BIG SIX: TRADE BENEFITS OF THE US ECONOMIC RECOVERY

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00316R000100150004-1
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• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: August 31, 2010
• Sequence Number: 4
• Publication Date: June 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Big Six:
Trade Benefits of the
US Economic Recovery
EUR 84-10116
June 1984
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 Intelligence
Big Six:
Trade Benefits of the
US Economic Recovery
Issues Branch, EURA~
This paper was prepared b
with the assistance o Office of
European Analysis. Comments and queries are
welcome and may be directed to the Chief, Economic
Confidential
EUR 84-10/ 16
June 1984
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Blg S1X:
Trade Benefits of the
US Economic Recovery
(:nnfidenHAl
Key Judgments The rapid economic recovery taking place in the United States is providing
Information available an important stimulus for other major industrial countries. Based on our
as N' / May 1984 econometric model, we estimate that for the Big Six countries in 1983 the
was used in tbis report. .
US recovery alone accounted for:
? More than $7 billion in additional sales to the US market.
? Almost one-half percentage point higher real GNP growth-roughly
one-fifth of their economic growth.
? Additional employment for 110,000 persons.
Canada and Japan, the two which. rely most on the US market, reaped the
largest gains, adding 0.8 and 0.6 percentage point, respectively, to their
growth. Smaller gains accrued to the others, but the US recovery still
accounted for a large share of their limited economic growth last year.
The strong dollar and the shape of the US recovery also helped boost Big
Six economies. The Six along with other countries improved their competi-
tive position in the US market because the dollar appreciated 25 percent
from the level two years earlier (on an inflation-adjusted, trade-weighted
basis). We believe this appreciation was the prime factor causing total US
import volume in the present recovery to grow at twice the pace of that in
the 1975/76 recovery-real GNP growth was comparable for the two
periods. The Big Six further benefited because in the present recovery
more US import demand has been directed toward manufactures~f
which the Six are the major US suppliers-than in the previous recovery.
We believe the other major industrial countries will reap even more
economic benefits over the next few years if the US recovery continues. To
estimate the impact, we used the Data Resources, Inc. (DRI) forecast for
US GNP growth of 5.3, 3.2, and 2.6 percent for 1984, 1985, and 1986, re-
spectively, in our econometric model. The results indicate that by .1986 a
US recovery of that pattern compared with zero US growth for the period
would benefit the Big Six countries by:
? Raising their exports to the United States by $100 billion, up 31 percent
in value and 29 percent in volume terms.
? Increasing real GNP growth by 2 percentage points.
? Creating nearly three-fourths of a million jobs, reducing their combined
unemployment rate by 0.6 percentage point.
Confidential
EUR 84-10116
June 1984
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Confidential
While the US recovery can provide important seed money to help the other
countries, it is insufficient to provide a solution to their fundamental
economic problems, particularly those faced by the major West European
Allies. US trade patterns favor Japan and Canada over West European
countries, who are the biggest critics of US economic policy. Protectionist
pressures in Europe are not likely to abate because the trade gains are not
benefiting the declining industries. Furthermore, although the Europeans
recognize the positive benefits of the US recovery, they still believe the
negative impact of high US interest rates more than offset them.
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Contents
Key Judgments
Impact of the US Recovery
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Confidential
Big Six:
Trade Benefits of the
US Economic Recovery
Last year, the United States was the fastest growing
major export market for the Big Six industrialized
countries. ' As a result, increased foreign sales to the
US market provided an important stimulus to eco-
nomic activity in those countries. The, rapid US
economic recovery, coupled with a strong dollar that .
favored foreign goods, helped the Big Six boost
exports to the United States by more than $14 billion
in 1983-a 12-percent increase over the previous year
in dollar terms (see table 1) and a sharp rebound from
1982 when their exports declined by almost 2 percent.
In volume terms, Big Six exports to the US market
were even more buoyant, up 15 percent from 1982
levels (see table 2).
