Globalization and U.S. International Trade Cletus C. Coughlin Vice President and Deputy Director of Research Federal Reserve Bank of St. Louis Professors’ Conference – February 21, 2008 Note: The views expressed are mine and do not necessarily reflect official positions of the Federal Reserve System.

Nominal Exports, Nominal Imports, and Nominal GDP Figure 1 Nominal Exports, Nominal Imports, and Nominal GDP 1947-2007 Y/Y Percent Change Nominal Imports Nominal Exports Percent Nominal GDP Source: BEA, HAVER Analytics.

Exports Price Index, Imports Price Index, and GDP Deflator Figure 2 Exports Price Index, Imports Price Index, and GDP Deflator 1947 – 2007 (2000=100) Imports Price Index GDP Deflator Index Exports Price Index Source: BEA, HAVER Analytics.

Exports Price Index, Imports Price Index, and GDP Deflator Figure 3 Exports Price Index, Imports Price Index, and GDP Deflator 1947 - 2007 Y/Y Percent Change Imports Price Index Percent Exports Price Index GDP Deflator Source: BEA, HAVER Analytics.

Richard Fisher – President, FRB Dallas “[T]he old models simply no longer apply in our globalized, interconnected and expanded economy…By spurring productivity and fomenting tectonic economic changes, globalization has acted as a tailwind for the Fed’s – and other central banks – efforts to hold down inflation.” Source: “Coping with Globalization’s Impact on Monetary Policy,” speech at 2006 ASSA Meeting, Boston, MA, January.

U.S. Results BIS Domestic Gap Foreign Gap Time Period 0.22 (1985 – 2005) (0.08) -0.13 0.61 (1985 – 2005) (0.08) (0.09) Board 0.140 -0.048 (1985 – 2005) (0.087) (0.098) 0.179 -0.157 (1977 – 2005) (0.052) (0.087)

Total Exports to Total Imports and Figure 4 Price Index Ratios: Total Exports to Total Imports and Total Exports to Non-Petroleum Imports 1967 - 2007 PEX/PNon-Petro IM Ratio PEX/PIM Source: BEA, HAVER Analytics.

Real Exports, Real Imports, and Real GDP Figure 5 Real Exports, Real Imports, and Real GDP 1947 - 2007 Y/Y Percent Change Real Imports Real Exports Percent Real GDP Source: BEA, HAVER Analytics.

Nominal Exports, Nominal Imports, Figure 6 Nominal Exports, Nominal Imports, and Nominal (Exports + Imports) as a % of GDP 1947 – 2007 EX+IM/ GDP IM/GDP Percent EX/GDP Source: BEA, HAVER Analytics.

U.S. Balance on Trade as a % of GDP Figure 7 U.S. Balance on Trade as a % of GDP 1960 – 2006 Percent Source: BEA, HAVER Analytics.

Figure 8 U.S. Balance on Trade 1960 – 2006 $ Millions Source: BEA, HAVER Analytics.

U.S. Balance on Trade in Goods Figure 9 U.S. Balance on Trade in Goods 1960 – 2006 $ Millions Source: BEA, HAVER Analytics.

Figure 10 U.S. Balance on Services 1960 – 2006 $ Millions Source: BEA, HAVER Analytics.

Nominal Trade-Weighted Exchange Value of US$ vs. Major Currencies, Figure 11 Nominal Trade-Weighted Exchange Value of US$ vs. Major Currencies, Jan 2003 – Jan 2008 Monthly Averages Avg, 3/73=100 Source: Federal Reserve Board, HAVER Analytics.

Real Exports and Real Imports as a % of Real GDP Figure 12 Real Exports and Real Imports as a % of Real GDP 1947 – 2007 IM/GDP EX/GDP Percent Source: BEA, HAVER Analytics.

Agricultural Exports Price Index, Non-Ag Exports Price Index, Figure 13 Agricultural Exports Price Index, Non-Ag Exports Price Index, and Services Exports Price Index 1968 – 2007 (2000=100) Agricultural Goods Services Non-Ag Goods Index Source: BEA, HAVER Analytics.

Agricultural Exports Price Index, Non-Ag Exports Price Figure 14 Agricultural Exports Price Index, Non-Ag Exports Price Index, and Services Exports Price Index 1968 – 2007 Y/Y Percent Change Agricultural Goods Percent Services Non-Ag Goods Source: BEA, HAVER Analytics.

Figure 15 Real Agricultural Exports, Real Non-Ag Exports, and Real Services Exports 1968 – 2007 Y/Y Percent Change Agricultural Goods Non-Ag Goods Percent Services Source: BEA, HAVER Analytics.

Petroleum Goods Imports Price Index, Non-Petro Goods Imports Price Figure 16 Petroleum Goods Imports Price Index, Non-Petro Goods Imports Price Index, and Services Imports Price Index 1968 – 2007 (2000=100) Petroleum Goods Index Services Non-Petro Goods Source: BEA, HAVER Analytics.

Petroleum Goods Imports Price Index, Non-Petro Goods Imports Price Figure 17 Petroleum Goods Imports Price Index, Non-Petro Goods Imports Price Index, and Services Imports Price Index 1968 – 2007 Y/Y Percent Change Petroleum Goods Index Non-Petro Goods Services Source: BEA, HAVER Analytics.

Non-Petro Goods Imports Price Index and Services Imports Price Index Figure 18 Non-Petro Goods Imports Price Index and Services Imports Price Index 1968 – 2007 Y/Y Percent Change Index Non-Petro Goods Services Source: BEA, HAVER Analytics.

