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Effects of strong dollar, economic recovery apparent in first-half import and export prices Essay

U.S. import price rose 1.0 percent in the first half of 1984, after
falling 2.5 percent during all of 1983. (See table 1.) The increase in
import prices was led by prices for food and miscellaneous manufactures,
which were partially offset by stable crude oil prices. The vigorous
U.S. economic recovery boosted demand for imported products–the Nation
imported a record $160.2 billion of merchandise during the first
half.sup.1.–while the strong dollar served to moderate price increases.
The small rise in import prices was an important factor in the continued
slowdown of domestic inflation as measured by the Consumer Price Index
and the Producer Price Index.

U.S. export prices rose 2.0 percent in the first half. (See table
2.) This price index was published for the first time with the release
of fourth-quarter 1983 data, and has risen 1.5 percent since that
period. Higher prices for crude materials and fats and oils led the
first-half increase in export prices. For raw materials, price
increases were generally larger in the second quarter than in the first,
reflecting rising prices for soybeans and fats and oils. Price increases
for manufactured articles were smaller in the second quarter than in the
first and rose only slightly during the entire first half, a development
that dampened the upward movement in U.S. export prices. The strong
dollar and reduced demand for U.S. products by developing nations with
heavy international debt loads placed downward pressure on export prices
for these articles, which include machinery and transport equipment,
chemicals, intermediate manufactures, and miscellaneous manufactures.

The price indexes discussed in this article are not seasonally
adjusted and are based on transaction price information provided by a
sample of U.S. importers and exporters. They represent 100 percent of
the value of all imported and exported products. Indexes are published
for detailed and aggregate categories of imports and exports.sup.2
General trends in trade

Because energy price account for approximately one-third of the
weight of the all-import price index, their 0.5-percent rise during the
first half was a major factor moderating increases in import prices.
When energy products are excluded, U.S. import prices rose 1.3 percent
in the first half. (See table 1.) In all of 1983, U.S. import prices
excluding energy rose 2.1 percent.

The dollar’s appreciation against the currencies of our major
trading partners in recent years has had a major impact on U.S. export
and import prices. From its low in July 1980 to June 1984, the
dollar’s trade-weighted exchange rate rose 36.0 percent. (See
chart 1.) Over the same 4-year period the dollar rose 748.3 percent
against the Mexican peso, 107.5 percent against the French franc, 56.8
percent against the Deutschemark, and 13.1 percent against the Canadian
dollar. Also by mid-1984, the dollar stood at record highs against the
British pound. This appreciation made imports less expensive while
driving up the price of U.S. exports in foreign markets.

Furthermore, the strong U.S. economic of 1983 broadened and
continued in 1984, boosting demand for imports. The recovery, fueled in
1983 by consumer

spending, spread to the capital goods markets in 1984, while consumer
spending continued to grow. Concurrently, capacity utilization in the
Nation’s mines, factories, and utilities rose to 82.0 percent in
June from 74.9 percent a year earlier. U.S. auto production also
continued to recover from depressed 1982 levels; during first half of
1984, domestic manufacturers produced 29 percent more autos than in the
first half of 1983, and 60 percent more than in the first half of 1982.
Moreover, first-half housing starts were up 14 percent from the same
period in 1983 and 102 percent from the first half of 1982.

This increased economic activity sharply stimulated demand for a
host of related consumer and capital goods, many of them imports. (See
chart 2.) For example, expanding auto production spurred demand for
such imported items as steel, aluminum, rubber, and engines, while the
increase in business investment boosted sales for foreign suppliers of
machine tools, building materials, and electrical equipment.

In contrast, activity in many major U.S. export markets remained at
reduced levels in the first half, and merchandise exports totaled only
$108.3 billion. (Although this represents a 10.5-percent increase over
the first half of 1983, it was less than the $112 billion exported in
first-half 1982 and was substantially below the $122 billion exported in
first-half 1981.) Economic growth in Western Europe was much slower
than in the United States: Industrial production growth for OECD Europe
was less than 4 percent between first-quarter 1983 and first-quarter
1984, compared with increases for North America (Canada and the United
States) and Japan of 15 and 11 percent, respectively. (See table 3.)

Many developing nations, including several in Latin America,
experienced debt problems that forced them to cut back on imports. (See
chart 3.) For example, Mexico, our third largest trading partner,
purchased only $5.7 billion of U.S. goods in the first half. Although
this was up from the $4.4 billion exported in the first half of 1983, it
was still well below the $7.2 billion recorded for the same period in
1982. Other important U.S. trading partners with debt problems are
Argentina, Brazil, and Chile. Several OPEC nations, in particular
Nigeria, also curbed imports, as oil revenues fell. The low level of
U.S. merchandise exports was a key factor in the record $51.9 billion
merchandise trade deficit for the first half of this year.

Along with the strong dollar, the growth in U.S. demand for imports
widened the merchandise trade gap as the Nation led the recovery from
the worldwide economic slump of 1980-83. First-half merchandise imports
were $160.2 billion, 31 percent more than in the first 6 months of 1983.
Petroleum imports rose to $28.7 billion from $23.6 billion in first-half
1983, and nonoil imports rose sharply, by 33.4 percent, to $131.5
billion. Moreover, the U.S. current account, which incorporates the
balances on both merchandise trade and services (including payments and
receipts of interest and dividends on international investments) set a
record deficit of $44.1 billion in the first half, compared with a
deficit of $12.5 billion for the same period a year earlier.

In recent years, the nations of the Far East have carried on an
increasing volume of trade with the United States. Several of these
nations, such as Japan, South Korea, and Taiwan, have posted high
economic growth rates, in part attributable to the strength of U.S.
demand for imports. In 1983, the nations of the Far East enjoyed
greater combined gross trade (merchandise imports and exports in
dollars) with the United States than did those of Western Europe. During
that year, 28.5 percent of U.S. gross foreign trade was carried on with
the nations of the Far East, compared with 20.8 percent in 1976.

