Trends in U.S. Trade and Comparative Advantage

WILLIAM H. BRANSON* Princeton University and HELEN B. JUNZ* Board of Governorsof the Federal Reserve System

IN RECENTYEARS, THE SHRINKINGU.S. tradebalance has drawna good deal of attentionand caused some concern here and abroad. The balanceon merchandisetrade reached a peak of $6.8 billionin 1964,and then shrank to about$650 million in 1968and 1969.This reduction was due to some extent to the excessdemand in the United Statesin 1966-68,and the ensuing inflation.But, as some observershave pointedout, the inflationaryboom couldexplain only partof the story.' They suggestedthat the deterioration was the resultmainly of longer-termtrends in the basic U.S. competitive position.This view has gainedmore prominence as the increasein the U.S. tradesurplus to $2.1billion in 1970was followedby a deficitin the firsthalf of 1971despite the slowdownin domesticeconomic activity. Thus, the re- cessionhas not been accompaniedby an improvementin the tradebalance, * We wish to thank Betty L. Barker, Barbara R. Lowrey, Kathryn A. Morisse, Nicholas Monoyios, and, especially,Raymond D. Hill for assistance.Besides acknowl- edgingassistance from the Brookingspanel, we are also indebtedto BenjaminJ. Cohen, Keith L. R. Pavitt, and staff membersof the Board of Governorsof the FederalReserve Systemfor commentson an earlierdraft. The views expressedin this paperare those of the authors,and do not necessarilyreflect those of the Board of Governors. 1. See, for example, Michael Boretsky, "Concerns about the Present American Positionin InternationalTrade" (paper presented at the National Academyof Engineer- ing Symposium on Technology and International Trade, October 14-15, 1970; processed).

285 286 Brookings Papers on Economic Activity, 2:1971 mainlybecause imports have continuedto risewell beyondtheir usual relation to the growthin grossnational product (GNP). In an attemptto illuminatesome of the uncertaintiesconcerning the U.S. tradeposition this paperpresents an analyticaldescription of U.S. tradein manufacturedgoods, drawingon our ongoingresearch into thesetopics. It is organizedaround three questions: What have been the long-termtrends in U.S. tradeby commoditygroups? How has the U.S. tradeperformance in the 1960scompared with that of othermajor industrial countries? What is the sourceof currentU.S. comparativeadvantage in trade? The first section drawson the trade data broken down by the end-use categoriesemployed by the Officeof BusinessEconomics (OBE) to review trendsin U.S. tradefrom 1925to 1970,by sevenmajor end-use aggregates. The second extendsthe analysisof the U.S. aggregates,drawing on the data publishedby the Organisationfor EconomicCo-operation and De- velopment(OECD) on tradeamong the majorindustrialized countries and on nationalGNP datain orderto compareU.S. output,demand, and trade by majorend-use categories with those of otherindustrial countries in the 1960s.The third sectionturns to disaggregateddata on tradein manufacturedgoods, reviewingtrends in disaggregatedOBE end-usegroups to ob- servepatterns in trade at the three-and four-digitlevel. The final section studiesthe sourceof U.S. comparativeadvantage in a cross-sectionof U.S. trade by two- and three-digitstandard international trade classification (SITC)categories;

Long-termTrends in U.S. Tradeby End-useCategories

A usefulperspective on developmentsin U.S. trade can be obtainedby reviewingits longer-runtrends by end-usecommodity categories. The OBE dataon tradeare broken down under five summary categories: foods, feeds, and beverages(0); industrialsupplies and materials(1); capitalgoods (2); automotiveproducts (3); and consumergoods (4).2This sectionconsiders these aggregateend-use categories. Selected three- and four-digitcategories are examinedbelow to observemore detailedmovements in trade.

2. U.S. Departmentof Commerce,Office of Business Economics, U.S. Exportsand ImportsClassified by OBE End-Use CommodityCategories, 1923-1968, A Supplementto the Surveyof CurrentBusiness (1970). WilliamH. Bransonand Helen B. Junz 287

INITIAL ASSUMPTIONS AND HYPOTHESES Two basic questionsarise in analyzingand presentingthe OBE data: How shouldthe data be disaggregated-interms of both categoriesto be used and degreeof detail?And how shouldexports and importsbe related to each other? To a large extent,the answerto the first questioninvolves the way the OBE organizesthe data. This disaggregationmakes sense if the courseof tradein subcategoriesis more similarwithin major categories than across majorcategories. Thus a decisionwas madeto disaggregate,within the end- use framework,as far as possibleto see whethersimilar trade patterns obtain within, and dissimilarpatterns across, categories. The second questioncalled for focus on trade balancesby commodity groups.This focus, of course,does not suggestthat all categories"should" show surpluses,or that categoriesshowing large and growingdeficits dis- play "weakness"that necessarilyshould be correctedby policy action.The net balance of paymentsshould be in equilibriumon whateverbasis is thoughtappropriate, while withinit some items show deficits,and others surpluses.Furthermore, the basicnotion of comparativeadvantage implies that the United States shouldbe a net importerof some goods and a net exporterof others. But evenat the finestlevel of statisticaldisaggregation that is available,it appearsthat most goods are subjectto two-waytrade. Thereby, the notion of comparativeadvantage becomes the propositionthat the United States shouldbe a net exporterof goodsin whichit has a comparativeadvantage- whetherit derivesfrom resourceendowment, technological advantage, or educationembodied in human capital-and a net importerof goods in whichit is at a disadvantage.3Thus it is naturalto focus on net exportsby commoditygroup in an analysisthat attemptsto revealsomething about movementsin U.S. comparativeadvantage and trade.4

3. Strictlyspeaking, in a list of commoditiesordered from those with maximumnet exports to those with maximum net imports, the United States has a comparative advantagein producingthe goods higher on the list relativeto those lower on the list. 4. Disaggregationof the end-use data in an analysis focusing on net exports runs into the problemthat, beyond the two-digit level, export and import categoriesdo not match.This arisesbecause a majorcriterion the OBE used for creatingsubcategories was the contributionof an item to the value total in its majorcategory, and this criterionwas 288 Brookings Papers on Economic Activity, 2:1971

TRENDS IN AGGREGATE END-USE CATEGORIES Table 1 showsnet exportsfor sevenmajor export end-use categories for the years1925-70, excluding the waryears 1941-45. In the table,total nonagriculturalindustrial supplies and materialswere disaggregated into three parts:fuels and lubricants; chemicals; and a residualcomponent. This dis- aggregationis necessaryfor two reasons.Fuels and lubricantsinclude as majorsubcategories crude petroleum and semifinishedpetroleum products andnatural gas, in whichtrade is heavilyinfluenced both by naturalresource advantagesand by governmentpolicies. Chemicalsare shown separately becausethey are the only three-digitcategory among nonagriculturalin- dustrialsupplies and materialsto show a surplusconsistently since World War II. Agriculturalgoods. From 1925to 1959,the U.S. tradebalance in agriculturalgoods typically fluctuated in the rangefrom a surplusof $1 billionto a deficitof $1 billion.Then from 1960 through 1967, agricultural trade showed surplusesin the rangefrom $0.7 billionto $1.7 billion.Since 1967,the sur- plushas beenconsiderably smaller-between $100 million and $500 million. Thus, between 1964 and 1970, a substantialdeterioration took place in trade in agriculturalgoods as the surplusfell from $1.7 billion to $0.5 billion. Fuelsand lubricants. Trade in fuels and lubricantsconsistently showed a smallsurplus from 1925 through 1940. At the endof the war,exports jumped beyond the prewarexperience, and then maintaineda fairly flat trend, around which, however,large swings occurred.On the other hand, just afterthe war,imports picked up at the prewarlevel, but grewrapidly thereafter.Thus in fuel andlubricants, what began as a substantialsurplus in the late 1940sbecame a balancein the mid-1950sand a steadilygrowing deficit in the 1960s.This patternis frequentlyseen in industrialsupplies and materials and in consumergoods. Chemicals.A differentpattern appears in chemicals(including fertilizers but excludingmedicinal preparations). From 1925 to 1937 trade in these productsroughly balanced. Then in 1938-40 a small but growingsurplus appeared.After the war, exportsstarted off substantiallyabove imports, applied separatelyon the export and import sides. In disaggregatingbeyond the two- digit level, therefore,the analysis here basically follows the export end-use categories, assigning import categories to the relevant export groups. For a discussion of the rationale and structureof the end-use groupings, see U.S. Exports and Imports,pp. vii-xviii. William H. Branson and Helen B. Junz 289 which were roughly at their prewarlevel, then grew substantiallyfaster than importsthroughout the period 1946-70,although imports picked up distinctlyin the late 1960s. Other nonagriculturalindustrial supplies and materials. The category of other industrialsupplies and materials,as shown in Table 1, is a hetero- geneousgroup of products,as can be seen in Table7. Most of themhave showndeficits throughout the period1925-70. Some of the moreinteresting subcategorieswill be discussedin the sectionon disaggregatedtrade patterns. Capitalgoods. Capital goods have had a surplusin every year of the period 1925-70.As is apparentin Figure 1, importswere very flat before WorldWar II, varyingin the rangeof $10 millionto $40 million,while exports generallywere in the $400 million to $600 million range. After the war,capital goods exports showed the typicalbump in the late 1940s,yielding a muchhigher surplus than in the prewaryears. That surplus has grown rapidlyand remarkablyconsistently to the present,exceeding $10 billionin 1970. Consumergoods. Consumergoods (excludingfood and beverages)de- scribea patterncompletely different from that of capitalgoods, as Figures1 and 2 confirm.Before World War II, the United Statestypically was a net importerof consumergoods by a smallmargin. Immediately after the war, a sizablesurplus emerged as exportsquadrupled from around$250 million to $1 billion.After this postwarbulge disappeared, exports grew slowly but steadily.Imports of consumergoods, on the otherhand, have expandedat an increasinglyrapid pace, overtakingexports in 1959.With the exception of a slight decreasein 1961,the deficithas increasedever since. The plot of consumergoods trade in Figure2 suggeststwo generaliza- tions. First, once the postwarbulge in consumergoods exportshad disap- pearedand the irregularlydeclining surplus dwindled away, the deficitgrew steadily, not settling at one level as it had before the war. Second, the growthin the deficitwas not a resultsimply of excessdemand in the late 1960s.The data revealit in the shrinkageof the surplusbeginning in the early 1950s. Automotiveproducts. In automotiveproducts, the United States had a surplusevery year until 1968,but sincethen has had an increasingdeficit. Therewas a smallbut steadysurplus before World War II, followinga pattern quitesimilar to that of capitalgoods (see Figure 1). Afterthe war the familiarexport bulge appeared,but was eliminatedby the early1950s. Ex- portsgrew erratically from 1953to 1962,and at a smoothlyincreasing rate oo 10o 1. O T-- 00n W0 oo tn M In 00 oo tn In' - N oN 00 4) n %o 0 o00 n e to OQ * to >m ? t:; m.CooOO~W)m a b t-eoO0b ^nNc N N I otC oo0C Oo0 0t-1

X - ' oo oo - bin ^ a N Co O q:t a F tn oo o oo tn V)C N N N eqI Cf N cn

cn~ n o 0 qN qW ent)I0ON00 ONe *t N (Om?N ) 00 n t- m cn n t- tn W tn o o ^f) en^ tn in 1 ea N ^ oa N N tnm "Hb-4 cr

^ eq 00 enO cqdz en 'i min 0 Qen ?Oto 00 nC 00 0 00 0 M ~~~~~~~~~~t- o ?vtNW) a) en

^ c: ^ a% N 0o oo I ^rF_ I In I I III 000 en^W en V-4 --4 -4 tn 0r-4~ e1q e t q nc ~~~~en0%Cl'0-f lt t e CICSIO W) )oNu o m N N o oo cr N

*m e or~c-tl t en en -e n 0' 000 tn o e cn-efke~e~ N o NCo cn0 cq 0

* "Z 8- X1 cn o e q 0 0o en n ^c %C It ~o 8m SI 4

a c I I! .e 10n.~O~en T4 .e I 4 Tq N en N en en WI St t- Itcte I I I I~~~~~~~~~~~~~~qin"z

U *xL. - entC l o o e W en en en en' O0 M en 00 00o 0 * It5It5It500~JI0~CIm o0 A -

S~~~~~~~~~tt

X m m m I E m.t I' I I cf2se C l e0n O 000 00

O X~~~~~~~~~tco t. o m el eon -t tn %o t- o as 0 Ch CNlC l C1c 9 en en enC en en enI'l It J tn . e K a a~~~~~Ccr)a as asz cON ON as m ONas m crm os a oc w~~~~~~~~~~"."-I _ q "4 V 4 TA - - I _- ". H - .- - - - eq ON Ch t- r- eq ON a, 00 tn %D m 00 tn 00 en tn In %O kn Ch ON cn v- tn en ON c lqil en Ot- I "-4 cl cli 14, kr cf), V-4, lr ll tt %6 ll: cl ll

ON cri C14

t- C14 as 00 eq el en In CK m m V-4 r- in Itt 0 m N cli t- M C) r-4 .qr ba v-4 a Cd ": p 1-1 C4 3,6 5 8 0

0 0 0 C) tn ON C) C) 00 en en In C) eq a 0 " 00 in T--4 -It (In -8 0 00 00 as In W4 0 N O in en 00 t- 00 ON m 00 It -

0 4. o Cd 9 41 tn C) cn en 1%0 as tn Cd r--q 'a V-4 N r.-4 "tzr O t- ta cwj en en en 00 00 tn 00 -14 00 O"

0 0 o tn In m 1- O t- N %Q tt) oo C) ON r-I 00 00 oo tn en eq oo cn tn t- iC 00 !r- (A WI'o, 8 10- N eq IrST S. I 14 Itt tn tn 1.0 IND 1.0 r..: oc c 0 V-4 -?l 4P It 0

cis C', In tn en o cn In t-- oo C4 V-4 V--q OS 00 M r- tn %C Ch "t tn eq C) t- ON c M WI W) 'o. 0 Cd

