The Importance of Hemispheric Trade by Sidney Weintraub

Three points stand out when examining the significance of U.S. trade with other countries in the Western Hemisphere: 1. Exports are becoming increasingly important for the healthy growth of the U.S. economy. 2. The United States exports much more to countries in this hemisphere than to any other region of the world. 3. The growth in U.S. exports in the 1990s has been considerably greater to the Western Hemisphere than to anywhere else. Exports of goods and services grew from 5 percent of U.S. gross domestic product (GDP) in 1960 to close to 11 percent in 1994 (fig. 1). U.S. merchandise exports to other countries in this hemisphere were 40 percent of total U.S . merchandise exports in 1994, compared with 29 percent to Asia and the Pacific Rim and 24 percent to all of Europe (fig. 2). Annual average growth of U.S. merchandise exports from 1990 through 1994 was more than 12 percent to the Western Hemisphere compared with 6.5 percent to Asia and the Pacific Rim and less than one-half of 1 percent to Europe (fig. 3).   U.S. Trading Patterns Comparative data provide perspective on individual country markets and the role of the Western Hemisphere in this picture. Canada, which was the destination of more than $114 billion in U.S. exports in 1994, is far and away the most important foreign cust omer for U.S. goods. Japan, which in 1994 took about $54 billion of U.S. merchandise exports, ranked second, just ahead of Mexico. Western Hemisphere countries, excluding Canada, took more than $94 billion of U.S. merchandise exports last year, with Mexic o accounting for $53 billion of this total. The United States' single largest bilateral trade deficit in 1994 was by far with Japan ($65 billion). The United States also had a deficit in its merchandise trade with Canada ($15 billion), but had a modest surplus in its trade with the remainder of the hemisphere ($4.5 billion). A bilateral trade surplus or deficit is not significant in and of itself because the United States is a global trader, but the various balances do give an indication of the U.S. trading pattern at any given time. The direction of U.S. exports depends on three features in addition to the competitiveness of U.S. products in the various markets: 1 the size of a country's economy; 2. the rate of economic growth it is experiencing; and 3. geography. Market Size Because of Canada's high per capita income, its market of about 27 million is larger for U.S. exports than is the combined market of the rest of the hemisphere, which has 450 million people. Despite the importance of the hemisphere in the total U.S. trade picture, the markets other than Canada are limited by their low per capita incomes. As the Latin American economies grow, however, so, too, will the export opportunities of U.S. business. This is evident from the U.S. experience in exporting to the hemis phere.   Economic Growth The LAC countries based their development programs following World War II on restricting imports to the maximum extent possible in order to build their industrial structures. This import-substitution model of development collapsed during the 1980s. The de veloping countries of Northeast and Southeast Asia, in contrast, opted after World War II for a model that was biased in favor of exports; their economic growth in the postwar period surpassed that of the LAC countries. Japan benefited from the fortunate circumstance that the region in which its exports dominated grew faster economically than the Western Hemisphere, where U.S. exports dominated. In the 1970s, the LAC countries enjoyed robust GDP growth. During that decade, U.S. merchandise exports to the region grew by 400 percent. The decade of the 1980s, often referred to as the "lost decade," was horrible in economic terms for Latin America. The main reason is that substantial resources had to be devoted to servicing the foreign debt, leaving little for import growth or national investment. Growth in GDP in Latin America and the Caribbean (the LAC countries) was about 1 percent a year during the decade. Because the economy grew more slowly than the population, there was a decline in per capita income and the economies of the LAC countries stagnated, as did U.S. exports to the region. The decline of U.S. exports to Latin America followed inexorably from the economic decline. U.S. exports to the LAC countries grew by less than 4 percent a year during the 1980s, or by about 50 percent for the decade as a whole. Because prices of U. S. Ex port products increased by roughly the same percentage over the decade, there was no real growth in U.S. exports to the LAC region during the 1980s. U.S. exports to all destinations during the 1980s grew by 8 percent a year, or double the rate to the LAC region. Since the 1980s, the LAC model has shifted to export promotion. Chile led the change, which most of the countries of the hemisphere have now adopted. In the 1990s to date, LAC economic growth has recovered to more than 3 percent a year on average. Even though the economies of the countries in Asia and the Pacific have grown more rapidly than those in the Western Hemisphere thus far in the 1990s, U.S. export growth has been greater in this hemisphere because the U.S. share of LAC imports is higher-a bout 40 percent on average, compared with about 20 percent for the Asia-Pacific region. Thus, it takes twice as much growth in Asia as in this hemisphere to translate into the same U.S. export growth rate. The high growth of the Asian countries cannot be explained simply on the basis of an export-promotion policy, but this has been a contributing feature. Nor can one conclude that Chile's good growth performance in recent years is due solely to export promo tion, but it has been an essential element. At any rate, the hemisphere is now exploding with economic integration arrangements involving the reduction of import barriers and an emphasis on attracting investment and promoting exports. If the new model suc ceeds, if per capita incomes rise in the hemisphere, the United States can only benefit.   Geography It is evident that geography also greatly influences trade patterns. This may be a throwback to relationships built in earlier times and cultivated over many years that persist despite great advances in transportation and communications. Whatever the full explanation, the United States has a more dominant position in Western Hemisphere markets than it has in any other region of the world. The influence of geography and past relationships also shows up in U.S. import patterns from countries in the hemisphere. In general, the U.S. market is more important the farther north a country is. Thus, Mexico and Canada rely on the U.S. market for upw ards of 70 percent of their exports, Central America and most of the Caribbean for 50 percent or more, Colombia and Venezuela for around 40 percent, Brazil for close to 30 percent, Chile for 20 plus percent, and Argentina for only 10 percent. It was geography that motivated the Monroe Doctrine and various other U.S. interventions in this hemisphere, some aggressive and others cooperative. The United States in this century adopted the Good Neighbor Policy during the early years of the Franklin D. Roosevelt administration and the Alliance for Progress under President John F. Kennedy, both of which reflected U. S. desire for close relations with countries in this hemisphere. The North American Free Trade Agreement (NAFTA) derives its rationale f rom the combination of geographic contiguity of the three member countries-Canada, Mexico, and the United States-plus the extensive trade and investment relations that exist among them. The idea of expanding trade and investment relations into a Free-Trad e Area of the Americas (FTAA) was proposed by George Bush and is being promoted by Bill Clinton. This initiative is being pursued because the United States is both the major market of other countries in the hemisphere and the most important supplier of go ods and services to them. Although geography is an important determinant of hemispheric economic interaction, other reasons may also help explain this pattern: The extent of U.S. direct investment in particular countries and trade and investment seem to go hand in hand. U.S. investment itself is influenced by geography and ease of transportation, as is evident from the large U.S. investment in Canada and Mex ico. The types of products that countries export, such as grains from Argentina and sugar from the Dominican Republic, may compete directly with U.S. production. These competitive features may be more salient than geography in determining trade patterns.   The Current Trade Picture The trade picture in the hemisphere is more promising today than it has been for decades for the following reasons: The region is recovering from the traumatic decade the 1980s. It is doing so under a philosphy that emphasizes importance of trade. Trade barriers are falling rapidly, largely in the context of subregional economic integration. The old constraints that sought to limit trade relations with the United States are giving way to a desire for hemispheric free . The Western Hemisphere is already the largest destination for U.S. exports, and this dominance would increase if the region's economies could sustain economic growth. Dr. Sidney Weintraub, an economist, is Dean Rusk Professor of International Affairs at the LBJ School. He also holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.