Except for Canada, which accounts for only a minor
share of Big Six exports, other Big Six export markets
posted marginal gains or actual losses over 1982.
Sluggish growth in the West European economies
hampered their import demand. While Japan was
able to boost its market penetration, the four major
West European countries experienced nominal de-
clines and modest volume gains in sales to their
neighbors-a major factor for these four countries
because 61 percent of their exports go to the West
European market. Big Six exports-both by value and
volume-fell to the LDCs last year as declining oil
revenues, slack commodity prices, and debt servicing
problems forced the LDCs to trim imports sharply.
Despite respectable percentage increases, the Com-
munist countries account for a relatively small share
of Big Six exports. Dollar gains scored by France and
Italy in this market, however, rivaled those achieved
with the United States
Trade gains in the US market were not evenly
distributed. Canada and Japan, the two largest US
trading partners, posted the most rapid volume
growth followed closely by France, West Germany,
and then Italy. Canada is closely linked to the US
economy, particularly in the rebounding auto and
housing markets, while Japan is more competitive
overall than Western Europe in the US market. A
$1.2 billion drop in US oil imports from the United
Kingdom was the cause of the meager UK volume
gains and the decline in total nominal exports to the
United States. This pattern of gain closely parallels
the importance of the US market for each of the Big
Six countries.
Most of the increase in Big Six exports to the US
market was in manufactures. US imports of transport
equipment, machinery, nonferrous metals, and chemi-
cals increased the most (see table 3). Canada, with
special links to the US auto industry, scored the
largest gains in transport equipment. Japan's export
performance was strongest in machinery, capturing
over 80 percent of the increase in US machinery
imports, followed by autos as higher priced models
offset Tokyo's quantitative restraints. Sales of Japa-
nese office and ADP equipment to the United States
were up $1 billion over the previous year. On the other
hand, Japan absorbed over half of the 40-percent cut
in US steel imports from the.developed countries that
resulted from the combination of slack US demand
and voluntary export agreements. British gains in
manufactures resulted almost solely from its role as a
nonferrous metals broker. The United Kingdom was
the only Big Six country to lose ground in the'US
machinery market last year. West Germany suffered
-the second-largest drop in steel sales to the United ,
States as a result of the EC voluntary restraint
agreement but scored gains in other manufactures
categories. The overall increase in exports of manu- .
factures by France and Italy were modest and not
highly concentrated. In contrast to small French
increases in auto exports as price competitiveness ., ...
improved, Italian auto sales in the US~ market fell ~ .;
because of the pullout of Fiat.
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Table 1
Big Six: Export Performance, 1983 e
World
United
States
Japan
Western
Europe
Canada
LDCs
Communist
Big Six 652.3
132.8
9.2
289.4
7.8
149.7
30.5
Change over 1982 (percent) -0.2
12.4
3.0
-1.7
17.7
-7.0
8.3
Japan 147.0
42.3
23.1
3.6
60.7
9.4
Change over 1982 (percent) 6.2
15.7
6.8
25.6
-0.5
10.1
West Germany 169.4
12.8
2.2
112.1
1.2
25.3
8.9
Change over 1982 (percent) -4.0
10.3
2.8
-3.6
18.5
-12.9
4.6
France 94.9
5.7
1.1
55.1
1.0
22.3
4.0
Change over 1982 (percent) -1.8
9.4
0.0
-0.9
37.5
-9.4
20.9
United Kingdom 91.6
12.7
1.2
51.2
1.4
18.5
1.8
Change over 1982 (percent) -5.6
-2.8
1.3
-0.8
-5.6
-15.6
-3.0
Italy 72.7
5.5
0.8
41.4
0.6
17.4
3.2
Change over 1982 (percent) -1.0
5.2
4.2
-1.4
13.6
-6.1
16.8
Canads 76.7
53.8
3.9
6.4
5.5
3.3
Change over 1982 (percent) 7.6
15.7
4.2
-8.0
-15.0
-0.6
? Column totals may not ad
d due to rounding.