Cd Ei 0 0 &O .0 Cd I:t en 0 %C 00 en t- en t% WI en t-. cn Cf) lqt kn N en 00 v--( C) tl- eg o Cf) m tn t- 00 00 m en %O tn O C) Cl C4 Cd 0 0 404

tn Wt %0 eq Ch Ch cn c) %O 0 0 oo en C) en en 00 WI c N In o 93 0 =1 ON C) ON 0 N V--4"r 0 ON 0

0 s 0 0

5 0 0

00 o W) C%4 tn N 00 00 00 t- en 0 '00 0 tn cn C-4 t-- 04 tn tn oo Qo cn :t 0 r- N ON o C14 -0, 0 eq oo m t--. C) o in tn to "en -4 e -4 -o ;-4 "t -4 cd c, W 0 0 a 0 fl eq 0 . I" >* Vu u$4 Cd w t44-* 0 Cd cd cl oo , 5. . C4

0 Cn tn %C t, 00 In O 00 0 0 0 in tn tn tn tn in In In in c %O o o 0 1 la 'i .0 ON Ch CK 0% m 0% ON as m m Ch ON m ON Ch m m W "-4 "--4 -14 "4 "4 r--4 r--4 V--4 r-4 v--4 r--4 v,-l v--4 "-4 " v--4 v--4 v--4 -4 q 99 9 o 292 Brookings Papers on Economic Activity, 2:1971 Figure 1. U.S. Imports and Exports of Capital Goods, 1925-70, Billions of dollars 16

12 -

Exports

2 Imports: -

I 0 TI r t I I1.l I I1l 1925 1930 1935 1940 1946 1950 1955 1960 1965 1970 Sources: Same as Table 1. a. Excluding the war years 1941-45. William H. Branson and Helen B. Junz 293 Figure2. U.S. Importsand Exports of ConsumerGoods, 1925-70, Billions of dollars 8

Imports 4

1925 1930 1935 1940 1946 1950 1955 1960 1965 1970 Sources: Same as Figure 1. a. Excluding the war years 1941-45. 294 Brookings Papers on Economic Activity, 2:1971 after that. Importsdid not appearat a significantlevel until about 1955. Theythen grew at an increasingrate-with a relapsein 1959-61-and over- took exportsin 1968,causing a deficitthat has been growingever since. Some of the recentexpansion in both importsand exportshas been due to the U.S.-Canadianauto agreementof 1965. On balance, automotive trade with Canadahas shiftedfrom a fairly steady surplusranging from $400million to $600million in 1960-65,to a deficitof $1.1 billion in 1970. Nevertheless,the underlyingtrend in automotivetrade is similarto that shownin Table 1. The followingdata on U.S. tradein automotiveproducts (shown in millions of dollars)suggest that, aside from tradewith Canada (whichthey exclude),the trendhas been from surplusto deficit:

1965 1966 1967 1968 1969 1970 369 90 -6 -602 -701 -1,193

In summary,the data of Table 1 give a strongimpression that U.S. trade sinceWorld War II has been characterizedby growingsurpluses in capital goods and chemicals,growing deficits in consumergoods and otherindustrial materials,and a deterioratingbalance in automotiveproducts. The nextsection compares the trendsin U.S. tradein finishedgoods in the 1960s with those of otherindustrial countries.

The U.S. CompetitivePosition in the IndustrialWorld

One importantconclusion from the precedingdescription of longer-run trendsin U.S. tradeis thatthe timeof stabledeficits and surpluses in various categoriesof trade has passed.The increaseddynamism in trade flows is one of the reasonsfor the difficultyin explainingthe currentdeterioration in the U.S. tradebalance. Some observers look to the previousperiod of excess demandand continuinginflation as a majorcause, and concludethat the United Stateshas suffereda once-for-allloss in competitiveness.They proposeexchange rate adjustments,accompanied by appropriatedemand managementpolicies, both to correctthe currentimbalance and to prevent new disequilibrium; Othersemphasize the longer-runloss of comparativeadvantage associatedwith rigiditiesin the industrialstructure, transmission of technology WilliamH. Bransonand Helen B. Junz 295 abroad,and so on. Theyrecommend additional remedies that directlyaffect supplyfactors and that are likelyto be of a microeconomicnature.5 One way to determinethe basic explanationis to identifyany greatdif- ferencesin recentdemand and outputtrends between the United Statesand otherindustrial countries. For example,a largerise in the importshare of domesticconsumption does not by itselfindicate a shiftin comparativeadvantage.6Any judgmentneeds to take into accountwhether import pene- trationof domesticmarkets had beenaccompanied by lossesof exportmarkets.And if exportlosses had occurred,the explanationmight depend upon whetherthe compositionof worlddemand had shiftedto the disadvantage of U.S. producers.This section,therefore, will examinethe trendsin U.S. tradein the 1960sin termsof the balancebetween output and consumption in the United States, and comparethem with trends in other industrial countries.These comparisonshave no normativeimplication: There is no reasonwhy one country'soutput and demandpattern should conformto the averageof all industrialcountries. Indeed, it wouldbe remarkableif it did. Underlyingeconomic growth rates vary among countries because pop- ulationtrends vary, if for no otherreason, and actualgrowth trends differ, if for no other reason, becausepolicy objectivesdiffer. But international comparisonsrequire some internationalaverage (or standard)as a yard- stick. In demonstratinghow developmentsvary among countries,these comparisonscan point to the directionin whichanswers should be sought.

THE STATISTICAL FRAMEWORK The analysisin this sectionrests upon a translationof trade data from SITC definitionsinto end-use type categories for all countries of the

5. Clearly, the effects of neither of these causes can be termed "temporary."The effectsof inflationaryexcesses on the pricestructure can no more be reversedby resump- tion of noninflationarygrowth than possible past misjudgmentsabout the importance of investing in particularkinds of human or other capital can be reversedby proper allocation of new resources, although both developmentswould help prevent further deterioration.Given the balance-of-paymentsconstraint and the aim to make the most efficientuse of resources,the choice is betweendifferent kinds of action, ratherthan, as is sometimesargued, between inaction and action. On this reasoningit is importantto determinethe most crucialexplanation among those that are being advanced. 6. The wordconsumption is used herein the widestsense, to cover all levels of demand includingcapital goods, and thus as a shorthanddenotation of resourceabsorption. 296 BrookingsPapers on EconomicActivity, 2:1971 OECD.7The trade categoriesstudied correspond to five major demand groups:food, consumerdurable goods, consumernondurable goods, passengercars, and capitalgoods. GNP data for fourteenindustrial countries werebroken down into matchingcategories, making it possibleto compare, acrosscountries and by categories,the shifts in sharesof domesticoutput absorbedby domesticconsumption, the sharesof domesticconsumption satisfiedby foreign production,and so forth.8Exports by the fourteen countriesin thesefive product groups, which together constitute, roughly, a finishedgoods category,amount to about50 percentof all OECD exports. Exportsof industrialsupplies and materials, an end-usegrouping for which no matchingGNP categoryexists, are 40 percent,and the remaining10 percent are accountedfor by exportsin unallocatedcategories and by tradeof the smallerOECD countriesnot includedin this study. The data coverthe periodfrom 1961to 1968,so that, unfortunately,the divergentcyclical developments between the United Statesand the rest of the industrialworld from late 1969onward cannot be analyzed.However, the periodis sufficientlylong to throwsome light on relativedemand and supplytrends among industrial countries in the 1960s.For this purpose,the second half of the decadeis contrastedwith the averagefor 1961-64.Al- thoughthe U.S. economywas operatingbelow full employmentin 1961-64, the gapwas beingnarrowed, prices were relatively stable, and the tradebal- ancewas in largesurplus, around $5 billionor so annually.By the firsthalf of the 1960s, other countries,except perhapsJapan, had fully completed their postwar reconstruction.Germany and the Netherlandshad made some upwardadjustment of theirexchange rates in recognitionof this fact, and quantitativetrade restrictionshad been largelyremoved (again with the exceptionof those appliedby and againstJapan). Thus, the periodpro-

7. These data were developedby KathrynA. Morisse at the Board of Governorsof the Federal ReserveSystem. A qualitativedescription of the data problemsis available from her on request.It should be noted that this classificationfollows the generallines of the OBE categories,but the results are not strictly comparablemainly because the export and import classificationschemes are not identical for certain categories. This leads occasionallyto wide divergencesfrom the publishedOBE data. 8. For a descriptionof the data and their adequacy,see Betty L. Barkerand Barbara R. Lowrey, "Gross National Product Data, by Selected Components, for Fourteen IndustrialCountries," Board of Governorsof the FederalReserve System, "Review of Foreign Developments," No. 662 (November 30, 1970; processed). GNP data were convertedto U.S. dollars at 1967 rates of exchange. William H. Branson and Helen B. Junz 297 vides a relativelygood base for comparisonsof changesin competitiveper- formance.Comparisons in this section are generallymade with the year 1968.That year was not an idealone, in termsof cyclicalbalance. But using a 1967-68average would have prejudicedthe resultseven more, since 1967 saw a recessionin Germanyand low growthin the UnitedStates. Whenever possible, abruptchanges in trend in 1968 are noted. The basic data on which subsequenttables in this section are drawn, are summarizedin Table2.

OUTPUT AND DEMAND PATTERNS IN THE INDUSTRIAL WORLD The changesin the structureof output and consumptionof industrial countriesmark the sixties as a decadeof growingtrade involvement.Im- ports and exportsof industrialcountries expanded much fasterthan their domesticoutput, as is shown in Table 3. Of course, this developmentis boundup with the creationof the EuropeanEconomic Community (EEC) andthe EuropeanFree Trade Association (EFTA). But the rapidexpansion of tradeamong the EEC, EFTA, North America,and Japansuggests that the interchangeof goods amongindustrial nations would have grownrap- idly anyway.Thus, it is not surprising,and shouldbe no a prioricause for alarm,that the shareof domesticmarkets supplied by domesticproducers has declinedalmost everywhere in almostevery category. For all categories and all fourteencountries together, it fell froman averageof 92.7 percentin 1961-64 to 91.3 percentin 1968, a 1/2 percentdecrease. In other words, consumptionhas becomeincreasingly cosmopolitan. A bettertest of changesin competitiveposition than the degreeof pene- trationof domesticmarkets by foreignproducers is the relationshipbetween domesticoutput and domesticconsumption. This ratio, shownin Table4, includeschanges in exportsas well as in imports.It reflectsboth shifts in tradebalances and the relationof the size of the tradebalance to total output.9Thus, the extentof the improvementin the tradepositions of Belgium, 9. The absolute level of (as distinctfrom the change in) the ratio of domestic output to domesticconsumption is not very meaningful.The adequacyof the shareof consumption covered by domestic output dependsupon a country'sbalance-of-payments structure in general,and upon its need to import industrialmaterials in particular(since the ratios given here capture trade in finished goods only). But changes in the ratio of domestic output to domestic consumption readily demonstrate shifts in the trade position. O oo li oo en N In oo " O o V- In 0 N "t (I cl C^ 4 CN 4 %6 % W; 6 Co 0 oN I + t S I +^+ ~~~~~I I++ II+ I++I

Utz ++ IIII+

tq Q 5^ w _ ~~~~~~N O 0 tn oo t m w m NoRoT n N oow Po g

k z S: O ~~~~~00 N en Ot00S7CzW tS t b0 R o E + I ^ I X ~~I I I I I + l { I

V Q1~~~~~~~~~~~0-s ":T o st o o st o N o oo tn o

sS 4? 4 I I + ~~~~~+++ ++ + +++"- I S bl) ,S::~~~~~~ no 8Y

X o~~~~~~~~~~~ t K tn N 0 N o o

C tr tr 6 06 6 6 6 14 6 %6mm

00e ikXoWFmnt ON 00 I' n t- r

.5~~~~~~~~~1iv^ cl c 0

b~~~~~~~~~~: %O % 0gm ON N %O O- 0

Po = > ot

9 = g b E a w Y E S 2 G i t *w E ffl o oo o m s - o o oo) 1% V- tt o I' tn o 00 oo O t o t- ItFt 1. o e I+ I I + + 11+ I + I+ ++ + + + tfOCcTo' %0 0o tnID e0VV ~%o \-o in + oo eq n oInO00o *o+ .. + n^ + + I I 1+ I I +1+I I I+ + + + I j+

o^em roOt br~ c too e Nbooo eW . cti m enWt 0ooVr 0 oo e eeFo^

I + +I+I+ + K+++I ++ I I + + oo o tt eq lq qt m tn - m m w 'l \1 cq - en cq .. CN N a Cs0l _I C) I cl O- C; .4 ct 06t- 00 4 t-~ Ch tn OT Q~_4. 08 )C 5 -iN I ~~~~I+ I IIII+ I+ I I q

o tn m V- ,t tn eq oo m t- o oo i qT 0 m m FN; tn r- o 0t

+ + l + + l E+ N

O mFFNto oo o o 0 00 0 ena tn tn tn en t m cq ON "-I en "-4- ~J c' + '-4 c S t - + +o +Noo + + + + c I^ I+ + I + I+ + + II + +IO I

+ -4 rI '-4 -4v-( q

00 crooN o 0 0 n m 0 0 0 o o a -. ONn 00 't It 00 0 0 tn

c tn C7%0s 00 ?OV- :t in ) O > O 00_ o?*lto00 W) %Coml

44 0

A - , W ^ F Int F O o 0 oo r-n oo

eq'r)T '- -4' W u to cqi o o - ON In t- o o o in CSW^t- 0 - N W

t~~~~~~~~~l1 t oz X o 6 6 -l 06 M 1. W o.4 14 14 14 \i V WI i^On WN?XOO W- W mWo 0

*0 oo 11 OA in N in to in 0 N ON ko t- 0 o t n m 00 o0 m5 X _I ^ oo Nw_ F c; b t ^oo oo r- et Ct k6 c E~~~~~ 'N '-4m C14~~~~~~~~~~~~0

t-c ooai p. z : W

*t w .

