Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Impact of the Asia Crisis on U.S. Industry: An Almost-Free Lunch?

Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Impact of the Asia Crisis on U.S. Industry: An Almost-Free Lunch?

Article excerpt

* The large devaluations experienced by Korea, Malaysia, Thailand, and Indonesia beginning in the summer of 1997 raised concerns that imports from these countries would soar while demand for U.S. exports weakened, causing U.S. industries to suffer.

* As it turned out, manufactured imports from the four countries rose only slightly, and the decline in U.S. exports was not large enough to have a significant effect on trend output for most industries.

* The one exception to this pattern was the steel industry: there, sharply rising imports and falling exports led to a drop in output and prices.

* Overall, the United States enjoyed an "almost-free lunch" in the wake of the Asia crisis. Cheaper imports benefited consumers, and domestic production and employment were largely unhurt.

When the Asia crisis erupted in the summer of 1997, many forecasters predicted that one effect would be an end to the economic boom in the United States. Surely, it was argued, the drop in demand for U.S. exports combined with surging import volumes would finally be enough to slow the U.S. economy. It did not happen. Indeed, the Asia crisis' overall effects on the United States were small.(1) In terms of trade flows, total manufactured imports from the Asian countries affected by a currency collapse--Indonesia, Korea, Malaysia, and Thailand, which I will refer to as the "Crisis 4" countries--grew only slightly, while exports to these countries fell sharply (Chart 1).(2)

[Chart 1 OMITTED]

Although the overall effects of the Asia crisis on the United States were modest, they could have obscured other, larger effects in particularly vulnerable U.S. industries. Accordingly, this article looks beyond the aggregate data associated with the crisis and instead focuses on these potentially larger effects at the sector level. It arrives at four key findings. First, dollar prices of imports from the Crisis 4 countries fell substantially after the currency collapses of summer 1997. In a few cases, the drops were accompanied by a fall in U.S. relative output prices. Second, most U.S. industries experienced a decline in exports to Asia, but in no case was the decline in export demand big enough to have a noticeable impact on the trend in U.S. shipments. Third, in only a few cases was there a sharp rise in import volumes resulting from the crisis. And finally, in only one case--the steel industry--was there clear evidence of a pattern of rising imports, falling exports, and an associated drop in domestic prices and employment.

These findings suggest, for the most part, that imports from Asia do not compete directly with U.S. production. Therefore, an appreciation in the dollar with respect to Asian currencies leads to gains in consumption with little or no domestic pain. (For example, consumer videocassette recorders are not produced in the United States, so a fall in their price benefits consumers without pressuring U.S. producers.) This consumption feast amounts to an almost-free lunch.


The basic supply-and-demand framework is adequate for presenting a discussion of the sectoral impact of the Asia crisis. In such a framework, the analysis looks at prices and quantities for one industry or firm at a time, holding all other prices (including wage costs and the prices of competing goods) constant. From the point of view of U.S. industry, the crisis represents a drop in demand for two reasons. First, demand by Asians for U.S. imports decreases due to the recessions in Asia and the higher Asian currency prices of U.S. imports after the devaluations of the Asian currencies. Second, demand by Americans for U.S.-produced goods falls because the dollar price of Asian goods, which are substitutes for U.S.-produced goods, also falls. This means that if we hold other factors that affect demand and cost constant, we should expect to see a drop in U.S. shipments and in U. …

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