Table 2
Big Six: Export Volume Growth, 1983
Percent cha
nge 1983/1982
Exports to
World
United
States
Japan
Western
Europe
Canada
LDCs
Communist
West Germany
0.3
15.2
7.3
0.6
23.7
-9.0
9.2
France
3.6
15.4
5.5
4.5
45.1
-4.4
27.6
United Kingdom
0.3
3.2
7.5
5.3
0.2
-10.4
3.0
Italy
5.2
11.8
10.8
4.5
20:8
-0.2
24.1
Canada
8.4
16.5
4.9
-9.4
-13.4
0.1
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Confidential
Table 3
United States: Imports of Manufactures
From Big Six Countries, 1983
We estimate that the increase in US imports from the
Big Six caused by the US economic recovery alone
helped boost Big Six real GNP growth last year by
almost one-half percentage point and employment by
110,000 persons (see table 4 and inset). Since econom-
ic growth among the Six averaged only 2.0 percent in
1983, the US recovery generated the equivalent of
almost one-fifth of the economic expansion in these
countries. Canada and Japan received the greatest
economic benefit from the US recovery, while West
Germany and France accrued the least.
According to the CIA's Linked Policy Impact Model Z
(LPIM), the US recovery accounted fora the equivalent
' The Linked Policy Impact Model is an econometric model of the
world. It integrates individual 200-equation economic models of the
seven major industrialized economies-West Germany, France,
Italy, the United Kingdom, Canada, Japan, and the United
States-and smaller models of regional economic groups-the
smaller developed countries, OPEC, and non-OPEC LDCs; the
centrally planned economies are represented by trade-flow equa-
of about three-fourths of the 8-percent increase in'
nominal US imports from the Big Sfx countries last
year. The rest was caused by other factors, principally
the appreciation of the dollar, which made foreign
goods more price competitive. In volume terms, US
growth had a similar impact-US import volume
from the Big Six was 6 percent higher than it would
have been if the US economy had not grown at all. Of
the $7.2 billion increase in Big Six sales attributable
to the US recovery, Canada and Japan combined ,
accounted for $5.1 billion, reflecting their large share
of the US market. West Germany and the United
Kingdom together took two=thirds of the remaining
$2.1 billion:
The impact of the US recovery on iridiviiiual Big Six
countries' real GNP varies primarily according to the
relative importance of the United States as an export
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Table 4
Big Six: Impact of US Recovery, 1983'
Big
Six
Japan
West
Germany
France
United
Kingdom
Italy
Canada
US imports from
the Big Six (billion US S)
7.2
2.3
0.7
0.4
0.7
0.3
2.8
US import volume
from the Big Six (percent)
6.0
6.0
6.0
5.9
6.7
6.0
5.9
Employment (thousand)
110
8
28
21
22
11
20
Real GNP (percent)
0.4
0.6
0.2
0.2
0.4 ,
03
0.8
Actual GNP growth (percent)
2.0
3.1
1.3
0.7
3.5
-1'.2
3.0
a Difference between the actual results for 1983 and an LPIM
scenario assuming zero US GNP growth in' 1983.
market for each country.' The Canadian and Japanese
economies received the largest stimulus because the
United States accounts for 70 and 30 percent, respec-
tively, of their exports. Of the four West European
countries, UK real GNP advanced the most since the
US share of total British exports is about 14 percent,
compared to 8 percent for West Germany and Italy,
and 6 percent for France. Despite the relatively small
influence on the French and Italian GNPs, the US
recovery accounted for a sizable share of their actual
GNP performance; for France, the United States
contributed the equivalent of almost one-third the
1983 growth, while, for Italy, the US contribution
helped cushion an overall economic decline.