Gross trade as a percentage of U.S. final goods production is a
measure of the importance of foreign trade to the goods sector of the
economy. Since 1970, this measure has increased substantially from 15.9
percent to 28.1 percent by 1983. Import price developments

Fuels and related products. Import prices for fuels and related
products rose 0.5 percent in the first half, after falling 11.8 percent
during 1983. The first-half price increase was the result of rising
prices for petroleum products, unchanged crude oil prices, and a
2.0-percent decline in natural gas prices. The drop in petroleum prices
in recent years reflects sluggish world economic growth, increased
substitution of other forms of energy for crude oil, and stepped-up
conservation in the major industrialized nations. During the first
half, spot prices for many crudes were below the official OPEC prices,
as several OPEC members attempted to maintain revenues by discounting
prices and making sales in excess of their quotas.

Contrary to expectations, the Iran-Iraq conflict seems to have
helped depress world oil prices. It appears that attacks by those two
nations on oil-bearing traffic in the Persian Gulf induced other OPEC
members to boost their output, which more than compensated for the
curtailments in shipments resulting from the attacks. In addition,
plentiful oil stockpiles in the United States, Japan, and Western Europe
acted as insurance against disruption of supplies and helped to ease

Even so, the U.S. economic recovery stimulated demand for petroleum
products, reversing a 5-year decline. The Nation’s consumption of
oil products was up about 7 percent from the first half of 1983, while
domestic production, spurred by decontrol, had risen 0.4 percent. The
resulting shortfall in oil supplies was met by imports, which were up 21
percent over first-half 1983 levels.

Early in 1984, heating oil demand and prices rose sharply as a
result of the unusually cold weather in the northeastern United States.
By June 1984, the U.S. average price for heating oil was $1.13 per
gallon, compared with $1.06 in June 1983. Imports of heating oil surged
to meet the increased demand, and domestic refiners increased production
of distillate fuel. As a result of the latter development, gasoline supplies expanded sharply, because refineries produce gasoline and
heating oil simultaneously, regardless of the season. U.S. consumers
reaped a windfall from the unexpected increase in gasoline supplies; in
June 1984, the average U.S. gasoline price (all types) was $1.21 per
gallon, down slightly from $1.26 per gallon in June 1983. When the
improved fuel efficiency of the Nation’s auto fleet is taken into
account, gasoline costs per mile driven for U.S. consumers have declined
substantially since 1980.

The strong dollar also had a major effect on world crude oil prices
in the first half. Specifically, the dollar’s appreciation against
the currencies of our major trading partners meant that those nations
did not reap the full benefit of the cuts in posted dollar prices for
oil. In fact, buyers in several nations found that oil prices in their
own currencies actually rose in the first half, because of the
depreciation of those currencies against the dollar. This phenomenon
further depressed world oil demand.

U.S. oil imports continued to be predominately from non-OPEC
sources, as more oil was imported from sources in the Americas, such as
Mexico and Canada, and from other non-OPEC suppliers–primarily the
United Kingdom, Norway, and Egypt–which have brought increasingly large
amounts of crude to world markets in recent years. During the first
half, the United States purchased 38 percent of its imported crude oil
and petroleum products from OPEC sources, compared with 37 percent in
1983, 42 percent in 1982, and 70 percent in 1977–the year of the
greatest volume of oil imports. Leading suppliers in first-half 1984
were Mexico, at 730 thousand barrels per day (bpd), Canada (647 thousand
bpd), Venezuela (526 thousand bpd), Saudi Arabia (359 thousand bpd), and
the United Kingdom (357 thousand bpd).

The decrease in natural gas prices reflects lower prices for
imports from Canada, which supplies approximately 90 percent of total
U.S. imports of natural gas. Prices for Mexican pipeline gas and
liquified natural gas shipments from Algeria were unchanged during the
first half.

Food. The food index represents 6.6 percent of the all-import
price index. Imported food prices increased 3.1 percent in the first
half, with almost 70 percent of the gain occurring in the first quarter.
The food index is one of the most volatile components of the all-import
price index because of uncertainties in production and climatic
conditions, and difficulties involved in shipping perishable products.
However, the first half of 1984 saw a continuation of an upward trend
which began in mid-1982; the food index climbed 13.1 percent from June
1982 through June 1984, with a rise of 1.24 percent during the first 6
months of 1983. An important factor in the strong gain in first-half
1984 was the harshness of the past winter, which reduced domestic
supplies and greatly stimulated import demand. Import prices for the
fruits and vegetables food group jumped 8.6 percent during the first 6
months of 1984. Rises in import prices for coffee, tea, and cocoa also
contributed to the upward movement in the food index, which was only
partially dampened by lower prices for fish.

The 8.6-percent increase in prices of fruits and vegetable
contributed significantly to the food index’s upward movement in
the first 6 months of 1984. This jump resulted from a 20-percent rise
in fresh vegetable prices in the first quarter, partially attributable
to low U.S. supplies during the winter months. Moreover, killing frosts
in Florida and Texas in December 1983 and continued cold weather in
early 1984 damaged U.S. crops, especially citrus fruits, and resulted in
extremely strong import demand. Tight supplies and growing world demand
for citrus fruits and juices continued throughout the first half of
1984, while U.S. supplies of tomatoes and green vegetables made a
relatively quick comeback from winter damage. Although the vegetable
group’s price index increased 20 percent in the first quarter, it
showed a 1.3-percent decrease in the second quarter. Price declines are
typical during the spring months, during which domestic supplies are
abundant. World vegetable production was also up in the second quarter.
Lime prices fell this spring as normal Mexican export flow resumed,
following the lifting of a February 1984 temporary ban by the United
States on imports of Veracrus citrus because of citrus canker.