Cd -> ci

: ;3g0 - u "Z Q Z _k-(-lUi v~ 4

!~~Et~~~~~~~ 'M +I 1+++1I + + III+ 1 1+

U * o t F N ^ ^%O0^ co n ONG L.4tk 0n o oo 00'o m +

I + P w~~ No lLLIo IIl % u2 tS a 00N1 1XC t 0 M

.~~~~~~~~~~~~~~~~~~~1. ti~~~~~~_z C4 o en '- 0 0-o0o

' a 0'CM0CMC6 0 w 4)00" Wk t

CM4 :t m

r-n - c* o0* 0M* 0 t oooao

4"~~~~~~~~~1 a~~~~~~t ~~ ~~~-4CM0~~~~~~~0w %O ~~~~oog~~1-

04 C

O? m X oo ^ N W ? o'-4a CM o

> N t t cz~~ON N ON o

F O F ? Ko W , qo 0 :

C4') ~~~~~~~~dC,

E~~~~~~~~Z.egESS@Y . n rn, in en cq It e o m o t eq 00 cq 0c1410 44r e' 'r oo'o Noo r +~~~~~~~~~t^~-c~ + ei f- 0 Q I o m o F oo N 14T-4 cq * C14 t-:

111111I ~ 1111111~0~~~~++ +n e~ IC3.~o 2 eOON t - \O F N oo Al. 4) * . . . ..* . . X N in N o) C\ Cn k6 CN Wn cl C; o ej3I III +T??II i'I I 43S 8

~-Or~~.O O~44f4r)OO~O00 ~. O O) m eq 'ItOt en 4 4.3

c tOrC c t1 0 en cO \ c O) s a

O O 0 O\ 00 C\ V '-.0 0n O-0 t4'.C r00 C)IA 4 st >* t~~~~~~~n\0 0 ttqtN0 E a

- tn o0 OC 00 a - en t In t- M 0 r

cl oo6 rf F oN4 oo t4 ~6 c . . f I ~ 0'4-~ . .3.. .4..***3 CI 0 mMONt-mo 0ooo 5

oo B N O ^ N WF Ndw ~~~~~~~0 t I

% e 00n00 O00000or * ) 44 e~~~~&~~~~0~~~r3 ~~~,6%el l f l l o0 43~~~p 4.1

~~.000e4'o0~~-~00 ~ '-4 .'.)~~~ 14. ON (ON \ot en m oo toOe .

00 enO in 0 I co N 0 *~~~300 O 0000 *43*.000 O0N .4*.***3

4)4

02 4..~~~~~~~~~~~~~~~~~~~~~~~~~~~' 0 "0 )4 >3 co co 4S g 43 O4~43~444 9 Z 302 Brookings Papers on Economic Activity, 2:1971 Table 3. Growth of Output, Demand, and Trade in Selected Finished Goods, from 1961-64 Average to 1968, All IndustrialCountries and the United States Percentagechange Domestic output for domestic Domestic Domestic con- con- Countriesand goods output Exports sumption Imports sumption Industrialcountries, includingthe UnitedStates Food 39 33 39 32 38 Consumerdurables 55 108 49 132 56 Consumernondurables 50 81 49 132 51 Passengercars 68 151 59 245 71 ExcludingU.S.-Canadian trade 68 94 65 148 71 Capital goods 63 73 60 87 64 Total 50 74 48 79 50 ExcludingU.S.-Canadian auto trade 50 70 48 74 50 UnitedStates Food 30 11 31 46 32 Consumerdurables 57 78 56 153 60 Consumernondurables 45 46 45 131 46 Passengercars 56 258 53 511 64 ExcludingU.S.-Canadian trade 60 57 60 225 64 Capital goods 67 55 69 74 74 Total 46 48 46 131 48 ExcludingU.S.-Canadian auto trade 46 42 46 112 48 Sources: Same as Table 2. Note: Domestic output minus exports equals domestic output for domestic consumption; the latter plus imports equals domestic consumption (GNP).

Germany,Italy, Japan,and Switzerlandthat took place between1961-64 and 1968is reflectedclearly in the movementof this ratio. The deterioration in the U.S. tradeposition over the periodbecomes equally apparent. Extensionof the datathrough 1969 probably would sharpen this picture. The dwindlingof the U.S. overalltrade surplus, from over$5 billionan- nuallyin 1961-64to virtuallyzero in 1968,is paralleledby the changein the surpluson finishedgoods: Overthe periodthis surplusfell from 1.3 percent of domesticexpenditures on finishedgoods to just belowzero. To whatex- WilliamH. Bransonand Helen B. Junz 303 Table4. DomesticOutput of FinishedGoods in IndustrialCountries as a Percentof DomesticConsumption, Selected Periods, 1961-68 Average, Country 1961-64 1964 1966 1968 United States 101.3 101.4 100.7 99.6 Austria 92.4 93.8 90.4 92.2 BLEU 94.1 94.0 95.5 97.6 Canada 92.9 93.7 92.7 92.6 Denmark 111.1 109.5 109.2 108.1 France 100.7 100.1 100.4 100.5 Germany 105.3 106.0 106.4 108.7 Italy 102.4 102.4 104.9 106.1 Japan 101.6 101.6 103.4 104.0 Netherlands 99.6 97.6 97.9 99.5 Norway 88.7 89.9 87.6 86.8 Sweden 94.5 94.7 95.4 96.4 Switzerland 99.2 98.4 102.3 104.4 United Kingdom 99.2 99.2 99.6 99.4 Total 100.9 100.9 100.9 100.8 Sources: Same as Table 2.

tent can this changebe explainedby shifts in the structureof U.S. output and demand,compared with those in the rest of the industrialworld? And can any conclusionsbe drawnabout the permanenceof this change?

COMPARATIVE ANALYSIS OF OUTPUT AND DEMAND PATTERNS Overthe 1960sthe outputof finishedgoods grewsomewhat more slowly in the UnitedStates than in the rest of the industrialworld, as Table3 dem- onstrates.The share of U.S. output consumedat home remainedalmost stable.But, as importsapproximately doubled, the shareof the home market supplieddomestically was reducedfrom 97.1 percentin 1961-64to 95.5 percentin 1968,a fall of 111/2percent. This was more or less in line with the home-marketshares given up by domesticproducers in the EEC countries (theirshare of theirdomestic market was reducedfrom 88.3 percentto 87.2 percentover the period).10Unlike the United States,however, these countries experiencedincreases in productionfor exportthat more than offset

10. When U.S.-Canadianautomobile trade is excluded,the U.S. loss in its domestic marketwas exactly in line with that of other industrialcountries. 304 Brookings Papers on Economic ActivIty, 2:1971 lossesin home-marketsales, so that in thesecountries the ratio of outputto domesticfinal demandincreased. In the United States,export sales barely outpacedthe growthof domesticdeliveries to the home market,which in turn fell short of the growthof domesticdemand. Consequently, with the much fasterexpansions of exportsales by foreignproducers, the share of U.S. producersin foreignmarkets as well as in the U.S. marketwas reduced,as can be seen in partC of Table2 above." To whatextent have shiftsin the commoditystructure of productionand demandplayed a role in the losses in U.S. market shares at home and abroad,and to what extent can these changesbe attributedto excess demand?At leastpartial answers to thesequestions can be foundby compar- ing actualdevelopments in U.S. output,demand, and tradefor each of the productcategories with those that would have occurred if theyhad matched those of the rest of the industrialworld. Under this hypothesis,U.S. pro- ducerswould have maintained their share in the industrialworld's output in each categoryfrom 1961-64 onwardand they would have claimeda constant shareof exportmarkets. At the same time, purchasersin the United Stateswould have absorbeda constantshare of the industrialworld's supply of goods in each category,and that part of U.S. consumptionthat is satisfiedby foreigngoods wouldhave expandedin line with the growthof total importsof industrialcountries. Wheneverdomestic demand expandedsignificantly above the world trendwithout a commensurateincrease in supply,excess demand is taken to be the likely explanation.Whenever growth in supplyfell short of demandand demanddid not growfaster than the world trend, the explanation is assumedto lie primarilyin structuralfactors. The dollarfigures given in Table 5 suggestthe extent of the majorfactor that underliesthe trade balancechanges; but they can indicategeneral magnitudes only. Neverthe- less, they are a usefulguide to the correctanswers and will be employedas such in furtherwork. The comparisonsbetween actual developments and those calculatedon the basis of the constant-sharehypothesis, given in Table5, demonstrateclearly that the overallchange in the U.S. tradeposi-

11. The table shows the exports of individualcountries as a share of total exportsby industrialcountries. This share would be expressedmore properlyas a percentageof the export sales of all countriesexcluding those to the country for which comparisons are made. The data will be adjusted accordingly,pending the completion of a trade matrix by end-use categories. The global conclusions drawn here, however, are not likely to be materiallyaffected by this correction. William H. Branson and Helen B. Junz 305 Table 5. Changes in U.S. Output, Demand, and Trade, 1968, Actual and Estimated on Hypothesis of Maintenance of 1961-64 Shares in Total for All Industrial Countries Billions of dollars Domestic output for domestic Domestic Domestic con- con- Commoditygroup output" Exports sumption Imports sumption Food Actual 113.3 3.7 109.6 5.5 115.1 Calculated 120.6 4.4 116.2 4.9 121.1

Difference -7.3 -0.7 -6.6 +0.6 -6.0 Consumerdurable goods Actual 46.3 1.2 45.1 3.2 48.3 Calculated 46.0 1.4 44.6 2.6 47.2

Difference +0.3 -0.2 +0.5 +0.6 +1.1 Consumernondurable goods Actual 117.1 1.2 115.9 2.0 117.9 Calculated 121.0 1.5 119.5 2.1 121.6

Difference -3.9 -0.3 -3.6 -0.1 -3.7 Capitalgoods Actual 64.4 8.5 55.9 3.1 59.0 Calculated 62.7 9.5 53.2 2.4 55.6

Difference +1.7 -1.0 +2.7 +0.7 +3.4 Total Actual 341.1 14.6 326.5 13.8 340.4 Calculated 350.3 16.8 333.5 12.0 345.5

Difference -9.2 -2.2 -7.0 +1.8 -5.2 Sources: Same as Table 2. Figures are rounded and may not subtract to differences. a. Domestic output less exports equals domestic output for domestic consumption; the latter plus imports equals domestic consumption. tion was broughtabout by quite divergentmovements among the product categories.12In addition,they point to ratherdifferent explanations of the movementsfor the variouscategories. 12. Since the U.S.-Canadianautomobile agreement is a fact of life, it does not seem worthwhileto speculateabout what would have happenedin its absence.Therefore, no constant-sharecalculations were made for passengercars. 306 Brookings Papers on Economic Activity, 2:1971 Food. The tradebalance for the food group,according to the constant- sharecomparison, was adverselyaffected by a shortfallin exports,as well as by an excessof imports,totaling about $1 1/2 billion. This developmentdoes not appearto be associatedwith excessdemand, however. In fact, demand for food productsrose ratherless in the United Statesthan elsewhere.But output fell even furthershort of the world trend.This declinein the U.S. output share reflectsthe accelerationof output growthelsewhere, stimulated, as noted earlier,by agriculturalpolicies in variouscountries. As a result,the trade deficitin food productsthat the industrialcountries have generallyrun with the rest of the world has not expandedas fast as food consumption;that deficitrose from $6.8 billionto $8.9 billionbetween the 1961-64average and 1968. The changesin outputand tradein food productsfor the United States also reflectthe slowerrate in the expansionof U.S. consumptiondemand, comparedwith other countries.The rise in U.S. importsabove the trend probablyreflects taste changesas well as pricecompetition. Consequently, the trendsthat have becomeapparent in the changesin this productcate- gory appearto be largelyof a longer-runstructural nature. Durableconsumer goods. Unlike food, the constant-sharecomparison for durableconsumer goods clearlyshows the effectsof excessdemand in the United States.Although U.S. supply of these goods rose faster than that of the industrialworld, it did not matchthe evenlarger deviations from the worldtrend in consumptiondemand. The accompanyingloss in export and domesticmarkets compared with the constant-sharehypothesis totaled about $3/ billion. Nondurableconswner goods. Trendsin nondurableconsumer goods ap- pearsuperficially much like those in food products.However, the basic sit- uationis quitedifferent. Unlike food products,nondurable consumer goods are generallyproduced and tradedin nonregulatedmarkets. Furthermore, U.S. producershave not had a relativeadvantage in producingconsumer goods, as they have in food products. Growthof both outputand consumption of nondurableconsumer goods in the United Statesfell shortof industrial-worldtrends. But they did so to about an equalextent, so that, in theory,the tradeposition could have re- mainedunchanged. In fact, the loss of domesticmarket shares sustained by U.S. producerswas more or less in line with that of foreignproducers in their own home markets.But U.S. producerswere unable to make up for this loss in foreignmarkets, so that the constant-sharecalculation shows a William H. Branson and Helen B. Junz 307 slightdeterioration in the tradeposition. In this respect,the UnitedStates is not very differentfrom many otherindustrial countries. The EFTA countries(except Sweden), Belgium, Germany, and the Netherlandsall showthe sametrend. The increasein the U.S. tradedeficit in nondurableconsumer goods thus seems to be affectedless by demand pressuresthan by the longer-runstructural fact that manyhighly industrialized countries do not have a comparativeadvantage in producingmany of the goods includedin this category. Capitalgoods. The changesin supplyand demandof capitalgoods are much like those for durableconsumer goods, exceptthat the trendsstand out even more clearly.The similarityis not surprisingsince many durable consumergoods are near-capitalgoods. Productionexpanded appreciably fasterin the United Statesthan elsewhere.But the U.S. capitalinvestment boom in the second half of the 1960spushed demand even furtherabove the industrial-worldtrend. The shortfallin outputrelative to demandwas made up in partby a reductionbelow the trendin the expansionof export sales, allowingdomestic deliveries to the home marketto increaseconsid- erablyabove their trend. As a result,only a relativelysmall part of the excess demandwas satisfiedby extraimports.

