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, afterfalling 2.5 percent during all of 1983. (See table 1.

) The increase inimport prices was led by prices for food and miscellaneous manufactures,which were partially offset by stable crude oil prices. The vigorousU.S. economic recovery boosted demand for imported products–the Nationimported a record $160.2 billion of merchandise during the firsthalf.

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sup.1.–while the strong dollar served to moderate price increases.The small rise in import prices was an important factor in the continuedslowdown of domestic inflation as measured by the Consumer Price Indexand the Producer Price Index. U.S. export prices rose 2.0 percent in the first half.

(See table2.) This price index was published for the first time with the releaseof fourth-quarter 1983 data, and has risen 1.5 percent since thatperiod. Higher prices for crude materials and fats and oils led thefirst-half increase in export prices. For raw materials, priceincreases were generally larger in the second quarter than in the first,reflecting rising prices for soybeans and fats and oils. Price increasesfor manufactured articles were smaller in the second quarter than in thefirst and rose only slightly during the entire first half, a developmentthat dampened the upward movement in U.

S. export prices. The strongdollar and reduced demand for U.S.

products by developing nations withheavy international debt loads placed downward pressure on export pricesfor these articles, which include machinery and transport equipment,chemicals, intermediate manufactures, and miscellaneous manufactures. The price indexes discussed in this article are not seasonallyadjusted and are based on transaction price information provided by asample of U.S. importers and exporters. They represent 100 percent ofthe value of all imported and exported products. Indexes are publishedfor detailed and aggregate categories of imports and exports.

sup.2General trends in trade Because energy price account for approximately one-third of theweight of the all-import price index, their 0.5-percent rise during thefirst half was a major factor moderating increases in import prices.When energy products are excluded, U.

S. import prices rose 1.3 percentin the first half. (See table 1.) In all of 1983, U.S. import pricesexcluding energy rose 2.

1 percent. The dollar’s appreciation against the currencies of our majortrading partners in recent years has had a major impact on U.S. exportand import prices.

From its low in July 1980 to June 1984, thedollar’s trade-weighted exchange rate rose 36.0 percent. (Seechart 1.) Over the same 4-year period the dollar rose 748.3 percentagainst the Mexican peso, 107.5 percent against the French franc, 56.8percent against the Deutschemark, and 13.

1 percent against the Canadiandollar. Also by mid-1984, the dollar stood at record highs against theBritish pound. This appreciation made imports less expensive whiledriving up the price of U.S.

exports in foreign markets. Furthermore, the strong U.S. economic of 1983 broadened andcontinued in 1984, boosting demand for imports.

The recovery, fueled in1983 by consumerspending, spread to the capital goods markets in 1984, while consumerspending continued to grow. Concurrently, capacity utilization in theNation’s mines, factories, and utilities rose to 82.0 percent inJune from 74.9 percent a year earlier. U.S. auto production alsocontinued to recover from depressed 1982 levels; during first half of1984, domestic manufacturers produced 29 percent more autos than in thefirst 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 sameperiod in 1983 and 102 percent from the first half of 1982.

This increased economic activity sharply stimulated demand for ahost of related consumer and capital goods, many of them imports. (Seechart 2.) For example, expanding auto production spurred demand forsuch imported items as steel, aluminum, rubber, and engines, while theincrease in business investment boosted sales for foreign suppliers ofmachine tools, building materials, and electrical equipment. In contrast, activity in many major U.S.

export markets remained atreduced levels in the first half, and merchandise exports totaled only$108.3 billion. (Although this represents a 10.

5-percent increase overthe first half of 1983, it was less than the $112 billion exported infirst-half 1982 and was substantially below the $122 billion exported infirst-half 1981.) Economic growth in Western Europe was much slowerthan in the United States: Industrial production growth for OECD Europewas less than 4 percent between first-quarter 1983 and first-quarter1984, compared with increases for North America (Canada and the UnitedStates) 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. (Seechart 3.) For example, Mexico, our third largest trading partner,purchased only $5.7 billion of U.S. goods in the first half. Althoughthis was up from the $4.

4 billion exported in the first half of 1983, itwas still well below the $7.2 billion recorded for the same period in1982. Other important U.S.

trading partners with debt problems areArgentina, Brazil, and Chile. Several OPEC nations, in particularNigeria, also curbed imports, as oil revenues fell. The low level ofU.S.

merchandise exports was a key factor in the record $51.9 billionmerchandise trade deficit for the first half of this year. Along with the strong dollar, the growth in U.S. demand for importswidened the merchandise trade gap as the Nation led the recovery fromthe worldwide economic slump of 1980-83. First-half merchandise importswere $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-half1983, and nonoil imports rose sharply, by 33.4 percent, to $131.5billion. Moreover, the U.S. current account, which incorporates thebalances on both merchandise trade and services (including payments andreceipts of interest and dividends on international investments) set arecord deficit of $44.

1 billion in the first half, compared with adeficit of $12.5 billion for the same period a year earlier. In recent years, the nations of the Far East have carried on anincreasing volume of trade with the United States. Several of thesenations, such as Japan, South Korea, and Taiwan, have posted higheconomic growth rates, in part attributable to the strength of U.S.

demand for imports. In 1983, the nations of the Far East enjoyedgreater combined gross trade (merchandise imports and exports indollars) with the United States than did those of Western Europe. Duringthat year, 28.5 percent of U.S. gross foreign trade was carried on withthe nations of the Far East, compared with 20.8 percent in 1976.

Gross trade as a percentage of U.S. final goods production is ameasure of the importance of foreign trade to the goods sector of theeconomy.