Prices for coffee, tea, and cocoa rose 4.7 percent during the first
half. Imported coffee prices increased 3.9 percent in the first 6
months of 1984, following a 7.9-percent gain in all of 1983. World
coffee prices in the first half of 1984 moved above the established
range preferred by members of the International Coffee Organization
(ICO). (The ICO is an organization of 73 coffee producing and consuming
nations which uses export quotas to stabilize global prices.) World
coffee demand was strong in the first 6 months of the year, with the
result that imports were about 38.4 million bags for the period from
October 1983 through May 1984, compared with 36.5 million bags for the
same period in the previous year. Quota increases by the ICO during the
first half failed to dampen the price climb until a price peak was
reached on June 1, 1984. Conditions that spurred prices despite the
larger export quotas included: a fear of frost in Brazil; a West African crop that was less than anticipated; reductions in export shipments from
Brazil and Columbia early in the half; and the poor quality of last
year’s Brazilian and West African crops. Additionally, a U.S.
crackdown on coffee smugglers which began in 198o continued into the new
year, further shifting demand to legal sources.

Reduced production and increased speculation continued to boost
cocoa prices in 1984. Production of cocoa in West African countries was
down substantially during the first half because of a severe, prolonged drought in the first quarter. The size of Brazil’s crop was also
reduced by dry weather. A new international cocoa agreement aimed at
stabilizing prices was discussed by the International Cocoa Council but
not concluded during the first half of the year.

The continued upsurge in tea prices was due in large part to tight
supplies of raw teas. Prices of tea imported by the United States
jumped 9.2 percent in the first 6 months of 1984, for a gain since June
1982 of 63 percent. Shortages of raw tea reflect stagnant production
over the last 5 years, even while tea consumption rose steadily,
particularly in India, the Soviet Union, and West Asia. Another
supply-limiting factor during the first half of 1984 was the Indian
Government’s December 1983 ban on exports of certain types of teas
to ensure adequate domestic supplies. In Sri Lanka, favorable weather
conditions tempered the effects of a strike by plantation workers and
tea output was not affected to any substantial degree.

Fish prices declined by 1.3 percent, moderating the upward movement
of the food index during the first half. A 2.4-percent price decrease
occurred in the first quarter, although the index subsequently moved up
by 1.1 percent in the second quarter. Abundant supplies of fresh fish
resulted in a 0.9-percent decrease in price for that commodity in the
second quarter. The 4.8-percent first-quarter drop in shellfish prices
reflected increased shrimp supplies from Equador and Panama. Rock
lobster tails also fell in price early in 1984.

Crude materials. The crude materials index comprises product
groups such as wood, crude rubber, and metal scrap that are used
extensively as raw materials in manufacturing or construction. The
product principally responsible for the 4.1-percent increase in crude
materials import prices for the first half of 1984 was sulphate wood
pulp, the most commonly used pulp in the world market, for which import
prices rose 20 percent in the first 6 months of the year. Sulphate wood
pulp is primarily used to produce packaging materials, which are in
great demand as the result of robust growth in the U.S. manufacturing
sector. Imports were important in meeting the surging demand for
sulpate wood pulp, as U.S. pulp and paper industries approached full
capacity utilization toward the end of the first half. Some shortages
occurred as sulphate pulp supplies from Canada were reduced because of
labor disputes. Furthermore, U.S. supplies were disrupted during the
first quarter when severe weather conditions hampered production and
transportation. Declining prices for other product groups, including
crude rubber, wood, and crude minerals, partially offset the price gain
for suplhate wood pulp in the crude materials index.

Intermediate manufactures. Prices for intermediate manufacturers
rose 1.7 percent in the first half, after rising 3.7 percent during all
of 1983. These products include nonferrous metals, wood and cork
manufactures, textiles, iron and steel, glassware, paperboard, and many
other basic inputs to manufacturing processes. The United States
imported $22.3 billion of these products in the first half, up from
$16.2 billion in first-half 1983, as the U.S. economic recovery spurred
demand. Rising prices for iron and steel, nonferrous metals, and paper
and paperboard were major contributors to the increase in import prices
for intermediate manufactures.

The 3.6-percent hike in imported iron and steel prices led the rise
in the intermediate manufactures index. although the major U.S.
integrated steel firms began to recover in the first half from
recordbreaking losses during 1982-83, their gains were slowed by an
unprecedented surge of imported steel. U.S. demand for sheet steel was
buoyed by increased sales of autos and appliances, but production of
heavier items such as plate, structural, and bar steels continued at low
levels. Fully integrated U.S. steelmakers, who generally have higher
production costs than foreign producers, continued to heavily discount
posted prices to gain orders. While domestic production was up 28
percent from the first half of 1983, import penetration f the U.S. steel market in first-half 1984 was 25 percent, up from 20 percent in the
year-earlier period. A significant portion of the increase in steel
imports came from Third World nations. Many Third World suppliers can
deliver steel at prices well below the discounted prices offered by U.S.
firms. During the first half, steel supplies from Japan and the European
Community (EC) continued to be limited by trade agreements negotiated in

The debt situation of several nations which are steel producers has
been a major factor in the increased shipments of Third World steel in
recent years. In particular, Mexico, Argentina, and Brazil–all major
steel suppliers–have aggressively sought U.S. sales to obtain foreign
exchange for servicing their international debts.

To reduce the volume of imports, the U.S. steel industry petitioned
the U.S. International Trade Commission (ITC) for relief during the
first half of the year. In June, the ITC ruled that the domestic
industry was being injured by imports in five product groups accounting
for approximately 70 percent of the value of all steel imports. The
Commission recommended 5 years of import quotas and additional tariffs
to aid the domestic steel industry, conditional on cost-cutting and
modernization steps by U.S. producers. Some foreign steelmakers stepped
up shipments during the first 6 months of the year in anticipation of
quotas or tariffs. Others, fearing that they would be charged with
selling steel below cost, raised their prices to the United States.

The major U.S. steelmakers are also losing market share to domestic
minimills. Using modern equipment, minimills convert steel scrap and
semifinished slabs into products such as bars, rods, and light
structurals. Their production costs, including labor and materials, are
approximately one-third less than those of integrated plants. Minimills
now supply about 20 percent of all domestic steel shipments, and their
share is rising. Most minimills are located in Southern or Border

Other factors have curbed demand for steel in this country.
Significantly higher spending on foreign-made capital goods continues to
erode domestic steel consumption, while other metals, such as aluminum,
have taken over many of steel’s traditional markets.

