BPEA | 1971 No. 2

Trends in U.S. Trade and Comparative Advantage

William H. Branson and Helen Junz
Helen Junz Board of Governors of the Federal Reserve System

1971, No. 2

IN RECENT YEARS, THE SHRINKING U.S. trade balance has drawn a good deal of attention and caused some concern here and abroad. The balance on merchandise trade reached a peak of $6.8 billion in 1964, and then shrank to about $650 million in 1968 and 1969. This reduction was due to some extent to the excess demand in the United States in 1966-68, and the ensuing inflation. But, as some observers have pointed out, the inflationary boom could explain only part of the story. They suggested that the deterioration was the result mainly of longer-term trends in the basic U.S. competitive position. This view has gained more prominence as the increase in the U.S. trade surplus to $2.1 billion in 1970 was followed by a deficit in the first half of 1971 despite the slowdown in domestic economic activity. Thus, the recession has not been accompanied by an improvement in the trade balance, mainly because imports have continued to rise well beyond their usual relation to the growth in GNP.