CONCLUSIONS FROM THE COMPARATIVE DATA The changesin the patternof U.S. outputand demandduring the second half of the 1960ssum to a shiftin the tradebalance on finishedgoods from a surplusof $3.4 billion in 1961-64to a deficitof $1.2 billion in 1968 (the deficitis $0.4 billion when U.S.-Canadiantrade in passengercars is excluded). This $4'/2 billion swing arose from the combinedworkings of longer-runbasic trendsand the excessdemand that existedthrough 1968. The largerpart of the deteriorationis attributableto shifts in competi- tivenessrather than to an adversecomposition of U.S. output.The increase in the relativeimportance of the demandof other countriesfor imported capitalgoods almostoffset the relativedecline in theirdemand for imported food; these two categoriesaccounted for 70 to 721/2percent (depending upon inclusionor exclusionof U.S.-Canadianautomobile trade) of U.S. industrialexports in 1968.Furthermore, changes in the commoditystructure of U.S. output paralleledthese changesin the compositionof world demand.Thus, only a relativelysmall part-perhaps $1/2billion-of the deteriorationin the U.S. tradebalance on finishedgoods is explainedin this way. 308 Brookings Papers on Economic Activity, 2:1971 Table 6. U.S. Trade Balance, 1968, and Changes from the 1961-64 Average Bilions of dollars Changefrom 1961-64 average 1968 Actual less Major Category Actual Calculated Actual Calculated calculated factor Food -1.8 -0.5 -1.3 0.0 -1.3 Structural factors Consumer -2.0 -1.2 -1.4 -0.6 -0.8 Excess durables demand Consumer -0.8 -0. 6 -0.8 -0.6 -0.2 Structural nondurables factors Capital goods +5.4 +7.1 +0.8 +2.5 -1.7 Excess demand Total +0.6 +5.0 -2.7 +1.3 -4.0 ... Sources: Same as Table 2. Figures are rounded and may not add to totals.

More importantthan shiftsin the commoditycomposition of worldde- mandwere aggregate demand developments in the United Statesitself. In- flationarypressures and excessdemand cut into the U.S. tradeposition in consumerdurables and capitalgoods. As showninTable6,thetrade surplus on capitalgoods, at $5.4 billion in 1968, had grownby $% billion from 1961-644In the absence of excess demand,it might have been roughly $21/2billion above the 1961-64level. And the deficiton consumerdurables, whichwidened by almost$11/2 billion in the interval,would have grown by less thanhalf this amount.Thus, on the basisof thesetwo categories,excess demandmay have accountedfor roughly$21/2 billion of the declinein the tradebalance for finishedgoods.'3 The rise in the importsurplus in nondurablegoods and food, however, cannotbe ascribedprimarily to the failureof demandmanagement policies in the secondhalf of the 1960s.To be sure,part of the changewas associated with the worseningof the relativeprice position of U.S. producers.But it appearsthat underlyingtrends, reflecting structural factors, were also push- ing in a downwarddirection: Structural changes in the supplyof, and market regulationsfor, food productsin industrialcountries adversely affected

13. These dollarfigures can indicateonly rough magnitudesof the relativeimportance of each of these factors in the total change in the U.S. trade position. The differencein percentagechanges shown in Table 3 probablygives a slightlybetter, though also rough, indication of these magnitudes. William H. Branson and Helen B. Junz 309 U.S. exports;at the sametime, therewas an accentuationof the longer-run tendencyfor the UnitedStates to be a net importerof nondurableconsumer goods. The trend towardimport surpluses in the latter categoryreflected largelythe failureof U.S. producersto retainthe exportmarkets that they had securedimmediately after the warbut thatwere not traditionallytheirs. Probablyabout $1 billion-or one-half of the deteriorationbetween 1961-64and 1968in the tradeposition in food and nondurableconsumer goods-reflected structuralfactors in exportmarkets. And about $1/2bil- lion of the risein importsover the periodcan be ascribedto changesin taste and otherunderlying trends. Some of thesetrends are world-wide;others, however,arise from factorspeculiar to the structureof U.S. industrialoutput, The next two sectionsseek to identifycommodity groups for which longer-runtendencies-whether toward surplus or deficit-seem to be most clearlydefined and then to explorethe possibilityof explainingthem by productioncharacteristics.

DisaggregatedPatterns of Tradein ManufacturedGoods

Patternsof U.S. tradein manufacturedgoods, disaggregatedinto thirty- one end-usecommodity groups, are outlinedin Table 7.14The table attemptsto summarizethe movementsof exportsand imports of manufacturedgoods down to the level representedby four-digitend-use codes. Se- lectedcommodities serve as illustrationsof four generalpoints.

FROM RAW INPUTS TO FINISHED PRODUCTS: STEEL Withina given industry,such as steel or petroleum,the U.S. tradebalance tends to move from deficitto surplusalong the industrialscale from

14. The subsequent analysis focuses on trade in manufacturedgoods, for several reasons.First, and perhapsmost important,trade in agriculturalgoods is greatlyaffected by nonmarketactivities, mainly governmentsubsidy and import programs in all the developed countries, and the P.L. 480 agriculturalaid programin the United States. This generalintervention is much more extensivein agriculturaltrade than in trade in manufacturedgoods, and could easily obscure underlyingtrends in comparativead- vantages. In addition, the cross-sectiondata used below to assess the basis for U.S. comparativeadvantage in the mid-1960srelate only to trade in nonagriculturalgoods, althoughit includestrade in goods from the mining industry. L. 0 O) E tn o, 0 _C#) ^t

?~~~~~~~O ! IN

e 4 > S WW~~~-4 F o eo e ~~~~~~~~~~o O N 0 0 0 0 I ' 0 0f 003 j ON ON 0 -5 c ffi~~~~~~~~~~~C4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'- to Cd - ~~~~~~~~~~~~ a,-t 11 tn 00 ~ ~ 00 00 i co~~~~~~~~~~~~~~0

CS '0~~~C

4~~~~~~~~~~~~~~~41c - '~~~~~~~~- - -~~~~~~~tnt t -

N eq N 04 04 N 0'4 -4

pi 0 '0;&ei- CS4 C S f ,-4 ------4 ~~~~~~~~~-4 --C4

U2~~~~ U,~~~~~~~~~~4 '0 ~~~~~~~~~~~~~~.-C

U, 0~~~~~~~~~~~~~~~~(

0 -~~~~~~~~~~~~~~~~~~~~~~~~ O

w CdU CC , cAqs ~~UZ E-0~~ d 0 C 'n i4

4)~ONCd20 ~ ~

0 l 0 ~~~~~~~ 0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

eq 00o$ a.5 4

- (L e w 00) 4 -a0 00ON 0 co . 4

0% Q %0 ~~~~~~~~~~~~~~~~~~~0 ~~~~~~~~~~ 0 1 0w0 0% 0

0 0 'f C>

o 0 0 tr~~~~~~~~~e~~~~~~~~~', ~ ~ ~ ~ ~ ~ ~ ~~0e V) Io t- 0c1 _ I' 00 0 C)