To compete more effectively with imports, the major U.S. steel
firms have increasingly sought mergers with domestic partners. In
March, the Justice Department gave approval to the proposed merger of
Republic Steel and LTV Corporation. The company formed by the merger,
LTV Steel Company, will be the Nation’s second largest steel
producer. It plans to achieve production economies by consolidating the
best parts of the two firms and discarding less-efficient divisions. It
should be noted, however, that when U.S. Steel and National Steel
announced a planned merger in the first half, the Justice Department
vetoed this action for antitrust reasons.

Import prices for nonferrous metals increased 1.6 percent in the
first half of 1984, led by rising prices for zinc and cobalt. Imports of
these metals (in dollar value) were up 16 percent in the first half from
the same period in 1983. Falling silver and copper prices partially
offset these increases. Because nonferrous metals, which also included
nickel, lead, and molybdenum, are used extensively as basic inputs in
many major manufacturing processes, their prices are heavily affected by
the level of general economic activity. The buoyant U.S. economic
recovery also had a positive effect on prices of those metals, such as
zinc, which are used principally in the production of such consumer
products as housing and autos. However, metals for which demand is
dependent on the level of capital spending (such as copper) or
speculation (silver) did not fare as well. Prices for nonferrous metals
also were affected by the strong dollar and user resistance to higher
prices. Dollar-denominated metal prices have been eroded by the rise of
the dollar, while metal users, instead of passing along higher raw
material costs in the form of higher prices, are increasingly reacting
to price increases by cutting consumption or switching to substitute

Zinc prices rose 14.6 percent in the first half. In March, prices
on world markets reached near-record levels of more than 50 cents per
pound before declining slightly. As indicated earlier, zinc demand was
boosted by increased activity in the auto and housing industries.
Import prices for cobalt rose 49 percent in the first half of 1984 due
to a new marketing strategy by which Zaire and Zambia joined to restrict
supplies of cobalt for export. Together, these two countries supply
two-thirds of U.S. cobalt imports. This action, in combination with
growing U.S. demand for cobalt, caused the run-up in prices.

The domestic copper industry had a particularly difficult time
dealing with a flood of low-cost copper imports from Chile, Zaire, and
Zambia. With this industrial metal in abundant supply on world markets,
prices remained depressed: U.S. producer prices fell to an average of 65
cents per pound by June, down 15 cents from a year earlier. Production
costs for some U.S. producers ranged between 75 and 85 cents per pound,
while production costs in Chile, the world’s largest copper
producer, were around 46 cents per pound. Domestic producers also use a
lower grade of ore than that available in other major producing nations,
yielding one-third or less copper. During the first half, the ITC ruled
favorably on the U.S. copper producers’ petition for import relief,
recommending either the imposition of quotas or higher tariffs on
imported unwrought copper.

A 2.7-percent decline in import prices for cork and wood
manufactures moderated the increase in prices for the intermediate
manufactures group. The decrease in cork and wood manufactures prices
resulted from a 3.7-percent drop in prices for miscellaneous wood
manufactures and a 1.9-percent decline in prices for plywood and
veneers. Products from Southeast Asia account for most of the weight in
the index for plywood and veneers. Formerly, Indonesia had been a major
supplier of logs to mills in Korea, Taiwan, and the Phillipines, which
in turn exported finished products such as plywood to the United States.
However, Indonesia has constructed additional mills in recent years, and
now is exporting the finished products. The resulting price competition
between Indonesia and the other nations of Southeast Asia boosted
supplies and contributed to lower prices in 1984.

Machinery and transport equipment. This index, which accounts for
25.4 percent of the weight of the all-import price index, was unchanged
during the first half, after rising 2.4 percent in 1983. Some $58.5
billion of this merchandise was imported during the first half, up 44
percent from $40.5 billion in the first half of last year, as the
economic recovery fueled demand. This substantial increase was a major
factor in widening the first-half U.S. merchandise trade deficit.

Approximately half of the dollar value in this index consists of
consumer products such as autos, videocassette recorders, and household
appliances. As consumer spending grew, purchases of these types of
items rose. The index also includes many important components of
manufacturing processes, such as electric motors, air pumps,
compressors, valves, and roller bearings, for which demand grew with
U.S. manufacturing output. However, the continued appreciation of the
dollar served to moderate price increases.

Import prices for automobiles rose 1.1 percent in the first half,
after rising 4.8 percent for all of 1983. Surging firsthalf 1984 U.S.
auto sales and the Japanese Government’s voluntary quotas on auto
exports to the United States were factors affecting import prices.
Buoyant consumer confidence, higher levels of employment, stable
gasoline prices, and the improving economy boosted first-half retail
auto sales to 5.5 million from 4.6 million in the 1983 first half.
Import penetration of the U.S. market was 22.5 percent (in units), down
from 26.7 percent from the same period a year earlier. Retail sales were
restrained by short supplies of both imported and domestic autos:
Supplies of imported Japanese cars were held down by the quotas, while
dealer inventories of domestic autos stood at 48 days of sales on June
15, the lowest level in 10 years. Sales of larger cars were especially
brisk and shortages developed for many domestic car models.

In April, the quotas on Japanese auto shipments to the United
States were raised to 1.85 million units per year from 1.68 million. The
quotas, scheduled to expire in April 1985, have been a source of upward
pressure on prices of Japanese cars. In the first half, Japanese autos
accounted for 17 percent of all U.S. new car sales, down from 22 percent
in first-half 1983. Because of the quotas, Japanese automakers were
unable to maintain or increase their market share and fully exploit a
cost advantage estimated at $1,500 to $2,000 per car. Instead of
competing on price, Japan’s carmkers concentrated on selling
higher-valued, option-laden cars in the United States–in effect
providing a pricing floor for the domestic industry. As a result of
this change in the mix of imported automobiles, the unit value index for
automobiles increased at a much sharper rate than did the price index.
(See chart 4.) The price index adjusts for quality changes and
maintains a constant mix of goods; price is the only fluctuating variable. The unit value index reflects the shift to higher valued
top-of-the-line models, as well as ‘pure’ price changes. With
supply restricted by the quotas, inventories of Japanese cars dropped to
16 days of sales on June 30, 1984, compared with 27 days of sales on the
same date in 1981, the first year of the quotas.