For 1983 the employment effects of US recovery are
relatively small because of the lagged impact of GNP
growth on job creation. The largest employment gains
in absolute terms were felt by West Germany, the
United Kingdom, France, and Canada. After taking
account of the different size of the labor force in each
country, however, the impact on the unemployment
rate is about the same for most of the Big Six. We
estimate that the rate was roughly 0.1 percentage
point less than it otherwise would have been. Only in
Canada was the unemployment rate pulled down
more, an estimated 0.2 percentage point, because of
the relatively larger GNP impact of the US recovery.
The appreciation of the dollar over the 1981-83 period
probably has been the single most important other
factor helping to boost Big Six exports to the United
States. As a result of the strengthening of the dollar,
the price of Big Six exports dropped relative to the
price of US goods, thereby improving the competitive
position of the Six in US markets and leading to
expanded exports. The net effect of the strong dollar
during 1981-83 was to channel a larger share of the
increase in US aggregate demand into imports.
We believe the appreciation of the dollar largely
accounts for the more rapid pickup in US import
volume that has occurred in the present recovery
compared to the 1975/76 recovery. Although the pace
of real GNP growth has been about the same for the
two periods, during the first four quarters of the 1983
recovery, US import volume rose 28 percent com-
pared to only a 14-percent rise during the first four
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Estimating the Impact
of the US Recovery
Figure 1
United States: GNP Growth
During Economic Recovery
We used the CIA's Linked Policy Impact Model
(LPIMJ to estimate the impact c~'the US recovery on
Big Six exports and economic growth. The model
enables us to isolate the eJlect of US economic growth
on international tradelrom other.Jactors which influ-
ence trade patterns, such as the value ctf'the dollar.
To estimate this impact, we ran the LPIM assuming
1975 1=100
~ 19821V=100
Projected ~
actual trade, employment, and GNP.ror 1983 and the //
US real economic growth was zero in 1983 and 1e,1't
all other independent variables unchanged Jrom the
actual results that year. The di1lerence between
simulated results is the measure of the US recovery s
impact. Since the model links all the Big Six econo-
mies, this result captures not only the. direct impact
ct1'increased exports to the United States, but also the
indirect eJlect oJ'increased exports to each other (and
to the rest ctJ'the world) spurred by the change in US
growth
quarters of the previous recovery (see figures 1 and 2).
One of the major differences between the two cycles
was the movement of the dollar prior to the start of
each recovery. At the beginning of the 1983 recovery
(the fourth quarter of 1982), the dollar-on a trade-
weighted, inflation-adjusted basis-stood 25 percent
above its level two years earlier (see figure 3). In other
words, foreign competitors in the US market started
the recovery with a 25-percent improvement in their
competitive position compared to 24 months earlier.
At the start of the 1975/76 recovery, however, the
dollar stood 7 percent below its level of two years
earlier-foreign competitors had lost some competi-
tiveness.
Big Six exports to the United States also have grown
more rapidly in the present recovery compared to
1975/76 because more US import demand has been
directed toward the Big Six than to other countries,
the opposite of what occurred in 1975/76. Most of the
growth in US imports last year came in manufactures
which favored Big Six exporters. In the previous
recovery, however, US import demand for LDC oil
rebounded fairly quickly in contrast to the current
100 1 2 3 4 5 6 7 8
Quarters from base period
a Based on 1980 prices.
Source: Projected data from DRI (control 032684).
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period when the effects of conservation and use of
alternative fuels are holding down US oil imports.
Moreover, US demand for many LDC raw materials
is still at depressed levels.
We believe that over the next few years the Big Six
countries will reap even more economic benefit from
the continued US recovery than they did in 1983.
Over the 1984 to 1986 period, we estimate Big Six
annual economic growth will average 0.6 percentage
point higher than it would if the US economy were
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Figure 2
United States: Import Volume
During Economic Recovery
? From Big Six
(1982 IV=100)
~ From world
Projected ~~~~ ~ (1982 IV=100)
From Big Six
(1975 I=100)
~ I I I I I I I I
85 1 2 3 4 5 6 7 8
Quarters from base period
Based on 1980 prices.
