking beyond the present, recession toward
the mld-80s. There are some ideas and charts which you might find valuable
i n
re
a r i n
fe,.. t1
p
p
g
a
Wi l l i am J. Casey
Attachment:
NIC M 82.-10006
CONFIDENTIAL.
 Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5
Approved For Release 2007/05/07: CIA-RDP85T00176R001400060001-5