After 4 years of cost cutting which lowered their breakeven point
substantially, U.S. automakers posted record combined profits in the
first half of 1984. U.S. firms also benefitted from an increase in
demand for midsize and large cars. Sales of subcompact models were down
slightly from first-half 1983 levels, due to shortages of Japanese
models and consumer preference for larger cars. Several European
carmakers, selling higher-valued models, set sales records during the
first half.

The trend toward internationalization of automobile production
persists. In particular, some Japanese auto firms further developed
production facilities in North America to ensure continued access to the
prosperous U.S. auto market. U.S. firms also continued to make plans
for joint production of subcompact cars with Japanese and South Korean
partners. Most notably, General Motors and Toyota received permission
from the Federal Trade Commission to proceed with their joint venture to
produce small cars in California. Ford and Mazda also announced their
intention to build an assembly plant in Mexico to manufacture cars for
the U.S. market.

The price index for metalworking machinery was heavily affected by
large supplies of imports, falling 1.9 percent in the first half. The
bulk of the value in this index cosists of machine tools–power-driven
devices used to cut, shape, or form metal in the production of durable

The 1983 U.S. trade deficit in machine tools was $540 million.
While this compared favorably with the $638 million deficit in 1982, it
was quite large in historical terms and occurred despite sluggish
domestic demand. In recent years, U.S. machine tool makers have had an
increasingly difficult time matching the prices offered by competitors
in Japan, West Germany, Taiwan, the United Kingdom, and Switzerland.
During the first half, U.S. producers began to recover from the worst
downturn many had endured since the 1930’s. Because of recession
and foreign competition, shipments of U.S.-made machine tools dropped
almost two-thirds between 1981 and 1983.

Japanese imports accounted for nearly half of the 36-percent share
of the U.S. market taken by imports last year, up from 28 percent in
1982, and their penetration in advanced machine tools is much greater.
For example, during the first half of 1983, some 78 percent of the
machining centers sold in the United States were Japanese-made.

The intense foreign competition continued to force major changes in
the structure of the U.S. machine tool industry throughout the first
half of 1984, as firms withdrew, merged, entered joint ventures with
foreign producers, or moved operations offshore to cut costs. Domestic
firms continued to seek relief from lower-priced imports, and as the
first half ended, the National Machine Tool Builders’ Association
petition for import relief on the basis of national security under
Section 232 of the 1972 Trade Expansion Act was still pending.

Import prices for electric machinery and equipment fell 4.9
percent, despite brisk demand for new appliances for residential housing
and electronic components for military equipment. In 1980, the United
States posted a trade surplus of $2.2 billion for electric machinery and
equipment, but in 1983, it registered an $892.4 million trade deficit.
The decline in this index was keyed by falling prices for electronic
components and electric circuit switching equipment. The price decrease
in electric circuit switching equipment imported from Europe is
partially attributable to the dollar’s appreciation against such
currencies as the franc, the Deutschemark, and the pound sterling. At
the same time, Japan, Taiwan, and Korea have increased production of
electronic components such as integrated circuits, transistors, and
diodes. This increased production resulted in economies of scale and
production efficiencies which tended to lower prices. Finally,
component prices were further depressed because technological advances
have made metal oxide transistors competetive with bispolar transistors.
Although prices of metal oxide transistors have fallen, they still
remain approximately 40 percent above the cost of bispolar transistors.
However, the higher quality of metal oxide transistors and their new,
lower prices make them increasingly attractive to engineering designers.

Miscellaneous manufactured goods. The import price index for
miscellaneous manufactured products increased 1.5 percent in the first
half of 1984. This category comprises almost 10 percent of the
all-import price index, and includes a wide variety of consumer goods such as clothing, footwear, clocks, watches, and photographic equipment.
Higher prices for these products were the main force behind the upward
movement in the index for miscellaneous manufactures. U.S. demand for
these products was strong as high consumer spending levels during 1983
continued into the first half of 1984. This demand was increasingly met
by imports, which surged from $15.6 billion during the first 6 months of
1983 to $21 billion in the same period this year. This represented a
34.6-percent increase, compared to a first-half 1982-83 gain of only
11.4 percent.

During the first 6 months of 1984, imported clothing and footwear
prices exerienced similar increases of 3.1 percent and 3.5 percent,
respectively. Clothing and shoes experienced high retail sales growth
in the United States throughout 1983 and into 1984. During the first
half of this year, consumer outlays for clothing and shoes averaged over
$139 billion (seasonally adjusted annual rate), compared with $127.0
billion for all of 1983 and $118.8 billion in 1982.

Limited supplies of some apparel items contributed to higher price
levels, in part because of Federal tightening of import controls and
quotas and a crackdown on illegal and counterfeit imports of apparel.
(For footwear, the possibility of additional controls was lessened when
the International Trade Commission determined in June 1984 that imports
of nonrubber footwear were not causing serious injury to the domestic
industry.) Higher raw material costs experienced by foreign clothing
and shoe manufacturers also were reflected in increasing prices during
the half. These included steep hikes in the price of leathers over the
past year, and moderate gains in the prices of cotton and manmade

The index for photographic apparatus and supplies, optical goods,
and watches and clocks moved up by 2.4 percent in the first half. Prices
for photographic apparatus and equipment advanced 3.4 percent as strong
consumer demand reversed a downward trend that began early in 1982 in
response to product innovations. Optical lenses and watches also
contributed to the increase in the index, with gains of 6.4 percent and
10.3 percent, respectively. Price of these products had declined during
1981, 1982, and 1983 because of steep competition among suppliers and
reduced production costs. The higher quality watch market showed
particular strength this year.

Grain. Export prices for gain rose 1.7 percent in the first 6
months of 1984 after a 16.8-percent advance in 1983. The price movement
for the first half resulted when substantial price increase for wheat
and feed grains in the second quarter dominated the more moderate price
declines registered in the first quarter. Increases in market prices in
May and June reflected unfavorable weather conditions in the United
States and Soviet Union. U.S. grain exports represent over 7 percent of
the value of all U.S. merchandise exports, and consist primarily of
wheat, corn, and sorghum. Grain exports totaled $7.8 billion in the
first 6 months of 1984, compared with $7.4 billion for the same period
in 1983.