Since 1970, this measure has increased substantially from 15.9percent to 28.1 percent by 1983. Import price developments Fuels and related products. Import prices for fuels and relatedproducts rose 0.5 percent in the first half, after falling 11.

8 percentduring 1983. The first-half price increase was the result of risingprices for petroleum products, unchanged crude oil prices, and a2.0-percent decline in natural gas prices. The drop in petroleum pricesin recent years reflects sluggish world economic growth, increasedsubstitution of other forms of energy for crude oil, and stepped-upconservation in the major industrialized nations. During the firsthalf, spot prices for many crudes were below the official OPEC prices,as several OPEC members attempted to maintain revenues by discountingprices and making sales in excess of their quotas.

Contrary to expectations, the Iran-Iraq conflict seems to havehelped depress world oil prices. It appears that attacks by those twonations on oil-bearing traffic in the Persian Gulf induced other OPECmembers to boost their output, which more than compensated for thecurtailments in shipments resulting from the attacks. In addition,plentiful oil stockpiles in the United States, Japan, and Western Europeacted as insurance against disruption of supplies and helped to easespeculation. Even so, the U.S. economic recovery stimulated demand for petroleumproducts, reversing a 5-year decline.

The Nation’s consumption ofoil products was up about 7 percent from the first half of 1983, whiledomestic production, spurred by decontrol, had risen 0.4 percent. Theresulting shortfall in oil supplies was met by imports, which were up 21percent over first-half 1983 levels. Early in 1984, heating oil demand and prices rose sharply as aresult of the unusually cold weather in the northeastern United States.

By June 1984, the U.S. average price for heating oil was $1.13 pergallon, compared with $1.06 in June 1983. Imports of heating oil surgedto meet the increased demand, and domestic refiners increased productionof distillate fuel.

As a result of the latter development, gasoline supplies expanded sharply, because refineries produce gasoline andheating oil simultaneously, regardless of the season. U.S. consumersreaped a windfall from the unexpected increase in gasoline supplies; inJune 1984, the average U.S. gasoline price (all types) was $1.

21 pergallon, down slightly from $1.26 per gallon in June 1983. When theimproved fuel efficiency of the Nation’s auto fleet is taken intoaccount, gasoline costs per mile driven for U.S. consumers have declinedsubstantially since 1980. The strong dollar also had a major effect on world crude oil pricesin the first half.

Specifically, the dollar’s appreciation againstthe currencies of our major trading partners meant that those nationsdid not reap the full benefit of the cuts in posted dollar prices foroil. In fact, buyers in several nations found that oil prices in theirown currencies actually rose in the first half, because of thedepreciation of those currencies against the dollar. This phenomenonfurther depressed world oil demand. U.S. oil imports continued to be predominately from non-OPECsources, as more oil was imported from sources in the Americas, such asMexico and Canada, and from other non-OPEC suppliers–primarily theUnited Kingdom, Norway, and Egypt–which have brought increasingly largeamounts of crude to world markets in recent years. During the firsthalf, the United States purchased 38 percent of its imported crude oiland petroleum products from OPEC sources, compared with 37 percent in1983, 42 percent in 1982, and 70 percent in 1977–the year of thegreatest volume of oil imports.

Leading suppliers in first-half 1984were Mexico, at 730 thousand barrels per day (bpd), Canada (647 thousandbpd), Venezuela (526 thousand bpd), Saudi Arabia (359 thousand bpd), andthe United Kingdom (357 thousand bpd). The decrease in natural gas prices reflects lower prices forimports from Canada, which supplies approximately 90 percent of totalU.S. imports of natural gas. Prices for Mexican pipeline gas andliquified natural gas shipments from Algeria were unchanged during thefirst half. Food. The food index represents 6.

6 percent of the all-importprice index. Imported food prices increased 3.1 percent in the firsthalf, 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-importprice index because of uncertainties in production and climaticconditions, and difficulties involved in shipping perishable products.

However, the first half of 1984 saw a continuation of an upward trendwhich began in mid-1982; the food index climbed 13.1 percent from June1982 through June 1984, with a rise of 1.24 percent during the first 6months of 1983. An important factor in the strong gain in first-half1984 was the harshness of the past winter, which reduced domesticsupplies and greatly stimulated import demand. Import prices for thefruits and vegetables food group jumped 8.6 percent during the first 6months of 1984. Rises in import prices for coffee, tea, and cocoa alsocontributed to the upward movement in the food index, which was onlypartially dampened by lower prices for fish.

The 8.6-percent increase in prices of fruits and vegetablecontributed significantly to the food index’s upward movement inthe first 6 months of 1984. This jump resulted from a 20-percent risein fresh vegetable prices in the first quarter, partially attributableto low U.S.

supplies during the winter months. Moreover, killing frostsin Florida and Texas in December 1983 and continued cold weather inearly 1984 damaged U.S. crops, especially citrus fruits, and resulted inextremely strong import demand. Tight supplies and growing world demandfor citrus fruits and juices continued throughout the first half of1984, while U.S. supplies of tomatoes and green vegetables made arelatively quick comeback from winter damage.

Although the vegetablegroup’s price index increased 20 percent in the first quarter, itshowed a 1.3-percent decrease in the second quarter. Price declines aretypical during the spring months, during which domestic supplies areabundant.

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 UnitedStates on imports of Veracrus citrus because of citrus canker. Prices for coffee, tea, and cocoa rose 4.7 percent during the firsthalf. Imported coffee prices increased 3.9 percent in the first 6months of 1984, following a 7.9-percent gain in all of 1983. Worldcoffee prices in the first half of 1984 moved above the establishedrange preferred by members of the International Coffee Organization(ICO).