Source: Projected data from DRI (control 032684).
stagnant (see table 5 and inset). Moreover, the contin-
uation of US economic growth alone will help gener-
ate nearly three-quarters of a million more jobs in the
Big Six countries. As in 1983, the Canadian and
Japanese economies will gain the most. The four
major West European countries will experience on
average about one-half percentage point more eco-
nomic growth annually during the 1984 to 1986
period because of US economic expansion
According to the LPIM, continued growth in the
United States will mean almost an additional $100
billion in Big Six nominal exports to the United States
during the 1984 to 1986 period. In 1986, we estimate
US imports from the Six will be 31 percent greater in
value terms and 29 percent in volume over the levels
that would have existed if US growth were zero. With
`~ ~ From world
/ln^/c i-lnn\
shares of the US market expected to stay roughly' the
same, the pattern of trade benefits is much the same
as in 1983. In dollar terms, Canada and Japan take
the lion's share while West Germany and the United
Kingdom take the biggest slice of the balance, reflect-
ing their relatively large stakes in the US market
compared with France and Italy.
Manufactures should remain the fastest growing cate-
gory of imports from the Big Six; a rebound in US oil
demand may also reverse the cuts in energy sales
experienced by Britain and Canada in 1983. The
sharp drop in US steel imports in 1983 will not be
repeated, and, within the limits of the European and
Japanese voluntary restraints, steel imports from
these sources will probably rise a bit. Continued
strength in US auto demand will benefit the Canadi-
an and European automakers as well as those of
Japan which have higher quotas. In addition, Big Six
exports of machinery, electronics, and consumer
goods will gain from growth in US industrial produc-
tion and consumer spending.
The impact of US recovery on each of the Big Six
economies will be substantial over the next three
years. The cumulative boost for Canadian and Japa-
nese real GNP will reach 5.0 and 2.8 percentage
points, respectively. Among the other four, Italy with
a cumulative 1.7-percentage-point gain and Britain
with 1.5 percentage points will be the big winners;
even the 0.9-percentage-point gain for West Germany
will be a major contribution to its economic perform-
The cumulative effect of the projected US growth
over the three-year period leads to a much larger
positive impact on employment than occurred in the
1983 scenario. By 1986, the US recovery will generate
an estimated 730,000 additional jobs in the Big Six
countries, resulting in a 0.6 percentage point lower
unemployment rate compared to what it would be if
US growth stagnates. Canada will receive the largest
GNP boost and experience the greatest decline in the
unemployment rate~own 1.5 percentage points in
1986. The unemployment rate in the other countries
would be lower by between 0.4 and 0.6 percentage
points in 1986.
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Figure 3
United States: Inflation-Adjusted
Trade Weighted US Dollar
i~~~i~~~i~~~i~~~i~~~i~~,~~~,~~~~~~~~~~~~~~~~~~~~~~~~
95 1973 74 75 76 77 78 79 80 81 82 83 84 85
100
The impact of the US recovery in the Big Six can be
clouded somewhat if the value of the dollar drops
more rapidly than the DRI base forecast. A sharper
depreciation of the dollar would make Big Six goods
less competitive in US markets, thereby causing a
cutback in US imports and lower GNP growth in the
Big Six. As with an appreciation, however, the eco-
nomic impact of a depreciation would take roughly
two years to work fully through the system. ~~
Implications
The United States, with its vigorous economic growth,
is playing a leading role in stimulating Big Six
economic recovery, particularly for Canada and Ja-
pan. The major West European economies, however,
-face tough, fundamental economic problems that re-
quire mainly domestic solutions; thus the US recovery
can be of only limited help. Nonetheless, the gains in
exports, GNP, and employment accruing to the West
European economies from the continuing US recovery
can be viewed as seed money which will provide an
economic cushion for these countries as they attempt
to restructure their industrial base and grapple with
unemployment problems.
