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The outlook for net exports

  • Economics
  • Law


FRBSF WEEKLY LETTER September 26, 1986 The Outlook for Net Exports For some time now, analysts have been predict- ing an improvement in the u.s. trade balance. But there has been little indication of a turn- around so far, despite the 35 percent deprecia- tion of the dollar since its peak in February 1985. In fact, net exports of goods and services - total exports minus total imports~ worsened in the second quarter of 1986 to a deficit level of around $150 billion in 1982 dollars (see Chart 1). Alarmed by these developments, some forecast- ers have begun to predict that a substantial improvement in the trade balance is unlikely in the near future. If predictions of little or no improvement turn out to be correct, significant problems could lie ahead. For instance, most forecasts of an acceleration in economic growth over the next year depend heavi lyon an improvement in the net export sector. Without that improvement, real output may continue to be sluggish. Also, there is the strong possibility that a continuing high trade deficit will further increase election year pressures for protectionist legislation. If enacted, this legislation would not only raise consumer costs but could also lead to retaliatory actions by other nations that would close markets to u.s. exporters. A number of reasons have been proposed for the apparent lag in the anticipated turnaround in the current u.s. trade picture. These include the possibility that foreign exporters, having bene- fited from high profits when the dollar was strong, are now choosing to limit price increases and to sacrifice their profit margins on exports to the u.s. in order to preserve their share of the huge u.s. market. Another reason is that the dollar has not changed much in value against the currencies of some of our key trading partners, such as Singapore, Canada, Taiwan, Hong Kong, and South Korea. Thus, imports from these countries, which account for a substantial share of total u.S. imports, are not likely to decrease. In addi- ti

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