(The ICO is an organization of 73 coffee producing and consumingnations which uses export quotas to stabilize global prices.) Worldcoffee demand was strong in the first 6 months of the year, with theresult that imports were about 38.4 million bags for the period fromOctober 1983 through May 1984, compared with 36.5 million bags for thesame period in the previous year. Quota increases by the ICO during thefirst half failed to dampen the price climb until a price peak wasreached on June 1, 1984. Conditions that spurred prices despite thelarger export quotas included: a fear of frost in Brazil; a West African crop that was less than anticipated; reductions in export shipments fromBrazil and Columbia early in the half; and the poor quality of lastyear’s Brazilian and West African crops. Additionally, a U.

S.crackdown on coffee smugglers which began in 198o continued into the newyear, further shifting demand to legal sources. Reduced production and increased speculation continued to boostcocoa prices in 1984.

Production of cocoa in West African countries wasdown substantially during the first half because of a severe, prolonged drought in the first quarter. The size of Brazil’s crop was alsoreduced by dry weather. A new international cocoa agreement aimed atstabilizing prices was discussed by the International Cocoa Council butnot concluded during the first half of the year. The continued upsurge in tea prices was due in large part to tightsupplies of raw teas. Prices of tea imported by the United Statesjumped 9.2 percent in the first 6 months of 1984, for a gain since June1982 of 63 percent. Shortages of raw tea reflect stagnant productionover the last 5 years, even while tea consumption rose steadily,particularly in India, the Soviet Union, and West Asia.

Anothersupply-limiting factor during the first half of 1984 was the IndianGovernment’s December 1983 ban on exports of certain types of teasto ensure adequate domestic supplies. In Sri Lanka, favorable weatherconditions tempered the effects of a strike by plantation workers andtea output was not affected to any substantial degree. Fish prices declined by 1.3 percent, moderating the upward movementof the food index during the first half.

A 2.4-percent price decreaseoccurred in the first quarter, although the index subsequently moved upby 1.1 percent in the second quarter. Abundant supplies of fresh fishresulted in a 0.9-percent decrease in price for that commodity in thesecond quarter. The 4.

8-percent first-quarter drop in shellfish pricesreflected increased shrimp supplies from Equador and Panama. Rocklobster tails also fell in price early in 1984. Crude materials. The crude materials index comprises productgroups such as wood, crude rubber, and metal scrap that are usedextensively as raw materials in manufacturing or construction. Theproduct principally responsible for the 4.1-percent increase in crudematerials import prices for the first half of 1984 was sulphate woodpulp, the most commonly used pulp in the world market, for which importprices rose 20 percent in the first 6 months of the year. Sulphate woodpulp is primarily used to produce packaging materials, which are ingreat demand as the result of robust growth in the U.

S. manufacturingsector. Imports were important in meeting the surging demand forsulpate wood pulp, as U.S.

pulp and paper industries approached fullcapacity utilization toward the end of the first half. Some shortagesoccurred as sulphate pulp supplies from Canada were reduced because oflabor disputes. Furthermore, U.S. supplies were disrupted during thefirst quarter when severe weather conditions hampered production andtransportation. Declining prices for other product groups, includingcrude rubber, wood, and crude minerals, partially offset the price gainfor suplhate wood pulp in the crude materials index.

Intermediate manufactures. Prices for intermediate manufacturersrose 1.7 percent in the first half, after rising 3.7 percent during allof 1983. These products include nonferrous metals, wood and corkmanufactures, textiles, iron and steel, glassware, paperboard, and manyother basic inputs to manufacturing processes. The United Statesimported $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 spurreddemand. Rising prices for iron and steel, nonferrous metals, and paperand paperboard were major contributors to the increase in import pricesfor intermediate manufactures. The 3.

6-percent hike in imported iron and steel prices led the risein the intermediate manufactures index. although the major U.S.integrated steel firms began to recover in the first half fromrecordbreaking losses during 1982-83, their gains were slowed by anunprecedented surge of imported steel. U.S. demand for sheet steel wasbuoyed by increased sales of autos and appliances, but production ofheavier items such as plate, structural, and bar steels continued at lowlevels. Fully integrated U.

S. steelmakers, who generally have higherproduction costs than foreign producers, continued to heavily discountposted prices to gain orders. While domestic production was up 28percent 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 theyear-earlier period. A significant portion of the increase in steelimports came from Third World nations. Many Third World suppliers candeliver steel at prices well below the discounted prices offered by U.

S.firms. During the first half, steel supplies from Japan and the EuropeanCommunity (EC) continued to be limited by trade agreements negotiated in1982. The debt situation of several nations which are steel producers hasbeen a major factor in the increased shipments of Third World steel inrecent years. In particular, Mexico, Argentina, and Brazil–all majorsteel suppliers–have aggressively sought U.S. sales to obtain foreignexchange for servicing their international debts.

To reduce the volume of imports, the U.S. steel industry petitionedthe U.S. International Trade Commission (ITC) for relief during thefirst half of the year. In June, the ITC ruled that the domesticindustry was being injured by imports in five product groups accountingfor approximately 70 percent of the value of all steel imports.

TheCommission recommended 5 years of import quotas and additional tariffsto aid the domestic steel industry, conditional on cost-cutting andmodernization steps by U.S. producers. Some foreign steelmakers steppedup shipments during the first 6 months of the year in anticipation ofquotas or tariffs.

Others, fearing that they would be charged withselling steel below cost, raised their prices to the United States. The major U.S. steelmakers are also losing market share to domesticminimills. Using modern equipment, minimills convert steel scrap andsemifinished slabs into products such as bars, rods, and lightstructurals. Their production costs, including labor and materials, areapproximately one-third less than those of integrated plants. Minimillsnow supply about 20 percent of all domestic steel shipments, and theirshare is rising.