Figure 19 Real Petroleum Imports, Real Non-Petro Imports, and Real Services Imports 1968 – 2007 Y/Y Percent Change Petroleum Goods Non-Petro Goods Percent Services Source: BEA, HAVER Analytics.

Export Shares (Nominal Terms): Figure 20 Export Shares (Nominal Terms): Agricultural Exports, Non-Ag Exports, and Services Exports 1967 – 2007 Non-Ag Goods Percent Services Agricultural Goods Source: BEA, HAVER Analytics.

Export Shares (Real Terms): Figure 21 Export Shares (Real Terms): Agricultural Exports, Non-Ag Exports, and Services Exports 1967 – 2007 Non-Ag Goods Percent Services Agricultural Goods Source: BEA, HAVER Analytics.

Import Shares (Nominal Terms): Figure 22 Import Shares (Nominal Terms): Petroleum Imports, Non-Petro Imports, and Services Imports 1967 – 2007 Non-Petro Goods Percent Services Petroleum Goods Source: BEA, HAVER Analytics.

Import Shares (Real Terms): Figure 23 Import Shares (Real Terms): Petroleum Imports, Non-Petro Imports, and Services Imports 1967 – 2007 Non-Petro Goods Percent Services Petroleum Goods Source: BEA, HAVER Analytics.

Manufacturing and Private Services Employment Figure 24 Manufacturing and Private Services Employment as a % of Total Employment 1948 – 2006 Private Services Percent Manufacturing Source: BEA.

Value Added by Industry: Figure 25 Value Added by Industry: Manufacturing and Private Services as a % of GDP 1947 – 2006 Private Services Percent Manufacturing Source: BEA.

Real Value Added by Industry: Figure 26 Real Value Added by Industry: Manufacturing and Private Services as a % of GDP 1987 – 2006 Private Services Percent Manufacturing Source: BEA.

Chain-Type Price Indexes for Value Added: Figure 27 Chain-Type Price Indexes for Value Added: Manufacturing and Private Services 1947 – 2006 (2000=100) Private Services Manufacturing Index Source: BEA.

U.S. Exports – Industrial vs. Developing Countries Figure 28 U.S. Exports – Industrial vs. Developing Countries 5+ Year Averages 1981-1985 1986-1990 1991-1995 58% 63% 58% 36% 40% 41% China 4% China 4% India 2% China 4% India 2% India 1% FSU 2% FSU 2% FSU* 3% *Former Soviet Union 2001-2006 1996-2000 54% 56% 46% 43% China 9% China 5% India 2% India 1% FSU 2% FSU 1% Source: IMF Direction of Trade Statistics Yearbooks.

(5+ year averages ranked by $ of exports) Table 1 Top 10 U.S. Export Partners (5+ year averages ranked by $ of exports) 1981-1985 Canada Japan Mexico United Kingdom Germany Netherlands Saudi Arabia France Korea Belgium 2001-2006 Canada Mexico Japan United Kingdom China Germany Korea Netherlands France Singapore Source: IMF Direction of Trade Statistics Yearbooks.

U.S. Imports – Industrial vs. Developing Countries Figure 29 U.S. Imports – Industrial vs. Developing Countries 5+ Year Averages 1981-1985 1986-1990 1991-1995 58% 62% 57% 39% 40% 43% China 5.5% China 2.4% India 1.7% China 12.4% India 1.7% India 1.7% FSU <1% FSU <1% FSU* <1% *Former Soviet Union 2001-2006 1996-2000 47% 53% 53% 47% China 24% China 16.4% India 2.0% India 1.9% FSU <1% FSU 1.7% Source: IMF Direction of Trade Statistics Yearbooks.

(5+ year averages ranked by $ of imports) Table 2 Top 10 U.S. Import Partners (5+ year averages ranked by $ of imports) 1981-1985 Canada Japan Mexico Germany Taiwan United Kingdom Korea France Hong Kong Italy 2001-2006 Canada China Mexico Japan Germany United Kingdom Korea Taiwan France Venezuela Source: IMF Direction of Trade Statistics Yearbooks.

Figure 30 U.S.-China Bilateral Trade Deficit 1978 – 2007 $ Millions of Dollars Per Year: U.S. Net Exports Source: U.S. Census Bureau, HAVER Analytics.

U.S.-China Bilateral Trade Deficit & Figure 31 U.S.-China Bilateral Trade Deficit & U.S. Trade Deficit 1978 – 2007 U.S.-China Bilateral Trade Deficit $ Million U.S. Trade Deficit Source: U.S. Census Bureau, HAVER Analytics.

China’s Portion of the U.S. Trade Deficit Figure 32 China’s Portion of the U.S. Trade Deficit 1978 – 2007 Percent Source: U.S. Census Bureau.

Share of U.S. Goods Imports from China Figure 33 Share of U.S. Goods Imports from China 1991- 2007 Percent Source: U.S. Census Bureau.

Share of U.S. Goods Imports from the Pacific Rim: Figure 34 Share of U.S. Goods Imports from the Pacific Rim: China vs. Pacific Rim (ex China) 1991- 2007 Percent Source: U.S. Census Bureau.

Concluding Comments U.S. trade Implications for U.S. monetary policy Trade/GDP Trade Prices – rapid in 70s, relatively slow in 80s and 90s, faster than GDP deflator recently Exports of non-agricultural goods have increased as fast as exports of services Real manufacturing output/GDP constant Geographic pattern of trade shifting to developing counties China increasingly important – problem? Implications for U.S. monetary policy International sector increasingly important for U.S. economic activity Models based on foreign output gaps of dubious value Negligible exchange-rate pass-through for U.S.