International Trade: A Larger Piece of the U.S. Economic Pie. during the Past Four Decades, International Trade Has Grown from a Relatively Insignificant Slice to Nearly a Third of U.S. Domestic Economic Activity. to Cater to the Global Economy's Palate, U.S. Manufacturers and Service Industries Have Specialized and Become More Efficient in Producing Goods and Services That Suit the International Menu

By Alexeenko, Galina | EconSouth, Summer 2007 | Go to article overview

International Trade: A Larger Piece of the U.S. Economic Pie. during the Past Four Decades, International Trade Has Grown from a Relatively Insignificant Slice to Nearly a Third of U.S. Domestic Economic Activity. to Cater to the Global Economy's Palate, U.S. Manufacturers and Service Industries Have Specialized and Become More Efficient in Producing Goods and Services That Suit the International Menu


Alexeenko, Galina, EconSouth


From T-shirts and sneakers to cars and computers, ninny of the everyday goods that Americans consume are no longer "made in the USA" but are imported. In 2006 alone, the United States imported $2.2 trillion worth of goods and services.

The U.S. external sector--the sum of all imported and exported goods and services--is currently equivalent to 30 percent of overall domestic economic activity, or gross domestic product (GDP). Just four decades ago, however, the share of foreign trade represented a mere 10 percent of GDR To grow as a share of GDP during the past 40 years of significant U.S. economic prosperity, the external sector had to expand more than the overall economy did. Imports, increasing at an average rate of nearly 11 percent each year, led the external-sector expansion, while exports grew at an average rate of more than 9 percent per year.

In addition, U.S. goods-producing industries have become increasingly more dependent on international markets. Almost two-fifth of the revenues earned by U.S. manufacturers now come from sales abroad compared with less than 15 percent 40 years ago.

How did international trade become such a large, important component of the U.S. economy? The answer is straightforward: As the world became much more integrated through commerce and finance, the U.S. economy adapted and specialized in the production of certain goods and services. In turn, the economic forces that prompted the expansion of the external sector also changed the country's underlying production and consumption patterns.

To understand these changes, it helps to divide imports and exports of goods and services into categories and study the categories' evolution (see the sidebar on page 17). Understanding this evolution illustrates how the U.S. economy has allocated its resources, and these allocation patterns, in turn, demonstrate how the U.S. economy has become more specialized during the past 40 years.

The recipe for export growth

From 1967 to 2006, the export of services, expanding at an average pace of 10 percent per year, has led U.S. export growth. As table 1 (on page 18) shows, nearly a third of U.S. total export revenues now come from the export of services, such as financial services, telecommunications, and management and consulting services.

The United States has an especially large trade surplus in financial services because U.S. firms are major providers of banking, investment, and insurance services to the world. This trend is not surprising since, over the past several decades, the world's most developed economies (and the biggest U.S. trading partners) have increased their consumption of services while spending a smaller share of their income on physical goods. To meet this rising demand, the United States has become a major supplier of high value-added services.

At the same time, the United States has significantly increased its exports of capital goods, becoming increasingly efficient at producing these goods and allocating a greater share of resources to that production. During the second half of the 1990s, when massive investments were made in technological equipment and scientific innovations, capital goods exports reached a record high, representing nearly a third of all U.S. export revenues (see table 1). Over the past 15 years, semiconductors, computers, telecommunication equipment, and industrial machines have been the main drivers of U.S. capital goods export growth. Much of the demand for these items has come from developing economies. Since 1990, China has moved from 20th to third place, behind only Canada and Mexico, as a major importer of U.S. machinery and transport equipment.

Consumer goods have also been a consistent contributor to growth in U.S. export revenues. Table 1 shows that, as a share of total exports, consumer goods doubled from less than 5 percent four decades ago to almost 9 percent in 2006. …

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International Trade: A Larger Piece of the U.S. Economic Pie. during the Past Four Decades, International Trade Has Grown from a Relatively Insignificant Slice to Nearly a Third of U.S. Domestic Economic Activity. to Cater to the Global Economy's Palate, U.S. Manufacturers and Service Industries Have Specialized and Become More Efficient in Producing Goods and Services That Suit the International Menu
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