Most minimills are located in Southern or BorderStates. Other factors have curbed demand for steel in this country.Significantly higher spending on foreign-made capital goods continues toerode 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. steelfirms have increasingly sought mergers with domestic partners. InMarch, the Justice Department gave approval to the proposed merger ofRepublic Steel and LTV Corporation.

The company formed by the merger,LTV Steel Company, will be the Nation’s second largest steelproducer. It plans to achieve production economies by consolidating thebest parts of the two firms and discarding less-efficient divisions. Itshould be noted, however, that when U.S.

Steel and National Steelannounced a planned merger in the first half, the Justice Departmentvetoed this action for antitrust reasons. Import prices for nonferrous metals increased 1.6 percent in thefirst half of 1984, led by rising prices for zinc and cobalt.

Imports ofthese metals (in dollar value) were up 16 percent in the first half fromthe same period in 1983. Falling silver and copper prices partiallyoffset these increases. Because nonferrous metals, which also includednickel, lead, and molybdenum, are used extensively as basic inputs inmany major manufacturing processes, their prices are heavily affected bythe level of general economic activity.

The buoyant U.S. economicrecovery also had a positive effect on prices of those metals, such aszinc, which are used principally in the production of such consumerproducts as housing and autos. However, metals for which demand isdependent on the level of capital spending (such as copper) orspeculation (silver) did not fare as well. Prices for nonferrous metalsalso were affected by the strong dollar and user resistance to higherprices. Dollar-denominated metal prices have been eroded by the rise ofthe dollar, while metal users, instead of passing along higher rawmaterial costs in the form of higher prices, are increasingly reactingto price increases by cutting consumption or switching to substitutematerials.

Zinc prices rose 14.6 percent in the first half. In March, priceson world markets reached near-record levels of more than 50 cents perpound before declining slightly. As indicated earlier, zinc demand wasboosted by increased activity in the auto and housing industries.Import prices for cobalt rose 49 percent in the first half of 1984 dueto a new marketing strategy by which Zaire and Zambia joined to restrictsupplies of cobalt for export.

Together, these two countries supplytwo-thirds of U.S. cobalt imports. This action, in combination withgrowing U.S. demand for cobalt, caused the run-up in prices. The domestic copper industry had a particularly difficult timedealing with a flood of low-cost copper imports from Chile, Zaire, andZambia. With this industrial metal in abundant supply on world markets,prices remained depressed: U.

S. producer prices fell to an average of 65cents per pound by June, down 15 cents from a year earlier. Productioncosts for some U.S. producers ranged between 75 and 85 cents per pound,while production costs in Chile, the world’s largest copperproducer, were around 46 cents per pound. Domestic producers also use alower grade of ore than that available in other major producing nations,yielding one-third or less copper. During the first half, the ITC ruledfavorably on the U.

S. copper producers’ petition for import relief,recommending either the imposition of quotas or higher tariffs onimported unwrought copper. A 2.

7-percent decline in import prices for cork and woodmanufactures moderated the increase in prices for the intermediatemanufactures group. The decrease in cork and wood manufactures pricesresulted from a 3.7-percent drop in prices for miscellaneous woodmanufactures and a 1.

9-percent decline in prices for plywood andveneers. Products from Southeast Asia account for most of the weight inthe index for plywood and veneers. Formerly, Indonesia had been a majorsupplier of logs to mills in Korea, Taiwan, and the Phillipines, whichin turn exported finished products such as plywood to the United States.However, Indonesia has constructed additional mills in recent years, andnow is exporting the finished products. The resulting price competitionbetween Indonesia and the other nations of Southeast Asia boostedsupplies and contributed to lower prices in 1984. Machinery and transport equipment.

This index, which accounts for25.4 percent of the weight of the all-import price index, was unchangedduring the first half, after rising 2.4 percent in 1983. Some $58.5billion of this merchandise was imported during the first half, up 44percent from $40.5 billion in the first half of last year, as theeconomic recovery fueled demand.

This substantial increase was a majorfactor in widening the first-half U.S. merchandise trade deficit.

Approximately half of the dollar value in this index consists ofconsumer products such as autos, videocassette recorders, and householdappliances. As consumer spending grew, purchases of these types ofitems rose. The index also includes many important components ofmanufacturing processes, such as electric motors, air pumps,compressors, valves, and roller bearings, for which demand grew withU.

S. manufacturing output. However, the continued appreciation of thedollar 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 autoexports to the United States were factors affecting import prices.Buoyant consumer confidence, higher levels of employment, stablegasoline prices, and the improving economy boosted first-half retailauto 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), downfrom 26.

7 percent from the same period a year earlier. Retail sales wererestrained by short supplies of both imported and domestic autos:Supplies of imported Japanese cars were held down by the quotas, whiledealer inventories of domestic autos stood at 48 days of sales on June15, the lowest level in 10 years. Sales of larger cars were especiallybrisk and shortages developed for many domestic car models. In April, the quotas on Japanese auto shipments to the UnitedStates were raised to 1.85 million units per year from 1.68 million. Thequotas, scheduled to expire in April 1985, have been a source of upwardpressure on prices of Japanese cars. In the first half, Japanese autosaccounted for 17 percent of all U.

