WILLIAM H. BRANSON* Princeton University and HELEN B. JUNZ* Board of Governorsof the Federal Reserve System Trends in U.S. Trade and Comparative Advantage 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 ex- tent to the excessdemand in the United Statesin 1966-68,and the ensuing inflation.But, as some observershave pointedout, the inflationaryboom couldexplain only part of 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 rela- tion 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 manufac- turedgoods, 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 ob- tain 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 non- agriculturalindustrial 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 agricul- turalgoods 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 there- after.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 mate- rials 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