en 0l0 cn N0 0

N 04~~~~~~~~~~~~~~0

%0 0en en00 t- A CM CM CM CM CM CMCMCM~~~~~~~~~~~::0 -

en M M ~ C M

eJ1 ~~~o~~~~c 0)~~~~~~~~~~~~C 0)~~~~ ~ ~ ~ ~~~Cq V - tn m eq C,~~~~~' en ~ -

- ~~~~~~~~~~~~~- 0 -~~~~~~~~~~~~-

b~~~~0 0 ~~~~~~-~~~~~~~~~~~~C 0 '0~~~~b00 ~~~U Z~~~~"-I C d-~~~~~~~~~C to 0 | 0t 8 ; 3 o n.

4 G >* ri ri2A

r,~~~ CAO CM CA CA- . 0-

X CM CO t + b Co

t 0% 0, 43

- CM S - 0 CO 00 CO - 0

t aN > > > G n > g ql

~4~CMC CM4 CMC |N tII~0 t 0N0n 00 0 -g 0 0 00 0 0 0 0n -

&05~~~~~

0 ~~~~~~~

~00 0 4-'U~~~~~~~~~~o 4

Cd ~ ~ ~ . ~~~~~~~~~~~~~~~~~~~7 Bo . Wo j8 - g,;w.>ra0 8 cm 4SMo A So t4

4)X Cf) cn v:~~~~~~~~~~. - r 0o - 0 0 oo w 0 OD 0C)f

00 0 '3 S/) 0

~~. '1% O t b e' 0% 9r) '. - 0 ONN Zs'fON

0% t- 0 - N 00 0 ^ vs oo 8 > t 8~~~~~~~~~o& c1% ur~~ Cf~~ ~ C; Cl

o %0 0 's0 -

^ N> _?~-

'0 0

00~~~~~0% ~~~CA,C C14 00 0 00

0 Ho 0, "'CdOS> 0 (~U U" ~50 0 6

N - 04 0% CY, "O 0\ - 04 -01 C . 0 0 0 -4 - -t - -4

0 ~~~~~~~~~c 0 0 .9: C#2C

w 4 0~~~~~~~ bD bD~~~ 0 06 A 0 -f-) (A 'j5 to m 0 0 ou

c; NC , Cd . . = 0- bo . . :s 0 10 O too '(IL) 0 bD ;3 0 w Cd cd :t 0 w 0 0 0 0% El cd a) C,, o 0 --4 cz C14 b) "mn Cl as (ON a-, A 10 T--4 w T--4 - 10 .0 0 lial Cc 4.4 4 8 41 C,3 m Cd 450 0 4) cd 04 v-4 w co

g. 0

ON m "-4 "O. E. ON en 4)

"-4 00 too q

bo C,3- 76

0 O C'S 00 J! 4O 0 en 00 S 9.2 40. en Cd

> 0 0 4) "04

0 t:4 . 6 0

v 4u'00 C) 5 +- Ca = 4 , , cwd cl 0 0 V3

Z. 0 6.v 0 L) 03 C: V--q V-q 'RT Nt -.0. 0 0 0 0 10 '00 4..(2 (L) 0 0 = ra (L) 4) 4.0 0 0o, 0 NO 4-4 V--4 t WE 0 Cd w .6 t.) cd 0 0 o o o 7a 8 11;4 0 ba Cd Cd . :3a M CZ-o o,

cc 0 .2 0 S-4 W-B El- Cc 9 0 -r -4 Cd to t, t) 10 -6 81 0 C4 IO-Cd .1 0 Cd Cd 44 :5 Omto 2 .0 0 S.4 $-( 0 bo Cd V Cd > 0 0 04 Cd 0

1. o o 0 cd 4) U 00 V ON 316 BrookingsPapers on EconomicActivity, 2:1971 raw materialsto semifinishedproducts to finishedproducts. Iron and steel and finishedmetals provide a good example. The tradebalance in iron and steelis depictedin Figure3. In basicmate- rials, a surplusappears in the 1930s,but almostcontinuous deficits existed after 1946,widening significantly in the 1960s.In iron and steel products, except advancedmanufactures, a prewarsurplus widened after the war, and then narrowed,giving way to balancein the early 1960s,but a deficit openedfrom 1963onward. Finally, in finishedmetal shapesand advanced metalmanufactures the surplusthat beganto shrinkin the late 1950sdisap- pearedin the late 1960s.15 This descriptionmakes clear that the United Stateshas becomebasically a net importerof steel,with all threelevels of the industrynet importersby 1970.While the United Stateshas steadilylost its comparativeadvantage in iron and steel in general,the figurealso suggeststhat, the more advanced the stage of production,the longer the U.S. trade advantagewas maintained.16

THE POSTWAR EXPORT BULGE: TEXTILES

In severalcommodities the United States characteristicallyhad a bal- ancedor deficittrade position before World War II, enjoyeda substantial surpluswith a majorincrease in exportsjust afterthe war,and then lost it in a growingdeficit since 1950.A good exampleof this patternis presentedby textiles,both industrialand consumertextiles, as reflectedin the tradebal- ancesshown in Figure4. The postwarexport bulge in textilesdisappeared by 1949,leaving exports essentiallyflat at $500million to $600million in industrialtextiles and $150 millionto $200million in consumertextiles from 1950on, withlittle growth in the latterin the 1960s.Imports, however, grew in both cases.Consumer 'textileimports rose slowlyfrom 1947through 1954 and increasinglyrapidly after 1954, while industrialtextile importsgrew irregularlyfrom 1949 to

I 4 ~ I

-250 L ~ I~ IBscio' nseI .. VI

1925 1930 1935 1940 1946 1950 1955 1960 1965 1970 Sources: Same as Figure 1. a. Excluding the war years 1941-45. 318 BrookingsPapers on EconomicActivity, 2:1971 Figure 4. U.S. Trade Balance in Textiles and Man-made Fibers, 1925-70a

Millions of dollars 1,000

750-

Industrial textiles

500-

250- Manv-made fibers

-1,0)0 01,1,11l1 , 1925 1930 1935 1940 1946 1950 1955 1960 1965 1970 Sources: Same as Figure 1. a. Excluding the war years 1941-45. WilliamH. Bransonand Helen B. Junz 319 1961and extremelyrapidly after that. The United Statesbecame a net importerof consumertextiles in 1955and of industrialtextiles in 1963.17

THE PRODUCT CYCLE: MAN-MADE FIBERS Disaggregationto the four-digitlevel makesit possibleto determinethe pervasivenessof the productcycle phenomenon. In his seminalpaper, Ray- mondVernon suggested that tradein manufacturedgoods typicallyfollows a cyclein whichthe United Statesis firsta net exporteras a good is intro- ducedand "shakendown," and then becomes a net importeras production of the good becomesstandardized and moves abroadto minimizeproduc- tion costs.18Since the productcycle involvespatterns of tradein individual commodities,the likelihoodthat it can be observedincreases with disaggregationof the data. Man-madefibers constitute a good illustrationof the productcycle (see Figure 4). From 1925 to 1940, the United States was typicallya net importer;then, afterWorld War II to 1952,trade was roughlybalanced. A substantialexport surplus appearedin 1956, and grew rapidly to 1964 underthe impetusof exportgrowth; imports fluctuated in the rangeof $20 millionto $50 millionfrom 1950to 1963.After 1962, export growth slowed, andbeginning in 1963,imports picked up, so thatby 1970the productcycle was approachingthe net importingstage, with importsat $228 millionand the surplusdown to $6 million.19 The productcycle is, of course,a microeconomicphenomenon, observ- able at the four-digitlevel at best. That it can be observedat that level of aggregationsuggests, however, that it is a fairlywidespread phenomenon and shouldbe takeninto accountin tradeprojections. At anypoint in time,

17. Trade in footwear, luggage, and apparel of leather, fur, rubber, or plastic has followed a patternquite similarto that of consumertextiles. 18. Raymond Vernon, "InternationalInvestment and InternationalTrade in the Product Cycle," QuarterlyJournal of Economics,Vol. 80 (May 1966), pp. 190-207. 19. The same product cycle can also be observedin electricalhousehold appliances and in synthetic rubber. By 1962 the United States was a net importer of electrical household appliances, and by 1966 trade in synthetic rubber was roughly balanced. For examplesof the productcycle at a disaggregatedlevel, see Seev Hirsch,"The United States ElectronicsIndustry in InternationalTrade," National Institute Economic Review, No. 34 (November1965), pp. 92-97; and Louise T. Wells, Jr., "Test of a Product Cycle Model of InternationalTrade: U.S. Exportsof ConsumerDurables," QuarterlyJournal of Economics,Vol. 83 (February1969), pp. 152-62. 320 BrookingsPapers on EconomicActivity, 2:1971 commoditiesin which a substantialtrade surplus exists may be in the ma- turingphase of the cycle with shrinkingsurpluses, while productsjust en- teringit may be at tradelevels too smallto seem significant.Thus the exis- tence of the productcycle may tend to bias trade projectionsmade on a commodity-by-commoditybasis in a pessimisticdirection (in the sense of smallsurpluses).

CONSISTENCY WITHIN AGGREGATES: CAPITAL AND CONSUMER GOODS Finally,the disaggregateddata on tradein capitalgoods and in consumer goods exhibit strikinglysimilar patterns within the aggregatecategories. Throughoutthe period 1925-70, in each category of capital goods, the United States typicallyhas had a surplus,which has grown substantially since the early 1950s.The only exceptionis agriculturalmachinery. In the consumercategories, the UnitedStates typically had a deficitbefore the war and a surplusjust afterit. The surplusthen shrankto balancein the middle or later 1950sand a growingdeficit developed in the 1960s.Thus the patterns of trade are similarwithin end-use aggregates, and dissimilaracross them, confirmingthe usefulnessof the OBEcategorization;

CONCLUSIONS FROM THE LONG-TERM DATA From this surveyof the long-termdata, it appearsthat the United States has a growingcomparative trade advantage in capitalgoods andchemicals, but is at a disadvantagein consumergoods and other industrialsupplies and materials.In consumergoods, the United Statestypically had a deficit from 1925to 1938,and after a postwarsurplus, returned to a deficitposition startingin 1959.In some industrialsupplies and materials-fuels andlubricants, basic materialsfor iron and steel, and their products-the United Stateswas a net exporterbefore World War II and becamea net importer thereafter. Partof the movementfrom surplus to deficitin consumergoods andnon- chemicalindustrial supplies and materialssince the late 1940shas been due to the loss of a temporaryadvantage after World War II. This seemsto be the casein consumergoods andtextiles, although the tradedeficit continued to increaseeven afterthe postwaradvantage disappeared in the mid-1950s. In these areas,as well as in steel and petroleum,the loss of the postwarad- William H. Branson and Helen B. Junz 321 vantage merely reinforcedthe more fundamentalloss of competitive advantage.

U.S. ComparativeAdvantage in ManufacturedGoods

As the last sectionshows, since the early1960s at latestthe UnitedStates has beena net exporterof capitalgoods and chemicalsand a net importerof consumergoods and other nonagriculturalindustrial supplies and materials,with automotiveproducts on the margin.This patternof tradeholds even after allowancefor the effects of excess demandsince 1965. Thus it presumablyresults from underlyingrelative advantages the United States has in productionof capitaland chemicalgoods and disadvantagesin production of consumergoods and other industrialsupplies and materials. Whatthen is the sourceof the U.S. comparativeadvantage? Is the production of net exportgoods relativelyintensive in its use of physicalor human capital?Does the U.S. comparativeadvantage lie in goods that exhibit economiesof scale in production? To begin a study of the sourcesof U.S. comparativeadvantage, a 1964 cross-sectionof U.S. tradein manufacturedgoods by SITCclassifications is employed.Nineteen sixty-four is chosenbecause it was the last year before the appearanceof excess demandand inflationin the United States; whilethe conclusionsconcerning the trendsin U.S. tradeadvantage are not changedin any fundamentalway by adjustingfor the effectsof aggregate demandassociated with the Vietnamwar, it seemsuseful to focus on a recent year that does not sufferfrom this qualification.More importantly, thereis a full set of data on productioncharacteristics by SITCthree-digit categoriesfor the mid-1960s,developed by Hufbauer.20 This preliminarystudy of the sourcesof comparativeadvantage essen- tially consolidateswork that has appearedin the last few years,relating a numberof productioncharacteristics to net exportsacross commodities. Thereis nothingparticularly new in the techniquesused here, or in the re- 20. G. C. Hufbauer, "The Impact of National Characteristicsand Technology on the CommodityComposition of Trade in ManufacturedGoods," in Raymond Vernon (ed.), The TechnologyFactor in InternationalTrade, A Conferenceof the Universities- National BureauCommittee for EconomicResearch (Columbia University Press for the National Bureau of Economic Research, 1970). See Hufbauer'sTable A-2 for the data on productioncharacteristics, and his many referencesto the recent literatureon the sourcesof comparativeadvantage beyond those given below. 322 BrookingsPapers on EconomicActivity, 2:1971 sults.The aim has beenrather to use datathat arereadily available to sum- marizestudies that have beendone to date,present some illustrativeresults that are typical of this literature,and providea startingpoint for further researchon the question.2'

DATA ON PRODUCTION CHARACTERISTICS The analysisrelates U.S. net exportsin 1964, by 101 three-digitSITC categories,to four productioncharacteristics: physical capital per man,human capitalper man, a measureof economiesof scale in production,and the date at whichthe commodityfirst entered international trade in a sig- nificantway. On a more restrictedsubset of 61 three-digitSITC industries, researchand developmentexpenditures are introducedinto the analysisas a fractionof value added.Finally, at the two-digitSITC level, which permits only 28 observations,the analysisincorporates the ratio of skilled (professional,technical, and scientific)workers to total employmentby commodity. Factor endowments: physical and hunan capital. The classical factor- endowments theory of internationaltrade, generally associated with Heckscherand Ohlin,predicts that a countrywill exportgoods whosepro- ductionis intensivein the use of primaryinput factors with whichit is relatively well endowed,and importgoods whose productionintensively uses factorsin whichit is relativelypoor. In the usual two-goods,two-factors, two-countriesmodels, this dictummeans simplythat a countrybetter en- dowedwith capitalthan withlabor shouldexport goods whoseproduction is capital-intensive,and import goods that are labor-intensive.Since the UnitedStates has a highratio of capitalper employee,this propositionwas generallytaken to mean that its exportswould be more capital-intensive than its imports. This assumptionwas refutedby Leontiefin 1953,when, using the 1947 input-outputcoefficients, he showed that U.S. exports are less capital- intensivein productionthan are the goods it imports.22Leontief's findings havebeen recently confirmed by Hufbauerand Baldwin,who usedthe 1963 21. A cross-sectionfor only one year is used here because of data availability.One obvious extension of this preliminarystudy is to obtain cross-sectionsfor several years spanning a reasonablylong period. 22. Wassily Leontief, "Domestic Production and Foreign Trade; the American Capital Position Re-examined,"in Richard E. Caves and Harry G. Johnson, Selection Committee, Readings in InternationalEconomics, Vol. 11 (Richard D. Irwin for the AmericanEconomic Association, 1968). William H. Branson and Helen B. Junz 323 input-outputcoefficients, and Hufbauershows that they also hold for manufacturedgoods separately.23Leontief's paradoxical findings stimulated a huge outputof research.Most of this workinvolved first articulating all the assumptionsunderlying the Heckscher-Ohlinresult, and then showingthat relaxingone or more of the assumptionsinvalidated the result.Among the key articlesin this vast literaturewas one by Robinson,which critically re- viewsthe two-inputfactor proportions hypothesis, and one by Vanek,who studiesthe naturalresource content of trade.24Here the focus is on the explanation,initially suggested by Leontiefin his 1953article and the subject of attentionrecently, that the usual two-factorversion of the Heckscher- Ohlinmodel is too simple.An analysisof tradein manufacturedgoods must be couchedin termsof at leastthree inputs: physical capital, human capital, and raw(or uneducated)labor.25 In this case, the United States,because of its higherlevels of educationand training, may be relativelybetter endowed with humancapital than with physicalcapital. In a two-factormodel this situationwould lead to U.S. exportsof labor-intensivegoods; a three-factor model might reveal that the United States exportsgoods that embody a high amountof humancapital per man. Since 1965,work on the humancapital approach to Leontief'sparadox has followedtwo tracks.One assumesthat, in a cross-section, wage differ- entialsreflect differences in humancapital, following the spiritof Kenen's article.Thus Bharadwajand Bhagwati,as well as Hufbauer,find a role for wage differentialsas representinghuman capital in explainingtrade.26 The otherapproach attempts to measuredifferences in humancapital across in-