S. new car sales, down from 22 percentin first-half 1983. Because of the quotas, Japanese automakers wereunable to maintain or increase their market share and fully exploit acost advantage estimated at $1,500 to $2,000 per car. Instead ofcompeting on price, Japan’s carmkers concentrated on sellinghigher-valued, option-laden cars in the United States–in effectproviding a pricing floor for the domestic industry. As a result ofthis change in the mix of imported automobiles, the unit value index forautomobiles increased at a much sharper rate than did the price index.(See chart 4.

) The price index adjusts for quality changes andmaintains a constant mix of goods; price is the only fluctuating variable. The unit value index reflects the shift to higher valuedtop-of-the-line models, as well as ‘pure’ price changes. Withsupply restricted by the quotas, inventories of Japanese cars dropped to16 days of sales on June 30, 1984, compared with 27 days of sales on thesame date in 1981, the first year of the quotas. After 4 years of cost cutting which lowered their breakeven pointsubstantially, U.S. automakers posted record combined profits in thefirst half of 1984.

U.S. firms also benefitted from an increase indemand for midsize and large cars. Sales of subcompact models were downslightly from first-half 1983 levels, due to shortages of Japanesemodels and consumer preference for larger cars. Several Europeancarmakers, selling higher-valued models, set sales records during thefirst half.

The trend toward internationalization of automobile productionpersists. In particular, some Japanese auto firms further developedproduction facilities in North America to ensure continued access to theprosperous U.S. auto market. U.S. firms also continued to make plansfor joint production of subcompact cars with Japanese and South Koreanpartners.

Most notably, General Motors and Toyota received permissionfrom the Federal Trade Commission to proceed with their joint venture toproduce small cars in California. Ford and Mazda also announced theirintention to build an assembly plant in Mexico to manufacture cars forthe U.S. market.

The price index for metalworking machinery was heavily affected bylarge supplies of imports, falling 1.9 percent in the first half. Thebulk of the value in this index cosists of machine tools–power-drivendevices used to cut, shape, or form metal in the production of durablegoods. The 1983 U.S. trade deficit in machine tools was $540 million.

While this compared favorably with the $638 million deficit in 1982, itwas quite large in historical terms and occurred despite sluggishdomestic demand. In recent years, U.S.

machine tool makers have had anincreasingly difficult time matching the prices offered by competitorsin Japan, West Germany, Taiwan, the United Kingdom, and Switzerland.During the first half, U.S. producers began to recover from the worstdownturn many had endured since the 1930’s.

Because of recessionand foreign competition, shipments of U.S.-made machine tools droppedalmost two-thirds between 1981 and 1983.

Japanese imports accounted for nearly half of the 36-percent shareof the U.S. market taken by imports last year, up from 28 percent in1982, and their penetration in advanced machine tools is much greater.For example, during the first half of 1983, some 78 percent of themachining centers sold in the United States were Japanese-made. The intense foreign competition continued to force major changes inthe structure of the U.S. machine tool industry throughout the firsthalf of 1984, as firms withdrew, merged, entered joint ventures withforeign producers, or moved operations offshore to cut costs. Domesticfirms continued to seek relief from lower-priced imports, and as thefirst half ended, the National Machine Tool Builders’ Associationpetition for import relief on the basis of national security underSection 232 of the 1972 Trade Expansion Act was still pending.

Import prices for electric machinery and equipment fell 4.9percent, despite brisk demand for new appliances for residential housingand electronic components for military equipment. In 1980, the UnitedStates posted a trade surplus of $2.

2 billion for electric machinery andequipment, but in 1983, it registered an $892.4 million trade deficit.The decline in this index was keyed by falling prices for electroniccomponents and electric circuit switching equipment. The price decreasein electric circuit switching equipment imported from Europe ispartially attributable to the dollar’s appreciation against suchcurrencies as the franc, the Deutschemark, and the pound sterling.

Atthe same time, Japan, Taiwan, and Korea have increased production ofelectronic components such as integrated circuits, transistors, anddiodes. This increased production resulted in economies of scale andproduction efficiencies which tended to lower prices. Finally,component prices were further depressed because technological advanceshave made metal oxide transistors competetive with bispolar transistors.Although prices of metal oxide transistors have fallen, they stillremain 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 formiscellaneous manufactured products increased 1.5 percent in the firsthalf of 1984. This category comprises almost 10 percent of theall-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 upwardmovement in the index for miscellaneous manufactures. U.S.

demand forthese products was strong as high consumer spending levels during 1983continued into the first half of 1984. This demand was increasingly metby imports, which surged from $15.6 billion during the first 6 months of1983 to $21 billion in the same period this year.

This represented a34.6-percent increase, compared to a first-half 1982-83 gain of only11.4 percent. During the first 6 months of 1984, imported clothing and footwearprices exerienced similar increases of 3.

1 percent and 3.5 percent,respectively. Clothing and shoes experienced high retail sales growthin the United States throughout 1983 and into 1984. During the firsthalf of this year, consumer outlays for clothing and shoes averaged over$139 billion (seasonally adjusted annual rate), compared with $127.0billion for all of 1983 and $118.8 billion in 1982. Limited supplies of some apparel items contributed to higher pricelevels, in part because of Federal tightening of import controls andquotas and a crackdown on illegal and counterfeit imports of apparel.(For footwear, the possibility of additional controls was lessened whenthe International Trade Commission determined in June 1984 that importsof nonrubber footwear were not causing serious injury to the domesticindustry.

) Higher raw material costs experienced by foreign clothingand shoe manufacturers also were reflected in increasing prices duringthe half. These included steep hikes in the price of leathers over thepast year, and moderate gains in the prices of cotton and manmadefabrics. The index for photographic apparatus and supplies, optical goods,and watches and clocks moved up by 2.4 percent in the first half. Pricesfor photographic apparatus and equipment advanced 3.4 percent as strongconsumer demand reversed a downward trend that began early in 1982 inresponse to product innovations. Optical lenses and watches alsocontributed to the increase in the index, with gains of 6.

