Chemical Trade Prospers in the 1980's

Article excerpt

Chemical trade prospers in the 1980's

A strong U.S. chemical trade surplus in the 1980's reflected industry competitiveness in the international market; the favorable balance of trade was achieved through diversification, cost advantages, gains in efficiency, and economies of scale

The United States maintained a significant trade surplus--more exports than imports--in the chemical industry during the 1980's. Indeed, from 1985 onward, the chemical trade surplus more than doubled.(1) Some of the reasons for this prolonged surplus while overall U.S. trade has accumulated a large deficit are examined in this article.

The analysis begins with a brief background covering the factors that have most influenced the chemical trade balance. Among these are the large fluctuations in exchange rates and export and import prices that occurred in the 1980's. In particular, during the latter part of the decade, depreciation in the value of the dollar largely contributed to the rise in the chemical trade surplus. In addition, other factors unique to the chemical industry are analyzed--its highly technical nature, increased merger activity in the industry, and the costs of energy, regulation, and research and development. Finally, the focus will shift to specific industries associated with chemicals that had the most impact on the surplus.

U.S. trade balance in the 1980's

As the decade began, the United States had an overall annual trade deficit of $18.4 billion, compared with a trade surplus of $12.3 billion in the chemical industry. By 1985, the U.S. trade deficit had increased to $130.6 billion. However, in chemical products, the balance of trade remained in surplus, albeit at a lower level of $7.6 billion. Between 1985 and 1990, the trade surplus in the chemical industry more than doubled, increasing each year to a peak of $16.8 billion. During this same period, the overall U.S. trade deficit reached a historical peak of $158.2 billion in 1987, before dropping to $116.1 billion by the close of the decade.

Japan is the largest U.S. chemical export market and the third largest source of chemical imports. The United States maintained a chemical trade surplus with Japan during the 1980's, peaking at $2.3 billion in 1989. More than 60 percent of U.S. exports in 1989 were bound for the top 10 foreign markets: Japan, Canada, Mexico, Belgium, the Netherlands, Taiwan, South Korea, the United Kingdom, Australia, and West Germany. More than 75 percent of U.S. chemical imports came from Canada, West Germany, Japan, the United Kingdom, France, Switzerland, the Netherlands, Italy, Mexico, and Ireland. As these figures demonstrate, the majority of America's chemical trade was with the developed nations of Europe and Asia and with the neighboring North American countries. While the United States maintained sizable surpluses with its principal Asian trading partners, it had deficits with many European nations. In 1989, the largest such deficit was $1.3 billion, with West Germany. Trade deficits with France and Great Britain approached $500 million each.

Another component of the trade balance in chemicals is foreign direct investment. U.S. companies are expanding overseas chemical production, most of which is in Asia. In return, this globalization of production is expected to diminish U.S. chemical exports. In 1989, foreign direct investment in the U.S. chemical industry (book value, $46 billion) exceeded U.S. direct investments abroad in foreign chemical companies (book value, $36.2 billion). However, the income from the latter exceeded the income of foreign companies from their direct investment in the United States by $3.7 billion. When licensing fees and service charges and rentals are added into the totals, U.S. earnings from foreign chemical investments exceeded foreign company earnings in the United States by $5.1 billion.(2) This combination of trade surpluses and earnings from investments abroad has made the chemical industry a significant contributor to U. …