23. Hufbauer,"Impact of National Characteristics,"especially pp. 168-70; Robert E. Baldwin, "Determinantsof the Commodity Structureof U.S. Trade," AmericanEco- nomicReview, Vol. 61 (March 1971), pp. 126-46. 24. See Romney Robinson, "Factor Proportionsand ComparativeAdvantage: Part 1," QuarterlyJournal of Economics,Vol. 70 (May 1956),pp. 169-92; and JaroslavVanek, The NaturalResource Content of UnitedStates ForeignTrade, 1870-1955 (M.I.T. Press, 1963). 25. Leontief suggestedthat the United States exports labor-intensivegoods because its labor is more productivethan that abroad. If this were so because the United States is as rich in physicalcapital as in the two-factormodel, then his paradoxwould not have appeared.Rather, he implies that there is a third factor at work that also affects (raw) labor productivity.This third factor is human capital. The basic article developingthe role of humancapital in trade is Peter B. Kenen, "Nature,Capital, and Trade,"Journal of Political Economy,Vol. 73 (October 1965), pp. 437-60. 26. See RanganathBharadwaj and JagdishBhagwati, "Human Capital and the Pat- tern of Foreign Trade: The Indian Case," IndianEconomic Review, Vol. 2, New Series (October 1967), pp. 117-42; and Hufbauer, "Impact of National Characteristics," pp. 172-76. 324 Brookings Papers on Economic Activity, 2:1971 dustriesby proportionsof employeesin variousskill classifications.This is the routetaken recently by Baldwin,cited above, and earlierby Keesing.27 In a recentarticle, Gruber and Vernonuse both kinds of measures,but on two separatesets of data, so that they do not comparetheir relativeeffec- tivenessor discusstheir relative merits.28 The first approachshould be preferableif humancapital is, in fact, reflectedin earnedincome. If humancapital is correctlyvalued, and this value accruesas earnedincome, wage differentials should fully capturethe effects on productivityof differencesin humancapital per person. The presence of, say, a high proportionof scientistsin an industryshould make that a high- wage industry,with the capitalizedvalue of the excess of that wage rate overthe wageof an uneducatedperson measuring the humancapital input. In this event, the wage, or human capital,differential should capturethe contributionof the inputof humancapital to production,or to tradeadvantage. Only if the scientistscontribute something extra, in excess of their wage, to productionshould a "skillratio" of scientiststo total employees add to the abilityof the humancapital measure to explainvariations in output or tradeadvantage. Thus if wage rates accuratelyreflect differences in human capital, the capitalizedvalue of the averagewage above the wageof rawlabor can serve as a measureof humancapital in explainingnet exports.If, in addition,a skill ratio is significant,it revealsthat the skilledpersonnel are, in a sense, contributingmore to comparativeadvantage than theirmarket-determined wage indicates, At the three-digitSITC level, Hufbauer'smeasure of physicalcapital per man (K) was taken from Leontief'sbase-line 1947 measures,updated by capitalexpenditure data from the Census of Manufactures.Hufbauer calculated wagesper man by dividingthe wage bill for 1963(in 1963dollars) by total employees,with data from the Census of Manufacturesfor that year. Here,human capital estimates have been computed by subtractingthe 1963 value of medianincome for personswith less than eightyears of education ($2,500, taken from the CurrentPopulation Reports of the Bureauof the Census) from Hufbauer'saverage wage estimates,and then capitalizing

27. See Donald B. Keesing, "LaborSkills and ComparativeAdvantage," in American Economic Association, Papers and Proceedingsof the Seventy-EighthAnnual Meeting, 1965 (AmericanEconomic Review, Vol. 56, May 1966), pp. 249-58. 28. See William H. Gruber and Raymond Vernon, "The Technology Factor in a World Trade Matrix,"in Vernon (ed.), TechnologyFactor in InternationalTrade. William H. Branson and Helen B. Junz 325 that wagedifferential at a 10 percentrate. Thus the humancapital measure usedhere is

Wi-2,500- 0.1 whereW, is Hufbauer'saverage wage in productionof commodityi. At the two-digitSITC level, Hufbauercalculated the ratio (T) of professional,technical, and scientificpersonnel to total personnelin each industry, using the 1960 Censusas his source of basic data. The analysishere examinesthe data at the three-digitlevel, then aggregatesto the two-digit level and introducesthe skillratio, T, to assessits significancein explaining variationsin net exportsacross commodities independently of the human capitalmeasure, H. In the workof Keesingand of Baldwin,cited earlier, the skill distributionof employmentwas significantin explainingtrade patterns.But neitherKeesing nor Baldwinintroduced a measureof wages or humancapital into the sameequation. Scale economies.In additionto physicaland humancapital per man, a measureof economiesof scale in productionwithin industries is testedfor significancein explainingthe patternof U.S. trade.Basically the scaleeconomy hypothesissuggests that with a largedomestic market, U.S. producers can obtain the cost-reducingadvantages of large productionruns more readilythan can producersin smallermarkets. Thus the United Statesmay have a priceadvantage in goods whoseproduction entails significant economies of scale and these might be expectedto show relativelylarge trade surpluses,holding other factors constant. Hufbauercalculated a measureof scaleeconomies by relatingvalue added per employeeto the numberof employeesacross size classesof establish- mentswithin three-digit SITC categories. For eachSITC category, Hufbauer estimatedthe equation

= aN1, where

qi = value addedper employeein establishmentj q = averagevalue addedper man in the SITC category N1 = numberof employeesin establishment] S = scaleeconomy measure for productionof that SITCcommodity a = a constant. 326 Brookings Papers on Economic Activity, 2:1971 A value of S of 0.1, for example,means that doublingestablishment size- measuredby employment-raises value added per man by 10 percent. These S valuesare the measureof economiesof scale; in generalthey run from -0.05 to +0.15. The Vernonproduct cycle. Anothervariable tested for its influenceon internationaltrade is a ratherimperfect measure designed to reflectthe product cycle hypothesis.As noted above, it states that the United States, as the country with highestincome per capita and wage rates, should typically exportmanufactured goods that are in the earlystage of the product cycle, and importgoods that are in later stages.One measureof the "age" of a good that is particularlyappropriate as a proxy for the productcycle is the dateat whichit firstentered international trade. The earlierthe date, the olderthe good, in the sensethat is relevanthere. Startingwith 1909,when the U.S. CensusBureau's export classification list, ScheduleB, was firstpublished, Hufbauer found the date at whicheach seven-digitSITC categoryfirst appearedin the export schedule.He then averagedthese dates withinthree-digit categories to arriveat a first-trade date (in yearsand tenthsof years-for example,1947.8) at that level. These data serveas a (clearlyimperfect) proxy (P) for the productcycle.29 Research and developmentexpenditures. Closely related to the product cyclehypothesis and to the humancapital explanation of U.S. comparative advantage,especially in its skill ratio variant,is the researchand development(R&D) explanationof U.S. tradeadvantage. In a 1967article Keesing notedthe relationshipof R&D expenditures,as a percentof valueadded, to net exportsby industry.30This findingcould supplementboth the human capitaland productcycle hypotheses: A firmwith a high R&D ratio probably employsmore than the averagenumber of scientistsand technicians, who in turn are paid wagesabove the average.Thus research-intensivein- dustrieswould be human-capital-intensiveindustries as well.

29. An obvious question may be raised concerningHufbauer's use of U.S. export data alone to measurefirst-trade dates. If the product cycle hypothesis does not hold in general,the first date of U.S. export of a commodityis not likely to pinpointthe date when the good enteredinternational trade. But in that event the variableP should not significantlyimprove the explanation of variations of U.S. net exports in the cross- section. On the other hand, if the product cycle hypothesis does hold, the U.S. first- export dates should be a good approximationto dates of first internationaltrading and P should be significant. 30. See Donald B. Keesing, "The Impact of Researchand Developmenton United States Trade,"Journal of Political Economy,Vol. 75 (February1967), pp. 38-48. William H. Branson and Helen B. Junz 327 At this point the R&D explanationblends into the skill ratio case.31If such expendituresare only a proxyfor humancapital, the inclusionof an R&D measurealong with humancapital in a regressionequation explaining net exportsshould not significantlyimprove the explanation. But researchexpenditures also fit into the productcycle hypothesis. Pre- sumablythe productionof new consumerand capital goods involves,on the average,a greaterR&D ratio than does the productionof mature, standardizedgoods. If the productcycle hypothesis is correct,then production of goods in whichthe United Stateshas a tradesurplus should involve higherresearch ratios than does productionof goodswith net tradedeficits. Keesing'sdata on R&D ratiosfor 1960are used to observethe relation- ship of the cross-sectionof U.S. net exports,by SITCcommodity, to R&D expenditures.32As a functionof value addedin production,the valuesrun from0.01 to a high of 0.24 for officemachinery. Their use narrowsthe sample to sixty-onethree-digit SITC categoriesto whichR&D ratios can be assigned.

ANALYSIS OF THREE-DIGIT SITC DATA Simplecorrelation coefficients between the three-digitcross-section variables are shown in the correlationmatrix of Table 8. The firstcolumn re- veals that net exports(X) have a small negativecorrelation with physical capitalper man (K), andlarger positive correlations with human capital per man (H), scaleeconomies (S), and the first-tradedate (P). The secondcol- umn demonstratesthat physicaland humancapital are fairlystrongly correlated,while physical capital per man has a negativecorrelation with scale economies.Human capitalper man is weaklycorrelated with scale economies, accordingto the data in the thirdcolumn. The positivecorrelation across commodities between human and physical capitalper man, taken by itself, would be consistentwith a two-input productionmodel. In this case one wouldargue that, acrossindustries, high ratios of capitalper man lead to high wage rates and high estimatesof human capital.But, sincethe UnitedStates has a highratio of capitalper man in the entireeconomy relative to othercountries, this two-input model would

31. In fact, both Gruber and Vernon, "Technology Factor," and Baldwin, "De- terminantsof the CommodityStructure of U.S. Trade," use skill ratios to measurethe technology intensity of production. 32. See Keesing, "Impact of Researchand Development,"App. 2, p. 47. 328 Brookings Papers on Economic Activity, 2:1971 Table8. Correlationsof U.S. Net Exportsand Selected Production Characteristics,Manufactured Goods, by Three-digitSITC CommodityGroups, 1964a Net Physical Human Scale First-trade exports capital capital economies date Variable (X) (K) (H) (S) (P) Net exports (X) 1.000 -0.085 0.214 0.204 0.216 Physicalcapital (K) -0.085 1.000 0.591 -0.227 0.118 Human capital (H) 0.214 0.591 1.000 0.069 0.245 Scale economies (S) 0.204 -0.227 0.069 1.000 -0.065 Firsttradedate(P) 0.216 0.118 0.245 -0.065 1.000 Sources: Based on data developed by G. C. Hufbauer, "The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods," in Raymond Vernon (ed.), The TechnologyFactor in InternationalTrade, A Conference of the Universities-National Bureau Committee for Economic Research (Columbia University Press for the National Bureau of Economic Research, 1970), especially Table A-2; and on median income data from U.S. Bureau of the Census, CurrentPopulation Reports, Series P-60, No. 43, "Income of Families and Persons in the United States: 1963" (1964). a. Standard international trade classification groups 5-8. meanthat (a) U.S. net exportsshould be physical-capital-intensivegoods; (b) X and K thus shouldbe positivelycorrelated, and (c) X and H would also be positivelycorrelated, but only becausehigh K causesboth high X and high H. This set of implicationsof a two-inputmodel is clearlyinconsistent with Table 8, in which a negative(but very small)correlation appears between physicalcapital and net exports.A moreconsistent story can be told with a three-inputmodel: Industries producing with high ratios of physicalcapital per man (raw labor), relativeto other domesticindustries, also use high ratios of humancapital per man, whichleads to high averagewage rates. This could accountfor the 0.59 correlationbetween human and physical capital.But, as Leontiefsuggested long ago, whilethe U.S. economyhas a high ratio of physicalcapital per man, relativeto othercountries, it is even bettersituated with respectto humancapital per man, so that its net exports are intensivein the latter,as Table8 suggests. These impressionsfrom the simplecorrelation matrix are supportedby the regressionanalysis relating net exportsto the four productioncharacteristics,K, H, S, and p.33 Theseresults are summarizedin Table9, which 33. Multipleregression is used here strictlyas a descriptivedevice; it shows the rela- tionship of the cross-sectionof net exports to the productioncharacteristics in this set of data. To show the regressioncoefficients in the following tables is not, however, to imply that they can be used as partial derivatives,or policy multipliers.Rather, the point is to see whether net exports are positively or negativelyrelated to the various characteristicswithin the frameworkof a multivariateanalysis. William H. Branson and Helen B. Junz 329 Table9. Cross-sectionRegressions Explaining U.S. Net Exportsof ManufacturedGoods, by Three-digitSITC CommodityGroups Coefficientsof independentvariables Physical Human capital capital Scale First- per man per man economies trade Summary Equationand (K) (H) measure date statistics dependent (thousands (thousands (S) (P) variables of dollars) of dollars) (percent) (year) R2 Fb 9-1, 1964 net -8.63 81.82 3.44 9.22 0.21 6.65 exports (2.7) (3.1) (1.3) (2.3) 9-2, 1964net ... 37.73 5.88 9.91 0.15 5.92 exports (1.8) (2.3) (2.4) 9-3, 1964 net -2.42 ... 5.74 12.17 0.13 5.02 exports (0.9) (2.2) (3.0) 9-4, 1964net -10.23 102.90 ...... 0.16 9.73 exports (3.3) (4.1) 9-5, 1967 net -9.24 95.13 4.26 9.29 0.19 5.86 exports (2.5) (3.1) (1.4) (2.0) 9-6, 1964 gross exports dividedby sum of 1964 exports and -1.08 11.84 0.25 0.90 0.26 8.43 imports (3.2) (4.3) (0.9) (2.1) Meanvalue of variable 12.2 4.3 3.1 1945.2 Sources: Same as Table 8. Note: Here and in subsequent tables, figures in parentheses are t-statistics. a. The dependent variable in equations 9-1 through 9-5 is expressed in millions; in equation 9-6, it is in percent. Its mean is $74.8 million for 9-1 through 9-4, $50.2 million for 9-5, and 56.7 percent for 9-6. b. With 101 observations and four independent variables, the F statistic must be above 2.46 to be significant at the 5 percent confidence level and 3.51 to be significant at the 1 percent level. displaysthe coefficientsof the four variables,with their t-ratiosin parentheses, in severalregressions explaining variations in net exports.34Equa-

34. The regressionequation across commoditiesi (i = 1,... , 101) is Xi = ao + alKi + a2Hi + aaS1 + a4Pi + ei, wherethe coefficientsa, . . . , a4 are shown in Table 9, along with their t-statistics.The constantterm ao is simplythe differencebetween the mean Xi and the sum of the means of Ki, Hi, Si, and Pi, each multipliedby the relevanta, and is of no particularinterest here. This form of equation is traditionalin the literature.See, for example, Baldwin, "Determinantsof Commodity Structure."The equation is not fully consistent with a three-factorproduction model, which would suggest deflatingnet exports by employment in each commodity group. Failure to deflate in this way may lend undue weight to industriesthat have large trade flows due to size of industryalone. Inefficientparam- eter estimatesmay result. But at this time data on neither employmentnor output by 330 Brookings Papers on Economic Activity, 2:1971 tion 9-1 showsthe coefficientsof the explanatoryvariables when the full set is included.Human capital per man has a positive and significantcoeffi- cient,while physical capital per man has a significantlynegative coefficient. WhileK and H arepositively correlated across industries, as humancapital increases(holding K, S, andP constantacross commodities) net exportsin- crease,while the oppositeis true if H is constantand K increases.Thus in- dustrieswith large exportsurpluses seem to use a large amountof human capitalrelative to physicalcapital (or to have high wage rates relativeto theirphysical capital-labor ratios).35 Thenext two equationsin Table9 show,respectively, what happens when physicalor human capital is droppedfrom the equation.Since they are positivelycorrelated, but work in differentdirections on net exports,the omissionof one of them,which requires the otherto representboth, reduces the size of the coefficientof the includedvariable. In equation9-1 the productcycle variable P is marginallysignificant. All other things constant,newer products(in terms of first-tradedates) will