4 percent and10.3 percent, respectively. Price of these products had declined during1981, 1982, and 1983 because of steep competition among suppliers andreduced production costs. The higher quality watch market showedparticular strength this year. Grain.

Export prices for gain rose 1.7 percent in the first 6months of 1984 after a 16.8-percent advance in 1983. The price movementfor the first half resulted when substantial price increase for wheatand feed grains in the second quarter dominated the more moderate pricedeclines registered in the first quarter. Increases in market prices inMay and June reflected unfavorable weather conditions in the UnitedStates and Soviet Union. U.S.

grain exports represent over 7 percent ofthe value of all U.S. merchandise exports, and consist primarily ofwheat, corn, and sorghum. Grain exports totaled $7.8 billion in thefirst 6 months of 1984, compared with $7.

4 billion for the same periodin 1983. Prices for exported wheat edged upward by 2.6 percent in the firsthalf of 1984. Severe flooding in the Midwest this spring resulted inerosion, planting, and transportation difficulties, and placed upwardpressure on wheat prices despite huge U.S. stockpiles. Additionally,speculation in the grain market centered around a possible reduction inSoviet grain production as the result of a spate of bad weather in thatcountry. Demand for U.

S. wheat increased during the first half, in partbecause of severe drought in West African countries, but export pricerises were moderated by increased production in other countries such asCanada, European Community countries, Australia, and India. Tradeagreements concluded with the Soviet Union and the People’sRepublic of China in 1983 helped stabilize U.S.

exports to thesecountries in 1984. The U.S. Payment-in-Kind (PIK) program, initiated in January 1983to reduce surplus grain supplies and stabilize U.S. commodity prices,affected 1983 and 1984 soybean and corn prices much more than those forwheat. Huge wheat stockpiles were not greatly reduced by the program,partially because increases in yields per acre in 1983 kept outputlevels high. PIK benefits were reduced in 1984 and fewer farmerselected to enroll, with the result that 60 percent of grain acreage wasincluded in surplus reduction programs, compared with 86 percent in1983.

In a separate effort to draw down large wheat supplies, the U.S.Department of Agriculture announced a new program that provides wheatstocks on a competitive basis to private exporters for resale todrought-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 ofcorn were reduced by the PIK program and the 1983 drought, and thisyear’s spring floods in the Midwest disrupted the planting of newcrops. Growing demand for high fructose corn syrup contributed to theupward trend in corn prices, as the U.S. beverage industry increasinglychose this corn product as a substitute for sugar. Prices for other feed grains, including sorghum and barley, and forsoybeans, also rose during the first 6 months of 1984. Thesecommodities are substitutes for corn, and usually demonstrate similarprice movements. Sorghum was up slightly by 1 percent, barley pricesrose 2.