Prices for exported wheat edged upward by 2.6 percent in the first
half of 1984. Severe flooding in the Midwest this spring resulted in
erosion, planting, and transportation difficulties, and placed upward
pressure on wheat prices despite huge U.S. stockpiles. Additionally,
speculation in the grain market centered around a possible reduction in
Soviet grain production as the result of a spate of bad weather in that
country. Demand for U.S. wheat increased during the first half, in part
because of severe drought in West African countries, but export price
rises were moderated by increased production in other countries such as
Canada, European Community countries, Australia, and India. Trade
agreements concluded with the Soviet Union and the People’s
Republic of China in 1983 helped stabilize U.S. exports to these
countries in 1984.

The U.S. Payment-in-Kind (PIK) program, initiated in January 1983
to reduce surplus grain supplies and stabilize U.S. commodity prices,
affected 1983 and 1984 soybean and corn prices much more than those for
wheat. Huge wheat stockpiles were not greatly reduced by the program,
partially because increases in yields per acre in 1983 kept output
levels high. PIK benefits were reduced in 1984 and fewer farmers
elected to enroll, with the result that 60 percent of grain acreage was
included in surplus reduction programs, compared with 86 percent in
1983. In a separate effort to draw down large wheat supplies, the U.S.
Department of Agriculture announced a new program that provides wheat
stocks on a competitive basis to private exporters for resale to
drought-stricken African nations.

Corn prices moved up 1.9 percent during the first half of 1984,
following a substantial 34.5-percent price gain in 1983. Surpluses of
corn were reduced by the PIK program and the 1983 drought, and this
year’s spring floods in the Midwest disrupted the planting of new
crops. Growing demand for high fructose corn syrup contributed to the
upward trend in corn prices, as the U.S. beverage industry increasingly
chose this corn product as a substitute for sugar.

Prices for other feed grains, including sorghum and barley, and for
soybeans, also rose during the first 6 months of 1984. These
commodities are substitutes for corn, and usually demonstrate similar
price movements. Sorghum was up slightly by 1 percent, barley prices
rose 2.8 percent, and prices for exported soybeans (soybeans are
included in the crude materials index) advanced 5.6 percent. The
substantial gain in soybean prices in the first half reflected tight
domestic supplies following the summer drought of 1983, and dry weather
in Brazil in 1984. Even though soybean prices had risen more than 35
percent in 1983, strong demand for soybean oil in response to shortages
of other vegetable oils pushed up prices even further during the first 6
months of this year.

Demand for soybean meal decreased over the same period, following a
substantial price jump in the fall of 1983. The decline in prices of
animal feeds, which are included in the food index, tended to moderate
the first-half advance in that index.

Crude materials. The 5.4-percent price rise for crude materials
contributed significantly to the increase in the all-export price index
this half, as such materials represent almost 11 percent of the
all-export index. Demand for these products, which are used in the
early stages of production, increased sharply as worldwide industrial
production began to pick up in the first half of 1984. U.S. exports of
crude materials during the period were $11 billion, an 18.2-percent
increase over the $9.3 billion exported during the same period in 1983.
A 14.4-percent jump in prices of raw hides and skins, a 15.2-percent
surge for pulp and waste paper, and a 7.7-percent gain in oilsees led
the first-half increase in the crude materials index.

U.S. export prices for raw hides and skins have soared 52 percent
since the beginning of 1983, following declines in 1981 and 1982.
Droughts in 1982 and 1983 led to smaller herds and lower slaughter rates
in New Zealand, Australia, and Argentina, which in turn created a strong
world demand for U.S. hides during 1983 and the first half of 1984. In
recent years, trends away from beef consumption in the industrial
nations have also reduced available world supplies of cattlehides. It
is estimated that worldwide cattleherds declined 2.5 percent in 1983,
and will shrink by another 1 percent in 1984.

Demand for U.S. hides by the major buyers in the Far East grew
significantly as those countries’ sales of finished leather goods
to this country flourished with the economic upturn. Total U.S. exports
of hides and furskins in the first 6 months of 1984 were 59 percent
above those for the same period in 1983. U.S. furskin sellers took
advantage of a demand resurgence in Europe by raising prices on some
grades. Exported furskin prices edged upward by 5.5 percent in the
second half of 1983, and then jumped 11.7 percent during the first half
of 1984 after dropping more than 30 percent from December 1980 to June

Export prices for pulp and waste paper advanced more than 15
percent this half, driven by a 25-percent leap in prices for sulphate
wood pulp and moderated by declines in waste paper prices. The
combination of strong domestic demand and additional purchases in the
first half by China, Japan, and some European nations caused the rapid
price increases for sulphate wood pulp. The strong demand stemmed from
increased manufacturing activity, because the primary use for sulphate
pulp is for packaging items. U.S. exports of paper base stocks,
including wood pulp, were 14 percent higher in the first 6 months of
1984 than in the same period in 1983.

A 5-percent gain in cotton prices was the reason for the
2.0-percent rise in the textile fibers index, which continued an upward
trend begun in early 1983. (U.S. export prices for cotton had already
risen more than 30 percent from December 1982 through December 1983.)
The advance in cotton prices reflects rapidly rising world consumption
levels in the 1983-84 marketing year (season beginning in August) in the
face of world production levels that have been declining since the
1981-82 marketing year. Consumption is up as the result of increased use
of cotton in apparel, and because of sharp rises in the use of cotton
products in China, India, Turkey, and Egypt.