Taken by themselves, the positive trade benefits of the
US recovery should help to mute foreign criticism of
US economic policies. Much of the criticism has come
from the West Europeans. They argue that their
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Table 5
Big Six: Impact of US Recovery, 1984-86 a
Big
Siz
Japan
West
Germany
France
United
Kingdom
Italy
Canada
US Imports from
1984
14.2
4.7
1.4
0.7
1.2
0.5
5.7
Big Six (billion US $)
1985
32.0
10.0
3.2
1.6
2.7
1.2
13.3
1986
51.4
16.2
4.9
2.4
4.8
1.8
21.3
US Import Volume from
1984
10.4
10.2
10.1
10.1
11.8
10.2
10.5
Big Six b (percent)
1985
20.3
20.0
20.1
20.1
21.0
20.1
20.6
1986
28.8
27.5
28.1
28.4
29.2
28.3
30.1
Employment b (thousands)
1984
204
16
51
40
38
20
39
1985
515
32
111
92
100
52
128
1986
730
39
153
112
I50
78
198
Real GNP (percentage points)
1984
0.7
1.1
0.4
0.5
0.6
0.5
1.6
1985
0.8
1.1
0.3
0.5
0.6
0.7
1.6
1986
0.4
0.6
0.2
0.1
0.3
0.5
1.8
a Net difference between the LPIM baseline forecast for 1984-86
and a scenario assuming zero US growth in each year.
n Data are cumulative.
domestic interest rates have been pulled up by high
rates in the United States with an adverse impact on
their domestic investment and that import prices have
risen because of the appreciation of the dollar. Despite
these concerns, West European leaders increasingly
realize that rapid US growth is helping stimulate their
economies. In recent conversations with the US Em-
bassy staff, French Finance Minister Delors, one of
the most vocal critics in the past, has praised the US
recovery as the motor of world growth. Even the
strength of the dollar has had some positive effects by
helping boost exports to the United States and giving
their goods a price edge vis-a-vis US goods in third-
country markets. Nevertheless, the recent rise in US
interest rates appears likely to overshadow the positive
benefits from economic recovery
Improved export performance in the Big Six countries
is not likely to appreciably reduce protectionist pres-
sures abroad. Most of the increase in US purchases
has benefited Canada and Japan rather than Western
Europe, where protectionist trends are the strongest.
In turn, the growing Canadian and Japanese econo-
mies offer little help to West European export growth.
Moreover, the West European industries demanding
import restraints-textiles, steel, basic machinery,
and shipbuilding-are the least competitive interna-
tionally and, hence, have gained little from the US
recovery.
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a..vuamcuaau~
Estimating the Impact
of the US Recovery in
the 1984 to 1986 Period
As in our analysis c21' 1983, we used the LPIM to
analyze the impact ctJ'the US recovery on the Big Six
economies over the next few years. We incorporated
the most recent Data Resources, Inc. (DRIJ forecast
for US economic growth (CONTROL 032684) to
establish a baseline forecast c2l'Big Six economic
activity. According to DRI, the US economy will
advance 5.3 percent in 1984, 3.2 percent in 1985, and
2.6 percent in 1986. The DRI forecast assumes a
gradual 10-percent depreciation ct1'the dollar over the
three year period. To isolate the impact gf'the US
recovery on the Big Six economies, we compared our
baseline results with an LPIM simulation that held
US real growth to zero over the period-all other
independent variables were unchanged in the two
scenarios.
The added stimulus to Big Six economic growth
caused by the US recovery will indirectly help the
trade position of debt-troubled LDCs. Slow-in some
countries, negative--economic growth in the Big Six
last year led to a 6-percent decline in the volume of
Big Six purchases from LDCs; in dollar terms, im-
ports dropped by I 1 percent. As a result, the Big Six
intensified LDC debt problems, rather than help
alleviate them. To the extent that the US recovery
prompts more economic growth in the Big Six, their
imports from LDCs should expand.
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