8 percent, and prices for exported soybeans (soybeans areincluded in the crude materials index) advanced 5.6 percent. Thesubstantial gain in soybean prices in the first half reflected tightdomestic supplies following the summer drought of 1983, and dry weatherin Brazil in 1984. Even though soybean prices had risen more than 35percent in 1983, strong demand for soybean oil in response to shortagesof other vegetable oils pushed up prices even further during the first 6months of this year. Demand for soybean meal decreased over the same period, following asubstantial price jump in the fall of 1983. The decline in prices ofanimal feeds, which are included in the food index, tended to moderatethe first-half advance in that index. Crude materials. The 5.4-percent price rise for crude materialscontributed significantly to the increase in the all-export price indexthis half, as such materials represent almost 11 percent of theall-export index. Demand for these products, which are used in theearly stages of production, increased sharply as worldwide industrialproduction began to pick up in the first half of 1984. U.S. exports ofcrude materials during the period were $11 billion, an 18.2-percentincrease 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-percentsurge for pulp and waste paper, and a 7.7-percent gain in oilsees ledthe first-half increase in the crude materials index. U.S. export prices for raw hides and skins have soared 52 percentsince the beginning of 1983, following declines in 1981 and 1982.Droughts in 1982 and 1983 led to smaller herds and lower slaughter ratesin New Zealand, Australia, and Argentina, which in turn created a strongworld demand for U.S. hides during 1983 and the first half of 1984. Inrecent years, trends away from beef consumption in the industrialnations have also reduced available world supplies of cattlehides. Itis 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 grewsignificantly as those countries’ sales of finished leather goodsto this country flourished with the economic upturn. Total U.S. exportsof hides and furskins in the first 6 months of 1984 were 59 percentabove those for the same period in 1983. U.S. furskin sellers tookadvantage of a demand resurgence in Europe by raising prices on somegrades. Exported furskin prices edged upward by 5.5 percent in thesecond half of 1983, and then jumped 11.7 percent during the first halfof 1984 after dropping more than 30 percent from December 1980 to June1983. Export prices for pulp and waste paper advanced more than 15percent this half, driven by a 25-percent leap in prices for sulphatewood pulp and moderated by declines in waste paper prices. Thecombination of strong domestic demand and additional purchases in thefirst half by China, Japan, and some European nations caused the rapidprice increases for sulphate wood pulp. The strong demand stemmed fromincreased manufacturing activity, because the primary use for sulphatepulp is for packaging items. U.S. exports of paper base stocks,including wood pulp, were 14 percent higher in the first 6 months of1984 than in the same period in 1983. A 5-percent gain in cotton prices was the reason for the2.0-percent rise in the textile fibers index, which continued an upwardtrend begun in early 1983. (U.S. export prices for cotton had alreadyrisen more than 30 percent from December 1982 through December 1983.)The advance in cotton prices reflects rapidly rising world consumptionlevels in the 1983-84 marketing year (season beginning in August) in theface of world production levels that have been declining since the1981-82 marketing year. Consumption is up as the result of increased useof cotton in apparel, and because of sharp rises in the use of cottonproducts 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 worlddemand. U.S. exports were up 38 percent in the 1983-84 marketing yearover those for the same (August through April) period in the previousyear. The major buyers of U.S. cotton in the first half were Japan andthe Republic of Korean. While almost all countries importing cottonfrom the United States increased their purchases in 1983 and 1984, someAsian nations, such as Hong Kong and Taiwan, did so at higher rates astheir manufacture and export of clothing increased sharply in responseto the economic upturn in this country and some European nations.cotton price hikes were moderated by sharp production increases inMainland China, and by smaller rises in Soviet and Mexican cottonoutput. Fat and oils. Although the fats and oils export price indexrepresents just under 1 percent of total U.S. exports, its 34.8-percentsurge during the first half was responsbile for 15 percent of the2-percent rise in the all-export price index. The prices of soybean oiland animal fats and oils showed substantial gains in the second quarterof 1984. Prices were driven up when unfavorable weather conditions inthe Midwest this spring caused shortages of U.S. soybean oil.Additionally, tight supplies of palm, coconut, and sunflower seed oil inthe Far East and Malaysia placed upward pressure on prices, becausesoybean and animal oils are close substitutes for these other vegetableoils. Prices for animal oils were further pushed up by growing demandfor soaps and cosmetics, two products in which these oils are used. Chemicals. Export prices for chemicals rose 1.1 percent during thefirst 6 months of the year, reflecing higher prices for agriculturalchemicals and medicinal and pharmaceutical products. U.S. exports ofchemicals in the first half were above year-earlier levels, and themajor U.S. chemical firms recorded much-improved profits for the sameperiod, with several posting record second-quarter profits. In domestic and overseas markets, first-half sales of agriculturalchemicals such as fertilizers and pesticides were up sharply fromyear-earlier levels. Such factors as the continuing farm recovery inthe United States, the curtailment of last year’s PIK program thatreduced acreage plantings, and good weather in major agricultural areasaround the world were responsible for increased sales of pesticides.Exports to Europe were improved, as were sales in Pacific Rim nationssuch as China, New Zealand, and Indonesia. In recent years, U.S. firmshave made significant advances in pesticides which have resulted in moreeffective, less toxic, and easier-to-apply products. The Nation has historically posted large surpluses in internationaltrade of chemicals. In recent years, however, the surpluses have begunto shrink, falling from $10.4 billion in 1982 to $9.0 billion in 1983and to $4.2 billion in the first half of 1984. This trend isattributable to the strong dollar and to increasing world chemicalproduction capacity. Several Third World nations, especially thosethat are major oil exporters, have invested heavily in plants andequipment for chemical production. Oil producing nations have acomparative advantage in the production of petrochemicals, resultingfrom the ready availability of low-cost petroleum feedstocks. Inaddition, many developing countries are exporting chemicals to theUnited States on a duty-free basis under the Generalized System ofPreferences of the U.S. Trade Act of 1974. Such duty-free importsaccounted for more than half of the Nation’s total 1983 imports inthe benzenoid intermediate category (in tons) and for 96 percent ofimports of phthalic anhydride. Intermediate manufactures. Exports prices for intermediatemanufactured produces rose 1.3 percent in the first half, after rising1.8 percent in 1983. The first-half increase was paced by a 6.3-percentrise in export prices for paper and paperboard products, which waspartially offset by a 1.0-percent decline in prices for nonferrousmetals. In recent years, U.S. exports of intermediate manufacturedgoods have declined steadily. In 1983, the nation exported $14.9billion of these goods, down from $16.7 billion in 1982 and $22.3billion in 1980. The drop in export value is largely due to decliningexports of iron, steel, and nonferrous metals. The export price index for paper and paperboard products indexoften displays volatile movements, because demand for these products isclosely tied to conditions in the packaging industry. As increaseddemand for packaging materials drove the capacity utilization rate inthe U.S. packaging industry to 97 percent in the first half, prices forpaper and paperboard products quickly rose. The advance in export prices for paperboard and paperboard productswas led by a 15.6-percent increase in the index for kraft paper andpaperboard. World demand for these products was strong, and severalU.S. producers posted record sales. Kraft is a heavy-duty paper which,in unbleached form, is used for shopping bags and many