SITC commodities are available. Furthermore,as noted above, these results are not especially new, but simply consolidate past studies that use the form shown here. A more rigorous specificationof the correct equation for exploring the sources of comparative advantage, and collection of the data requiredto estimate that equation, is clearlythe next step after the purelydescriptive initial regressionsshown in Tables 9, 10, and 11. In response to suggestionsfrom the panel that some form of scale variablebe added to the analysis, the basic regressionwas also run with the ratio of gross exports to gross trade as the dependentvariable. This variable is bounded by zero and unity. The results, shown as equation 9-6 in Table 9, do not differappreciably from the basic results reportedbelow. 35. A further technical point is brought out by the regressionsof Table 9: Trade surpluses across commodities are positively related to human capital per man and negativelyrelated to physicalcapital per man in production.Thus it would make little sense to add together human and physicalcapital in explainingtrade patterns.In fact, if this is done, and equation 9-1 is rerun with "total capital," R2 falls to 0.12 and the "total capital" coefficienthas a t-ratio of 0.6. These results suggest that human and physical capital are not perfect substitutesin production and cannot be summed simply to "total capital." This is contraryto the suggestion by Kenen to use precisely that method to demonstratethat U.S. trade is capitalintensive, after all. See Kenen, "Nature,Capital, and Trade,"p. 457. This rescue of the two-factor model has also been hinted at in Harry G. Johnson, "The State of Theory in Relation to the EmpiricalAnalysis," in Vernon (ed.), TechnologyFactor in InternationalTrade, p. 14. It is also implicit in Lary's use of value added per man as a measureof capital intensity.Value added is simply profits plus wages, so value added per man is physical plus human capital per man times a common discount rate. See Hal B. Lary, Importsof Manufacturesfrom Less DevelopedCountries (Columbia Uni- versityPress for the National Bureauof EconomicResearch, 1968), Ch. 2. WilliamH. Bransonand Helen B. Junz 331 show largersurpluses. This is consistentwith the productcycle hypothesis for U.S. trade,and suggeststhat it is visibleat the three-digitSITC level. This evidence,combined with the earlierobservations on the long-term OBE end-usedata, confirmsthe productcycle as a fairlygood generalde- scriptionof the life of productsin tradein manufacturedgoods. The scale economyvariable is marginallyinsignificant in equation9-1. Industriesthat exhibitscale economies(again, all otherthings equal) may havelarger surpluses than those that do not, but the evidenceis faint.When both S and P are eliminatedfrom the equation(equation 9-4), the significanceof the basic physicaland humancapital variables is increased.Thus the three-factorversion of the classicaltrade model may serve as a good basic descriptionof the sourceof U.S. comparativeadvantage in trade in manufacturedgoods. Accordingto equation9-5, the basicresults are not particularlysensitive to choiceof yearfor the tradedata. The measurementsfor the independent variablesare taken from variousyears in the period 1960-65,and they re- late in similarways to U.S. tradedata for any of the years 1964-68.These are fundamentalrelationships of tradeadvantage, and they are unlikelyto changevery rapidly over time.36 Finally,the introductionin equation9-6 of a scaled versionof the dependentvariable, exports divided by the sum of exportsand imports,improves the results somewhat,raising R2 and the t-ratios of human and physicalcapital. Thus there appearsto be no reason to assumethat the basic results of equations9-1 and 9-4 are changedsubstantially by this modification.

THE ROLE OF R&D EXPENDITURES Narrowingthe three-digitsample from 101 to 61 commoditiespermits introductionof Keesing's1960 R&D expenditureratios into the analysis. The simple correlationsof the ratios of R&D expenditureto total value added(RD) with the othervariables introduced in the previoussection are as follows: X K H S P 0.43 -0.10 0.15 0.26 0.14

36. When the equationsare reestimatedexcluding SITC category68, which is mainly basic metalsand thus could be naturalresource-intensive, the resultsdo not changeat all. 332 Brookings Papers on Economic Activity, 2:1971 Thereis a highcorrelation of the R&D ratiowith net exportsin the sample. RD is negativelycorrelated with physicalcapital per man K and positively correlatedwith the scale economiesmeasure S. This is consistentwith the evidenceon the full 101-commoditysample in Table8, whichindicates that K and S are negativelycorrelated, The RD variableis positivelycorrelated withboth the humancapital measure H and the first-tradedate measure of the productcycle P, and the strengthof the correlationsis aboutthe same. ThusR&D-intensive industries do tend to havewage rates above the average and to producerelatively new products. In Table 10, whichfollows the formatof Table9, the R&D variableis introducedinto the regressionanalysis in two steps:First, with a 61-observa- tion subsample,equations 10-1 and 10-2reestimate the basicequations 9-1

Table 10. Cross-section Regressions Explaining U.S. Net Exports of ManufacturedGoods, Including Research and Development Expenditures as an Explanatory Variable, by Three-digit SITC Commodity Groups, 1964 Coefficientsof independentvariables Ratio of research Physical Human and de- capital capital velopment per man per man Scale First- expendi- (K) (H) economies trade turesto value (thou- (thou- measure date added,1960 Summarystatistics sandsof sands of (S) (P) (RD) Equation" dollars) dollars) (percent) (year) (percent) R2 Fb 10-1 -9.92 84.70 2.24 17.21 ... 0.29 5.72 (2.5) (1.7) (2.6) (1.9) 10-2 -12.99 127.95 ...... 0.16 5.53 (4.1) (2.5) 10-3 -8.47 60.23 4.75 15.71 21.22 0.37 6.45 (2.2) (1.3) (1.2) (2.5) (2.7) 10-4 -10.47 92.79 ...... 25.15 0.28 7.39 (2.6) (1.9) (3.1) Mean value of variable 12.2 4.3 3.1 1945.2 3.37 ...... Sources: Same as Table 8, and, for research and development variable, Donald B. Keesing, "The Impact of Research and Development on United States Trade," Journal of Politkcal Economy, Vol. 75 (February 1967), pp. 38-48. a. The dependent variable is 1964 exports; its mean is $74.8 million. b. With sixty-one observations and four independent variables, the F statistic must be above 2.52 to be significant at the 5 percent level and 3.65 to be significant at the 1 percent level. WilliamH. Bransonand Helen B. Junz 333 and 9-4, respectively.A comparisonof the pairs of equationsreveals that restrictingthe samplemoderately changes the size and significanceof some coefficients,as wouldbe expected. Next, in equations10-3 and 10-4,RD is addedto equations10-1 and 10-2, respectively.In both equationsthe coefficientof RD is quitesignificant, the fit of the equationis increasedsubstantially, and the significanceof both the humanand physicalcapital measures is reduced.The comparisonof equations 10-1 and 10-3 suggeststhat introductionof R&D spendingincreases the significanceof the productcycle measure and reducesthat of the scale economiesmeasure. The most interestingresult here is that the R&D measureis a significant variablein explainingvariations in net exportsof manufacturedgoods even when variationsin human capital have been accountedfor. This result comes in a subsamplethat is, in a sense, biasedagainst the humancapital explanationof U.S. comparativeadvantage. But it does appearthat the role of the R&D expenditureratio in explainingU.S. comparativeadvantage is not simplythat of a proxyfor humancapital or for the productcycle.

ANALYSIS OF THE SKILL RATIO The skill ratio T can enterthe analysisat the two-digitSITC level to reveal whetherthis sourceof variationin averagewage rates across industries addsto the explanationof net exportsonce humancapital, in general,is includedin the equation.Table 11 displaysthe resultsof this addition. Equation 11-1 simply reestimatesequation 9-1 on the two-digit data, yielding only twenty-eightobservations. The results are essentiallythe same, althoughaggregation tends to blurthe analysis,reducing the signif- icance of all the coefficients.37The entireequation does not explaina sta- tisticallysignificant fraction of the variationin net exportsat the two-digit level. Thus equation 11-2 eliminatesS and P, raisingthe significanceof physicaland humancapital. The next two equationsshow the resultsof addingthe skillratio T to the equationand excludingthe scale economiesand first-tradedate variables. In equation11-3 T substitutesfor humancapital. This resultsin a drop in

37. Note that, in aggregating,three-digit net export data have been summed to the two-digit level, while the three-digitdata on the explanatoryvariables were averagedby Hufbauer,using 1965 exports as weights.Thus the Table 11 coefficientsare largerthan those of Table 9. 334 Brookings Papers on Economic Activity, 2:1971 Table11. Cross-sectionRegressions Explaining U.S. Net Exportsof ManufacturedGoods, Including the Skill Ratioas an ExplanatoryVariable, by Two-digitSITC CommodityGroups, 1964a Coefficientsof independentvariables Ratio of professional, Physical Human scientific, capital capital and per man per man Scale First- technical (K) (H) economies trade employees (thou- (thou- measure date to total Summarystatistics sands of sands of (S) (P) (T) Equation dollars) dollars) (percent) (year) (percent) R2 Fb 11-1 -55.71 39.01 27.52 28.96 ... 0.33 3.00 (2.4) (2.1) (1. 0) (1.1) 11-2 -60.34 50.39 ...... 0.28 5.05 (2.6) (3.0) 11-3 -31.59 ...... 60.77 0.15 2.30 (1.5) (2.0) 11-4 -61.74 42.85 ...... 25.74 0.30 3.57 (2.6) (2.2) (0.8) Mean value of variable 12.2 4.1 4.2 1944.5 9.0 Sources: Same as Table 8, and for the skill ratio variable, data from U.S. Bureau of the Census, U.S. Census of Population: 1960, Subject Reports, Occupationby Industry, Final Report PC(2)-7C (1963). a. The dependent variable is 1964 exports; its mean is $270.2 million. b. With twenty-eight observations, the 5 percent levels of F are as follows: Number of independentvariables 2 3 4 5 3.37 2.99 2.78 2.64 the explanatorypower of the entireregression and T is less significantin 11-3than H is in 11-2.When human capital and the skill ratio are allowed to competedirectly in equation11-4, H is significant,while T has a t-ratio of only 0.8. Thus,as far as the two-digitdata reveal, once humancapital in general,as reflectedby high wage rates (relativeto the base wage for un- educatedlabor), is enteredinto the explanationof net exports,the inclusion of the skill ratio does not improvethe explanation,

Summaryand Conclusions

This paperreports an attemptto draw variousstrands of information into a coherentpattern of the trendsin U.S. tradein manufacturedgoods. WilliamH. Bransonand Helen B. Junz 335 As such, it is mainlydescriptive, not analytical.The efforthas been to de- scribepast patternswith a minimumapplication of implicittheory, rather than to explainthem in any detailedway or to providea mechanismfor predictingfuture trends.

TRENDS IN U.S. TRADE BeforeWorld War II, from 1925to 1937 or so, the United States gen- erallyhad surplusesin trade in capitalgoods, automotiveproducts, fuels and lubricants,and iron and steel products.Deficits typically appeared in consumergoods, textiles, and industrialmaterials based on natural resources,such as primarymetals and wood products.Trade in chemicalswas roughlybalanced. These surplusesand deficitsdid not show majortrends nor did tradeof commoditygroups at this level of aggregationfluctuate be- tweensurplus and deficit. The period1946-49 witnessed a greatexpansion in U.S. exports,virtually acrossthe board,while importsremained initially at prewarlevels. By the middleor late 1950s,the temporarysurpluses had disappeared,and a new set of trendsemerged. In no case did traderevert to the stablepattern of the 1925-37period. Rather, rapid change dominated the pattern,with growing surplusesin capitalgoods and chemicals,growing deficits in other industrialsupplies and materials,and a shrinkingsurplus turning into a growing deficitin consumergoods. The net resultof all this movementin commoditytrade balances is shown in Table 1 as the total balanceon trade.Once the postwarbulge was elimi- nated,the tradesurplus grew erratically to 1964.The excessdemand of the late 1960sobscured the trendof fast-growingsurpluses in capitalgoods and substantiallyincreased the deficitin durableconsumer goods. But whileag- gregatedemand factors were important in the late 1960s,a structuralmove- ment underliesthe changingU.S. trade position, operatingindependently of the state of aggregatedemand.

THE BASIS FOR U.S. COMPARATIVE ADVANTAGE The resultsreported here suggest that U.S. net exportsare not intensive in physicalcapital. This conclusionis by now commonplace.Net exportsof the United States seem to be intensivein humancapital, as measuredby averagewage differentialsacross commodity production, and to be posi- 336 BrookingsPapers on EconomicActivity, 2:1971 tively relatedto expenditureson researchand developmentacross industries.In addition,the Vernonproduct cycle appears in both the analysisof trade by four-digitOBE end-usecategories and the cross-sectionregressions on three-digitSITC categories, reported above.

IMPLICATIONS FOR TRADE POLICY The analysisof U.S. trade,taken by itself,permits no definitivestatement aboutwhat policy should be followed.If the subjectis balance-of-payments policy,the appropriatetrade balance can be determinedonly in light of decisions on the overallbalance of paymentsand its composition.Even with a tradedeficit, the United Statesmight run a substantialsurplus on current accountwith net incomeon investmentand other services. In 1970the U.S. tradesurplus was $2.1 billion(including military items, which are excluded from Table 1), while the surpluson investmentincome was $6.2 billion. Thusa currentaccount surplus that finances a capitalaccount deficit can be consistentwith a smalltrade surplus or deficit.38 On the other hand, if the subjectis policy concerningemployment and the compositionof industrialoutput, trade policy cannotbe fixed without decisions on the level and distributionof outputand employmentin general. The United Statesshould not look to tradeto achievehigh levels of employment:Suitable policies regarding aggregate demand are capableof maintainingfull employment.And it is hardto see why particularindus- triesthat are sufferingfrom competitionshould be aidedif the competitors are foreign,but not if they are domestic.Foreign competition is only one reason-and a minor one, at that-why industriesthat were once strong die out. This analysisdoes, however,throw light on the currentproblem of exchangerates. The tendencyfor importsto supplyan increasingshare of the U.S. domesticmarket is explainedlargely by the factthat tradehas become more dynamicin the postwar world. Consumptioneverywhere is more cosmopolitanand this developmentmust be recognizedin any analysisof trade positions.As noted before,the United Statesis highlyself-sufficient

38. The growingrole of investmentincome in the currentaccount has been empha- sized recently by Lawrence B. Krause, who suggests that the United States may be shifting from the role of an exporterof goods to that of an exporterof capital services. See LawrenceB. Krause, "TradePolicy for the Seventies,"Columbia Journal of World Business,Vol. 6 (January-February1971), pp. 5-14. William H. Branson and Helen B. Junz 337 in the supplyof finishedgoods. In today'sworld this fact alone mighttend to attractforeign competitors eager to increaseimport penetration of the U.S. domesticmarket. But, through1968, the U.S. degreeof self-sufficiency fell almostexactly in line with the declinein that of otherindustrial countries. Since 1968,however, the share of the domesticmarket supplied by foreign sourceshas probablygrown ratherfaster in the United States than elsewhere.In part, the inflationof the late 1960sis responsible.Although excess demandhas disappeared,relative price positions today reflectthe changesof the past five years,and the rate of inflationin the United States has not yet moderatedsufficiently to bringabout significantimprovement in this situation. The differentialmovements in pricepositions over the past few yearsby themselvespoint to the need for some exchangerate adjustments.But the fact thatthe currentexchange rate structure still reflectsvestiges of the early postwardistortions in competitivepositions and industrialpotential sup- ports the need for more far-reachingadjustments. Indeed, the events of late summer 1971 demonstratedclearly the extent of the existing dis- equilibria. Furthermore,if exchangerate adjustmentsare to be used to maintaina givenlong-run trade balance in a world of growingsurpluses and deficits, they probablywill have to be frequent.Before World War II, with static balances,a one-timechange in ratesmight have yielded the desiredchange in the tradebalance. But in a moredynamic world, "equilibrium" rates will be continuouslychanging, so that actualparity changes will have to be made with some frequency. Moreover,this study can suggestwhat kinds of policiesmight work, if a priordecision to "do something"concerning the tradebalance is taken. Giventhe alreadynumerous trade restrictions that exist, U.S. tradepolicy shouldaim at increasingexports, not at protectingor subsidizingdomestic import-competingindustries, a coursethat can be followedonly at the ex- pense of the welfareof U.S. consumers.Exaggerating somewhat from the findingson the sourcesof U.S. comparativeadvantage, one mightsay that the United States does not exportmass-produced, physical-capital-intensive goods; it exportscustom-made, human-capital-intensive goods. Thus a policy undertakenby the United States to improveits trade advantage oughtto focus on increasingthe inputof humancapital into the production processby promotinga more highlyskilled labor force and improvingits 338 BrookingsPapers on EconomicActivity, 2:1971 distribution,and perhapsby encouragingmore expenditure in researchand development.The results would tend to improve export performance, which is the proper objectivefor U.S. trade policy in today's world. To attemptto insulatethe countryfrom the naturaltrend towardexpanding trade among all industrialcountries would not be in the interestof the United States. Commentsand Discussion