Although cotton production had declined in the United States,
surplus stocks were used in 1984 in order to help meet the strong world
demand. U.S. exports were up 38 percent in the 1983-84 marketing year
over those for the same (August through April) period in the previous
year. The major buyers of U.S. cotton in the first half were Japan and
the Republic of Korean. While almost all countries importing cotton
from the United States increased their purchases in 1983 and 1984, some
Asian nations, such as Hong Kong and Taiwan, did so at higher rates as
their manufacture and export of clothing increased sharply in response
to the economic upturn in this country and some European nations.
cotton price hikes were moderated by sharp production increases in
Mainland China, and by smaller rises in Soviet and Mexican cotton

Fat and oils. Although the fats and oils export price index
represents just under 1 percent of total U.S. exports, its 34.8-percent
surge during the first half was responsbile for 15 percent of the
2-percent rise in the all-export price index. The prices of soybean oil
and animal fats and oils showed substantial gains in the second quarter
of 1984. Prices were driven up when unfavorable weather conditions in
the Midwest this spring caused shortages of U.S. soybean oil.
Additionally, tight supplies of palm, coconut, and sunflower seed oil in
the Far East and Malaysia placed upward pressure on prices, because
soybean and animal oils are close substitutes for these other vegetable
oils. Prices for animal oils were further pushed up by growing demand
for soaps and cosmetics, two products in which these oils are used.

Chemicals. Export prices for chemicals rose 1.1 percent during the
first 6 months of the year, reflecing higher prices for agricultural
chemicals and medicinal and pharmaceutical products. U.S. exports of
chemicals in the first half were above year-earlier levels, and the
major U.S. chemical firms recorded much-improved profits for the same
period, with several posting record second-quarter profits.

In domestic and overseas markets, first-half sales of agricultural
chemicals such as fertilizers and pesticides were up sharply from
year-earlier levels. Such factors as the continuing farm recovery in
the United States, the curtailment of last year’s PIK program that
reduced acreage plantings, and good weather in major agricultural areas
around the world were responsible for increased sales of pesticides.
Exports to Europe were improved, as were sales in Pacific Rim nations
such as China, New Zealand, and Indonesia. In recent years, U.S. firms
have made significant advances in pesticides which have resulted in more
effective, less toxic, and easier-to-apply products.

The Nation has historically posted large surpluses in international
trade of chemicals. In recent years, however, the surpluses have begun
to shrink, falling from $10.4 billion in 1982 to $9.0 billion in 1983
and to $4.2 billion in the first half of 1984. This trend is
attributable to the strong dollar and to increasing world chemical
production capacity. Several Third World nations, especially those
that are major oil exporters, have invested heavily in plants and
equipment for chemical production. Oil producing nations have a
comparative advantage in the production of petrochemicals, resulting
from the ready availability of low-cost petroleum feedstocks. In
addition, many developing countries are exporting chemicals to the
United States on a duty-free basis under the Generalized System of
Preferences of the U.S. Trade Act of 1974. Such duty-free imports
accounted for more than half of the Nation’s total 1983 imports in
the benzenoid intermediate category (in tons) and for 96 percent of
imports of phthalic anhydride.

Intermediate manufactures. Exports prices for intermediate
manufactured produces rose 1.3 percent in the first half, after rising
1.8 percent in 1983. The first-half increase was paced by a 6.3-percent
rise in export prices for paper and paperboard products, which was
partially offset by a 1.0-percent decline in prices for nonferrous
metals. In recent years, U.S. exports of intermediate manufactured
goods have declined steadily. In 1983, the nation exported $14.9
billion of these goods, down from $16.7 billion in 1982 and $22.3
billion in 1980. The drop in export value is largely due to declining
exports of iron, steel, and nonferrous metals.

The export price index for paper and paperboard products index
often displays volatile movements, because demand for these products is
closely tied to conditions in the packaging industry. As increased
demand for packaging materials drove the capacity utilization rate in
the U.S. packaging industry to 97 percent in the first half, prices for
paper and paperboard products quickly rose.

The advance in export prices for paperboard and paperboard products
was led by a 15.6-percent increase in the index for kraft paper and
paperboard. World demand for these products was strong, and several
U.S. producers posted record sales. Kraft is a heavy-duty paper which,
in unbleached form, is used for shopping bags and many other
applications. Price increases were recorded for all bleached and
unbleached types during the first half.

Kraft paper and paperboard products are made from kraft pulp.
During the first half, foreign demand for this type of pulp increased
sharply. This, combined with a strike in the major producing region of
Canada which reduced output and tightened supplies, served to drive up
world prices. Because production of both kraft pulp and paper is highly
capital intensive and is only efficient on a large scale, additional
capacity cannot be brought on-line easily over a short period. Higher
prices for kraft pulp raised input costs for U.S. producers of kraft
products such as linerboard, packaging cartons, and shipping sacks.

Prices for printing and writing paper advanced 5.6 percent in the
first half. Price rises were recorded for both coated and uncoated
papers. Demand for printing papers was buoyed by advertising
expenditures, particularly increases in magazine advertising, while the
growing use of office and home automation products in the major
industrialized nations boosted demand for both printing and writing

The 1.0-percent drop in nonferrous metals prices in the first half
followed a 1.0-percent rise in this index for all of 1983. In recent
years, exports of many of these metals have fallen in response to the
availability of lower-cost foreign supplies, substitution of alternative
materials, and decreased demand from basic industries. The decline in
the index was led by a 4.4-percent drop in the aluminum index, which was
partially offset by a 3.7-percent rise in silver export prices and a
2.3-percent increase in copper prices.

Aluminum prices fell as a result of a worldwide glut of ingots.
Much so the world’s aluminum supply is marketed in the form of
basic ingots. At the start of 1984, the major U.S. producers were
operating at near full capacity, but by midyear three of these firms cut
production because of lower prices. In recent years, aluminum has
increasingly been used as an instrument of speculation. In Europe,
aluminum is traded on the London Metals Exchange (LME), and beginning in
December 1983, the Commodities Exchange in New York began to trade
aluminum. Prices for the lightweight metal fell to 53 cents per pound
by mid-1984, down from a September 1983 high of 73 cents. On the U.S.
spot market, prices slipped to 61 cents per pound, down 11 cents from
levels reached earlier in the year. Growing world aluminum inventories
fueled the ingot price decline, although prices for more expensive
aluminum products fabricated from ingots remained firm. In May, U.S.
producer inventories were 11 percent higher than in December 1983. U.S.
aluminum exports, including mill products, ingots, and scrap, in the
first 6 months of 1984 were 8.4 percent (measured in tonnage) below
those recorded for the same period in 1983, while imports were up 41.4
percent. The strong dollar was an important factor in both the drop in
exports and the rise in imports.