otherapplications. Price increases were recorded for all bleached andunbleached 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 increasedsharply. This, combined with a strike in the major producing region ofCanada which reduced output and tightened supplies, served to drive upworld prices. Because production of both kraft pulp and paper is highlycapital intensive and is only efficient on a large scale, additionalcapacity cannot be brought on-line easily over a short period. Higherprices for kraft pulp raised input costs for U.S. producers of kraftproducts such as linerboard, packaging cartons, and shipping sacks. Prices for printing and writing paper advanced 5.6 percent in thefirst half. Price rises were recorded for both coated and uncoatedpapers. Demand for printing papers was buoyed by advertisingexpenditures, particularly increases in magazine advertising, while thegrowing use of office and home automation products in the majorindustrialized nations boosted demand for both printing and writingpapers. The 1.0-percent drop in nonferrous metals prices in the first halffollowed a 1.0-percent rise in this index for all of 1983. In recentyears, exports of many of these metals have fallen in response to theavailability of lower-cost foreign supplies, substitution of alternativematerials, and decreased demand from basic industries. The decline inthe index was led by a 4.4-percent drop in the aluminum index, which waspartially offset by a 3.7-percent rise in silver export prices and a2.3-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 ofbasic ingots. At the start of 1984, the major U.S. producers wereoperating at near full capacity, but by midyear three of these firms cutproduction because of lower prices. In recent years, aluminum hasincreasingly been used as an instrument of speculation. In Europe,aluminum is traded on the London Metals Exchange (LME), and beginning inDecember 1983, the Commodities Exchange in New York began to tradealuminum. Prices for the lightweight metal fell to 53 cents per poundby 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 fromlevels reached earlier in the year. Growing world aluminum inventoriesfueled the ingot price decline, although prices for more expensivealuminum 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 thefirst 6 months of 1984 were 8.4 percent (measured in tonnage) belowthose recorded for the same period in 1983, while imports were up 41.4percent. The strong dollar was an important factor in both the drop inexports and the rise in imports. Silver prices, normally very volatile, were relatively stableduring the first half. Prices were heavily affected by the strongdollar and rising interest rates, which tended to shift speculativeactivity from silver to dollar-denominated investments. The otherdeterminant of silver pricing, industrial usage, failed to increaseappreciably during the first half. U.S. exports of the white metalduring the first 5 months of 1984 were far below the 1983 pace, whileimports continued to exceed exports by large amounts. Lead prices and output continued at reduced levels during the firsthalf. Lead exports for the period were less than half of first-half1983 levels, while domestic production had fallen slightly. In recentlyyears, world demand for lead has been curbed by the substitution ofplastics, while use of the metal in storage batteries, solders, andgasoline has decreased significantly. Machinery and transport equipment. Machinery and transportationequipment 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 6months of 1984, after rising 2.2 percent for all of 1983. Most majorproduct groups within the machinery and transportation equipment indexshowed moderate price gains and sales increases for the first half. Thevalue of U.S. exports of machinery and transportation equipment was 6.6percent greater than in the same period in 1983. Some product groups,such as computers, electronic components, and telecommunicationsequipment, require a high degree of technical sophistication, and U.S.firms have a comparative advantage in their manufacture. However, inother product groups, such as metalworking, textile, and leathermachinery, export sales and prices continued to be depressed by thestrength of the dollar. The export price index for road vehicles and parts is the largestcomponent of the machinery and transportation equipment index. A2.7-percent rise in prices for parts for motor vehicles was largelyresponsible for the index’s 1.9-percent advance this half. Aslight 0.3-percent decrease in the price of passenger motor vehiclespartially offset this gain. The value of U.S. exports of road vehiclesand 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 capacityutilization in the U.S. automobile industry, thus influencing the pricemovement forthe half. To stay competitive in the world market, theindustry implemented various cost controls which moderated the priceadvance. Export demand for automobile parts was strengthened by therecent trend toward internationalization of automobile production, asadditional parts were shipped to U.S. subsidiaries in Mexico and Canadaduring 1983 and 1984. The “other transport” index, which excludes military andcommercial aircraft, moved forward by 4.7 percent in the first half.The general aviation aircraft component rose 4.1 percent and prices ofparts for aircraft and spacecraft were up 5.9 percent. The priceincreases in spacecraft parts reflect the highly sophisticated nature ofthese products, which limits the number of firms capable of supplying anexpanding world market. The United States maintains technologicalsuperiority in the production of high quality aviation parts, and U.S.manufacturers, even while operating at near-capacity, were unable tofully 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 ableto pass on production cost increases because of the inelasicity ofdemand for aircraft and aerospace replacement parts. World demandcontinued to be depressed for general aviation aircraft, but a pick-up adomestic demand in 1984 and vitality in the export demand for turbojet aircraft led to higher prices. General industrial machinery accounts for 14 percent of themachinery and transport equipment index. Prices for this product groupincreased 2.1 percent in the first half of 1984 after advancing 1.7percent in 1983. The items primarily responsible for the upwardmovement included pumps and compressors, for which prices jumped 9.2percent, and packaging and weighting equipment, up 2.4 percent. Mildprice declines occured in cooling equipment, centrifuges, poweredindustrial trucks, and ball and roller bearings. Total exports ofgeneral industrial machinery were basically stable for the year, withfirst-half sales of nearly $4.1 billion, compared with slightly morethan $4.05 billion for the same period in 1983. The economic upturn reached some areas of the capital goods sectorin Canada, Europe, and the Far East, boosting demand for generalindustrial products. Expanded residential and commercial construction,expecially in Japan and South Korea, increased demand for U.S.-made aircompressers, pumps for liquids, valves and cocks, and heating andcooling equipment. All of these products had some price hikes duringthe half except for cooling equipment, for which a 0.7-percent decreasewas 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. packagingand weighing equipment. Nonetheless, U.S. manufacturers of general industrial machinery andparts 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 downwardby 0.4 percent in the half. Debt problems of purchasers Mexico andBrazil also acted to depress demand and prices for U.S. generalindustrial machinery. Moreover, slack demand for general industrialequipment in the European chemical and steel industries exerted downwardpressure on U.S. export prices this half. First-half price increases in other major product groups included a1.6-percent gain in power generating machinery and equipment; a1.1-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 majorproduct group in the machinery and transport equipment index toexperience a price decline in the first half of 1984. Export pricesfell 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 therapid technological advancement and resulting lower production costs forsuch items as typewriters calculators, and computer terminals. Pricecuts also reflect the fierce competition among domestic and foreignsuppliers (particularly Japan) in these expanding market. Theintroduction of new products placed further downward pressure on theprices 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 thelevel recorded in the first 6 months of 1983.

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