R. A. Gordon:This paperdeals with two separatebut relatedtopics. The first is concernedwith long-termtrends in foreigntrade. Here the time dimensionis importantand the authorslook at the entire spectrumof trade. In the second, the authorssearch for the sourcesof this country's comparativeadvantage in foreigntrade. The analysisof that portion is entirelycross-sectional, and is limitedto trade in manufactures;it is en- lighteningand makesa contribution,but I regretits lack of a time dimen- sion. The authorshave put their fingerson at least some of the major sourcesof comparativeadvantage in Americanforeign trade in manufac- turesin the 1960s,but whathave been the majorchanges over the last half- century,and what do these changesportend for the future? In theirhistorical analysis of trendsin net exportssince 1925,the authors utilize the end-useclassification developed by the Departmentof Com- merce.I am not surethat this is the best classificationfor their purposes. If our chiefconcern is withthe changingcompetitive position of the Ameri- can economyin worldtrade, characteristics of the productionprocess and the marketfor inputs,not end uses, are the essentialbases for classifying exportsand imports. The authorsrecognize this in theirsubsequent analysis of the sourceof comparativeadvantage. Table 1 of the paper deservescareful study. Of the groupingsshown there, only in chemicalsand capital goods, as was pointed out, has the United Stateshad a growingexport surplus since the earlyfifties. Among the othercategories, the chiefdifferences are in the amountof the deteriora-

339 340 Brookings Papers on Economic Activity, 2:1971 tion and whenit began.In the recentdeterioration, an outstandingelement is the declinein net exportsof consumergoods of approximately$3.9 billion. This componentis far more importantthan the $1.2 billion drop in net agriculturalexports, which the authors emphasize.In contrast,the rapidincrease in net exportsof capitalgoods has not decelerated.That export surplusin 1970was nearlyenough to balancethe total importsurplus in those categoriesthat show trade deficits. The second section of the paper, comparingdomestic output and ex- pendituresin foreigntrade amongthe variousindustrial countries, covers groundthat is largelyfamiliar. Although the authorscombine the figures in a differentway, they offerlittle that is new. Whilethe methodof analysis in that sectionleaves much to be desired,I acceptthe conclusionthat the Americanboom of the late sixtiesexplains only a part of the deterioration of our trade balanceduring that period. In view of the highly simplified treatment,however, I have no confidencein theirquantitative estimates of the actualeffect. Among the factorsignored or slightedare relativeprices, income elasticities,and the natureof underlyingstructural changes. In the authors'comparative analysis, I missedany use of tradematrices, particularlytrade matrices over time by broadcommodity groups such as the InternationalMonetary Fund is developingfor its own use and for the LINK project,which seeks to connectthe econometricmodels of major countries. On the whole, I have little quarrelwith the last part of the paperwhich deals with the sourcesof comparativeadvantage in manufacturedgoods. In general,I acceptthe conclusionsas valid with respectto the very short intervalof timethat is covered.The authorslook for the sourcesof Ameri- ca's comparativeadvantage in manufacturing,particularly capital goods and chemicals,in terms of the followingfactors: capital-labor ratios, investmentin humancapital, economies of scale,the productcycle, research and developmentexpenditures, and the ratio of highly skilledworkers to total employment.They regressnet manufacturingexports by commodity groupson variouscombinations of thesevariables. The resultsconfirm both the Leontief paradoxand his explanationfor it, in emphasizingthe im- portanceof humancapital as a sourceof U.S. comparativeadvantage. The authorsencounter problems of gettingappropriate measures of the variables they wantto use, andthey windup explaininga ratherlow proportion of the variationin net exportsamong commodities. But the evidencedoes supportthe generalconclusion that U.S. comparativeadvantage in manu- WilliamH. Bransonand Helen B. Junz 341 facturedgoods tends to be associatedwith relativelyheavy investmentin humancapital, research and developmentexpenditures, and the age of the industriesconcerned. Finally,to returnto the issue I raisedearlier about the lack of a time dimensionin the study of comparativeadvantage, I am remindedof Ed- wardDenison's study, WhyGrowth Rates Differ.' In his last chapterDeni- son emphasizesthe catching-upprocess that helps to explain the faster growthrate in most other industrialcountries compared with the United States. These trends also apply to Americanexports of manufactures.I would add that the catching-upof other countriesin productivityhas not been matchedby a fully comparableprocess on the wage side. The difference is clearestin the case of Japan.

LawrenceKrause: Branson and Junz arguethat, if trade positionschange over time, the shifts point towardthe need for changingexchange rates. But, in fact, the balanceof tradeis only one elementof the balanceof payments,and no reasonableman-not even a reasonablegovernment official -should havea targetfor a particulartrade surplus. Trade balances should be expectedto change.The strangefact is the fixityof thesebalances in the prewarperiod, rather than their variabilityin the postwarperiod. I would like to underlinethe authors'own warningsthat, in the comparisonof the UnitedStates with othercountries, no one shouldexpect that it will be or should be exactly like other countries.One is nonetheless temptedbecause the authorsfocus on differencesas thoughthey need ex- plainingor as thoughthey help providean explanationfor whathappened to the overallbalance. The differencesare presentedunfortunately in some normativesense. Finally,the authors'own presentationand analysisdo not point to any- thing "bad"that requirescorrection in the tradebalance. I findit puzzling to see a policy conclusionthat favors expenditureson researchand development.

WilliamBranson: I agree with Krause that no policy recommendations can be made as a resultof the study.It was aimedpurely at informingour- selves and our readersabout what has happenedto U.S. trade.Surely, we

1. Edward F. Denison, assisted by Jean-PierrePoullier, Why GrowthRates Differ: Postwar Experiencein Nine WesternCountries (Brookings Institution, 1967). 342 Brookings Papers on Economic Activity, 2:1971 cannot say whetherthe trade surplusshould be increased,but if a policy decisionis made to increaseit for whateverreason, we can say something about how that mightbe done. In responseto Aaron Gordon, a time dimensioncertainly should be addedto the analysisin the latterpart of the paper.This paperreports an initial set of impressionsbased on a first inspectionof data-largely data assembledby other researchers.I certainlyagree that the next step should be a collectionof cross-sectiondata throughthe 1960s,or at least for the censusyears, to permita more detailedinvestigation.

HelenJunz: R. A. Gordonnoted our emphasison the declinein the agriculturaltrade balance,which was a smallerdeterioration than the change in the consumergoods balance. I believethat this relativestress is appropri- ate becausethe shift towarddeficit, or into largerdeficit, in nonfood consumergoods is a trend commonto all industrialcountries. Although the United Stateshas done a bit worsein this areathan most otherindustrial countries,its performanceis not outstandinglybad. In my view,this trend in the consumerbalance suggests mainly that highly industrializedcoun- tries ought not to pour resourcesinto, or to make large investmentsin, industriesproducing consumer goods for export.

GeneralDiscussion

Warren Smith questionedwhether the analysis supportedthe policy conclusionthat, to increasethe tradesurplus, heavier investment in human capitalproduced more results than the investmenttax crediton machinery. The formerdid seemmore importantfor increasingexports, but the latter mightbe as effectiveon the net balanceby strengtheningdomestic industries that competewith imports.He expressedhis personalopposition to resumptionof the investmenttax credit,and his preferencefor investment in humancapital, but the consequencesfor the tradebalance had no rel- evanceto that choice. Smithsuspected that the authorswere showinga tendency(common to many expertson trade)to endorseanything that increasesthe volume of trade. Since the world is markedby barriersto trade, there is a case for stimulatingexports rather than restrainingimports, when the objectiveis to improvethe tradebalance. On the otherhand, if the worldhad no trade William H. Branson and Helen B. Junz 343 restrictions,there would be no argumentwhatsoever for preferringmea- suresto expandexports over measuresto contractimports. Either would distorttrade patterns from their optimum. LawrenceKlein said that the investmenttax creditproposal had so many dimensionsand so many effectsthat it was reallyquite irrelevantto tie it to internationaltrade considerations.He supportedthe authors'position in focusingon the trade surplusand on export stimulationin their commentson policyissues. Even though Krause was rightthat whatmatters is the overallbalance of paymentsand not simply the balance on goods, Klein foundit hardto imaginean appropriateadjustment of the U.S. balance of paymentsunless the trade balance improves.Concentrating on exportstimulation rather than import restriction makes sense in the present context, despiteWarren Smith's reservations. Holding down importsen- tails a negativerestriction policy, whilepromoting exports can be positive and liberalizing,Klein concluded. In furtherdiscussion of the policy implications,Joseph Pechmanex- pressed strong reservationsabout the wisdom of any tax credit for researchand developmentexpenditures. Arthur Okun felt that the hugeU.S. trade surpluson capitalgoods arguedstrongly against a "buyAmerican" provisionin the proposedinvestment tax credit;if othercountries followed such a precedentin their investmentincentives, the United Stateswould have to be a loser. RobertHall was puzzledby the conceptualdistinction in the paperbe- tween somethingcalled "competitiveposition," on the one hand, and relativeprices, as influencedby inflationand exchangerates, on the other. He understoodthe authors'desire to discussstructural changes affecting U.S. comparativeadvantage in differentcategories of goods, as distinct fromrelative prices. But he wonderedwhether the frameworkincorporated adequatelythe role of price effects. R. J. Gordon also wonderedhow and to what extent relativeprices played a role in the changingpatterns of trade. He cited a comparative study of unit labor costs recentlypublished in the MonthlyLabor Review, which showed that certaincountries-Germany, for example-gained in worldtrade in comparisonwith the United States,even though their unit labor costs rose more rapidly. British exports continuedto drop, even though the prices or unit labor costs of Britain'smain competitorswere risingas fast as their own. Thereis a real puzzleabout the effectsof differential inflationrates on worldtrade. 344 Brookings Papers on Economic Activity, 2:1971 David Fand wonderedwhether the loss of comparativeadvantage by some U.S. industriesmight be accountedfor in part by increasedindus- trial concentrationor by increasedunion powerthat limits their effective- ness in world markets.He was also struckby the sizable discontinuities that appearwhen the categoriesare classifiedby comparativeadvantage. Changesover time seem to intensifythe net surplusesor net deficitsof varioussectors, but do not shift them from one side of the ledgerto the other. He asked whetherthat was surprisingor whetherit was a conse- quenceof the OBE classification. Helen Junzresponded that she doubtedit was a matterof how the data were sliced.In the SITCdata, which are essentiallycommodity or product type classifications,the same sort of thing is evident.She agreedthat relative pricemovements among countries and acrosscommodities would lead one to expect that variousgoods ought to move from surplusto deficit categoriesand vice versa.But that is not what the data reveal. Klein was concernedthat the cross-sectionanalysis of U.S. comparative advantagelooked at Americantechnology alone. Unless overseastech- nologyis consideredat the sametime, much ambiguity remains about what reallymoves net exports. R. J. Gordonmade a point relatedto Klein's.Any projectionof comparativeadvantage in various sectors must considerdevelopments both here and abroad. The United States cannot count on maintainingor strengtheningits comparativeadvantage in those industrieswhere it has heavy investmentof humancapital unless it can be sure to stay ahead of such investmentby other countries.Human capital seems to be gaining rapidlyin someindustries in Germanyand in Japan.It wouldbe interesting to compareshares of exportsof majorcountries with ratiosof humancapital in differentindustries, to see whetherthat comparisonimproved the explanation. CharlesSchultze suggested that, giventhe stronglypositive simple correlationbetween human and physicalcapital, the key to the differencesin the multiple regressionmust be industriesthat combined low intensity of physical capital with high intensity of human capital. Identifyingand analyzingthat group of industriesmight give some insightinto the forces that are actuallyat work. Severalparticipants were concerned that the dependentvariable was not scaledin the regressionanalysis of the sourcesof comparativeadvantage. With net exportsexpressed in dollarswhile the independentvariables were William H. Branson and Helen B. Junz 345 takenlargely as dollarsper man, big industriesreceived undue weight and spuriouscorrelations with the size of industrymight be introduced.A number of suggestionswere offered:to scale the independentvariables by the size of the industry;to use as the dependentvariable net exportsper man, the ratio of exportsto imports,the ratio of exportsto the sum of exports and imports,or the ratio of net exportsto total output. Bransonagreed that some scalingwas desirablebut notedthat he lacked comparabledata on total outputor employmentto implementsome of the suggestions.He felt that relationshipsmight be blurredbut would not be biased by his procedure.He reiteratedthat the regressioncoefficients shouldnot be interpretedas structuralpartial derivatives. Equation 9-6 (in Table9) reflectsadditional work Branson did in responseto this discussion. FrancoModigliani, however, offered an illustrationof how resultsmight becomebiased and distortedby the absenceof scaling.If young industries tend to be small industries,the variableon the initial date of tradewould becomea negativeproxy for industrysize and an adversebias againstthat variablewould mar the regressionanalysis. However, Branson pointed out that new productsare not necessarilyassociated with young industries- the chemicalindustry is continuouslyproducing new products,for example-so that a negativerelationship between industry size and the first- trade-datevariable is not necessarilyimplied.