Silver prices, normally very volatile, were relatively stable
during the first half. Prices were heavily affected by the strong
dollar and rising interest rates, which tended to shift speculative
activity from silver to dollar-denominated investments. The other
determinant of silver pricing, industrial usage, failed to increase
appreciably during the first half. U.S. exports of the white metal
during the first 5 months of 1984 were far below the 1983 pace, while
imports continued to exceed exports by large amounts.

Lead prices and output continued at reduced levels during the first
half. Lead exports for the period were less than half of first-half
1983 levels, while domestic production had fallen slightly. In recently
years, world demand for lead has been curbed by the substitution of
plastics, while use of the metal in storage batteries, solders, and
gasoline has decreased significantly.

Machinery and transport equipment. Machinery and transportation
equipment accounts for 35.3 percent of the value of all U.S. exports.
Export prices for these products advanced 1.8 percent in the first 6
months of 1984, after rising 2.2 percent for all of 1983. Most major
product groups within the machinery and transportation equipment index
showed moderate price gains and sales increases for the first half. The
value of U.S. exports of machinery and transportation equipment was 6.6
percent greater than in the same period in 1983. Some product groups,
such as computers, electronic components, and telecommunications
equipment, require a high degree of technical sophistication, and U.S.
firms have a comparative advantage in their manufacture. However, in
other product groups, such as metalworking, textile, and leather
machinery, export sales and prices continued to be depressed by the
strength of the dollar.

The export price index for road vehicles and parts is the largest
component of the machinery and transportation equipment index. A
2.7-percent rise in prices for parts for motor vehicles was largely
responsible for the index’s 1.9-percent advance this half. A
slight 0.3-percent decrease in the price of passenger motor vehicles
partially offset this gain. The value of U.S. exports of road vehicles
and parts surged from $7.29 billion in the first 6 months of 1983 to
$9.15 billion for the same period in 1984.

High levels of Canadian demand for vehicles and vehicle parts,
combined with strong domestic demand, resulted in high capacity
utilization in the U.S. automobile industry, thus influencing the price
movement forthe half. To stay competitive in the world market, the
industry implemented various cost controls which moderated the price
advance. Export demand for automobile parts was strengthened by the
recent trend toward internationalization of automobile production, as
additional parts were shipped to U.S. subsidiaries in Mexico and Canada
during 1983 and 1984.

The “other transport” index, which excludes military and
commercial aircraft, moved forward by 4.7 percent in the first half.
The general aviation aircraft component rose 4.1 percent and prices of
parts for aircraft and spacecraft were up 5.9 percent. The price
increases in spacecraft parts reflect the highly sophisticated nature of
these products, which limits the number of firms capable of supplying an
expanding world market. The United States maintains technological
superiority in the production of high quality aviation parts, and U.S.
manufacturers, even while operating at near-capacity, were unable to
fully meet the growing first-half export demand.

Price hikes in this index, in both the domestic and export markets,
average 1 to 2 percent per quarter. U.S. parts manufacturers are able
to pass on production cost increases because of the inelasicity of
demand for aircraft and aerospace replacement parts. World demand
continued to be depressed for general aviation aircraft, but a pick-up a
domestic demand in 1984 and vitality in the export demand for turbojet aircraft led to higher prices.

General industrial machinery accounts for 14 percent of the
machinery and transport equipment index. Prices for this product group
increased 2.1 percent in the first half of 1984 after advancing 1.7
percent in 1983. The items primarily responsible for the upward
movement included pumps and compressors, for which prices jumped 9.2
percent, and packaging and weighting equipment, up 2.4 percent. Mild
price declines occured in cooling equipment, centrifuges, powered
industrial trucks, and ball and roller bearings. Total exports of
general industrial machinery were basically stable for the year, with
first-half sales of nearly $4.1 billion, compared with slightly more
than $4.05 billion for the same period in 1983.

The economic upturn reached some areas of the capital goods sector
in Canada, Europe, and the Far East, boosting demand for general
industrial products. Expanded residential and commercial construction,
expecially in Japan and South Korea, increased demand for U.S.-made air
compressers, pumps for liquids, valves and cocks, and heating and
cooling equipment. All of these products had some price hikes during
the half except for cooling equipment, for which a 0.7-percent decrease
was recorded because of intense competition from Japan, West Germany,
and Italy. Expansion of food processing facilities in Singapore,
Malaysia, Thailand, and Indonesia stimulated demand for U.S. packaging
and weighing equipment.

Nonetheless, U.S. manufacturers of general industrial machinery and
parts continued to face strong competition from Japan and the Far East,
and were adversely affected by the continued strength of the dollar.
For example, export prices for ball and roller bearings edged downward
by 0.4 percent in the half. Debt problems of purchasers Mexico and
Brazil also acted to depress demand and prices for U.S. general
industrial machinery. Moreover, slack demand for general industrial
equipment in the European chemical and steel industries exerted downward
pressure on U.S. export prices this half.

First-half price increases in other major product groups included a
1.6-percent gain in power generating machinery and equipment; a
1.1-percent rise for machinery specialized for particular industries;
and a 2.6-percent advance for electrical machinery and equipment.

Office machines and data processing equipment were the only major
product group in the machinery and transport equipment index to
experience a price decline in the first half of 1984. Export prices
fell 1.0 percent in the half, continuing a slide that began in mid-1981.
Steadily declining prices for these products are due in part to the
rapid technological advancement and resulting lower production costs for
such items as typewriters calculators, and computer terminals. Price
cuts also reflect the fierce competition among domestic and foreign
suppliers (particularly Japan) in these expanding market. The
introduction of new products placed further downward pressure on the
prices of some competing older models.

While prices of office machinery and computers were declining,
export sales boomed during the first half, rising 24 percent above the
level recorded in the first 6 months of 1983.

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