Big emerging marketsand U.S. trade

Linda M. Aguilar and Mike A. Singer

"No nation was ever ruinedby trade."

—Benjamin Franklin

The preceding quote byBenjamin Franklin is as true today as it was 200years ago. United States history is steeped intrade and trade debate, from the pivotal role ofthe Boston Tea Party in shaping the UnitedStates as a nation, to the recent debate over themerits of U.S. ratification of the present roundof the General Agreement on Tariffs and Trade(GATT) negotiations.

The U.S. Department of Commerce isactively involved in promoting exports. In1993, President Clinton announced a NationalExport Strategy for the United States, de-scribed as "a comprehensive plan [that] up-grades and coordinates the government'sexport promotion and export finance pro-grams to help American firms compete in theglobal marketplace."' In particular, the Na-tional Export Strategy identifies past prob-lems with U.S. trade promotion efforts andrecommends improvements to current ones.This includes enhancing existing trade financeones such as the Exim Bank and the OverseasPrivate Investment Corporation and creating aTied Aid Fund to help U.S. firms compete ona level playing field. As an outcrop of thisinitiative, Commerce identified ten foreignnations as the big emerging markets (BEMs)of the upcoming century, markets where thepotential for trade growth is the greatest.

It has long been recognized that exportsplay an important role in the U.S. economybecause they support jobs and they represent asignificant component of gross domestic prod-uct (GDP). Over the last few years, U.S. ex-ports have contributed significantly to overall

GDP growth. But targeting emerging marketsis a new concept for the U.S. In the past, thenation could expect trade to expand steadilywith its traditional trading partners—mainlyEurope, Canada, and more recently, Japan. Asthe National Export Strategy was being devel-oped, however, it became clear that the U.S.could not rely on these partners as a source ofcontinued growth. In fact, trade with our tradi-tional trading partners has been, and is project-ed to continue to be, flat.' The next logicalstep was to determine where growth was likelyto occur. Thus was born the BEM initiative.

In addition to growth potential, the tenBEMs have other traits in common. They are allphysically large with large populations, haverecently undergone some program of economicreform, are politically important to their regionof the world, and are likely to spur growth withintheir regions.' Where are these markets? Geo-graphically they represent several parts of theworld. In Asia they are China, Indonesia, India,and South Korea; in Latin America they areMexico, Argentina, and Brazil; in Central andSouthern Europe they are Poland and Turkey; inAfrica it is South Africa.

Commerce estimates that the BEMs andother less developed countries will be the fast-est growing import markets through the year2010. By then, the BEMs are expected toaccount for 27 percent of total world imports,three times their 1992 share. 4 U.S. firms willwant to capture as much of that market as pos-sible. With accurate knowledge and supportfrom all levels of government, they can realizethat goal; to some extent, they are already

Linda M. Aguilar is a regional economist andMike A. Singer is an agricultural economist at theFederal Reserve Bank of Chicago.

2 ECONOMIC PERSPECTIVES

ahead of the curve. In 1987, U.S. commodityexports to the BEMs accounted for nearly 15percent of all U.S. exports. By 1994, the BEMmarket had grown to 20 percent of all U.S.exports—an increase of $65 billion. Totalexports to the BEMs increased 177 percent.

State governments also actively promoteexports and overseas business opportunities forfirms located in their state. In the SeventhFederal Reserve District, which includes all ofIowa and parts of Illinois, Indiana, Michigan,and Wisconsin, efforts by state governmentsmay have helped exports to the BEMs growfrom 10 percent of all District exports in 1987to 13 percent in 1994, an increase of $5.6 bil-lion in goods.' Total District exports to theBEMs grew 152 percent over the period, withthose to Indonesia, Argentina, and Brazil expe-riencing the largest growth (425 percent, 334percent, and 249 percent, respectively).

This article will begin by examining theimport profiles of the BEMs as a group over the1988-92 period. We then present U.S. andSeventh District exports to these markets forroughly the same time period. Next we examineagricultural exports separately because of theimportant role played by Seventh District statesin U.S. agricultural output and trade. We thenprovide additional detail on U.S. trade withseveral of the larger BEMs. The followingsection examines current U.S. and District ex-port promotion initiatives. Finally, we sum upand conclude with an assessment of how wellU.S. exports are meeting the needs of the BEMs.

The data in this article represent the fullrange of goods that can be bought and sold in themarketplace, including agricultural goods, min-erals, clothing, chemicals, metals, machinery,scrap and waste, secondhand goods, and an-tiques. They do not include services. We usedseveral data sources. Import data on the BEMscame from United Nations data and cover the1988-92 period. We chose 1988 as the base yearfor import data since U.S. trade with the BEMshas only recently started to expand. We chose1987 as the base year for export data solelybecause that was the start year of one of the dataseries we used. Detailed Census data on U.S.exports are more current and are availablethrough 1993, but to avoid confusion we usedthose data only when discussing total U.S. ex-ports or aspects of the BEMs unrelated to theUnited Nations data. State export data, based onCensus data, came from the Massachusetts Insti-

tute for Social and Economic Research (MISER).These data were available through 1994, but weused them only for aspects unrelated to UnitedNations import data

One other note on the data. In reportingimports for the BEMs, the United Nations usesthe Standard International Trade Classification(SITC) system, a system originally developedin 1950 by the United Nations so that all coun-tries reporting trade statistics would use compa-rable categories. However, for most purposes,U.S. trade is reported on the basis of the Stan-dard Industrial Classification (SIC) system thatwas originally developed for analyses of do-mestic commerce. These two systems (as wellas several other reporting systems) are notgenerally comparable. Although the commodi-ty or industry descriptions may sound similar,the actual components that comprise them aregenerally not the same.

The growing BEM market

The BEMs' share of world imports grewfrom 7.7 percent in 1988 to 9.3 percent in1992. In the latter year, the BEMs imported$357 billion in commodities. The U.S. cap-tured the largest share with nearly 22 percent,up from 20 percent in 1988. Japan held sec-ond place with approximately 14 percent,down from 17 percent in 1988. Germanycaptured nearly 9 percent, as it did throughoutthe period (see figure 1). South Korea andChina are by far the largest of the BEMs interms of total imports. In 1992, each of thosetwo countries imported around $81 billion ingoods. Mexico was the next largest with near-ly $48 billion.

Two things stand out about the types ofgoods that the BEMs imported in 1992. First,the single largest import commodity was petro-leum and petroleum products (mostly crudepetroleum and fuel). Second, the next fourlargest import commodities were all in machin-ery and transportation equipment—electricalmachinery (such as household appliances andswitchgears), machines for special industries(such as textile and leather machinery), roadvehicles, and general industrial machinery(such as heating and cooling equipment).Combined, these five commodity categoriesaccounted for $124 billion, or about 35 percentof total BEM imports (see figure 2).

FEDERAL RESERVE BANK OF CHICAGO

FIGURE 1

Sources of imports of all BEMscombined, 1992

Source: United Nations (1993).

FIGURE 2

Top commodities imported by all BEMScombined, 1992

Petroleumand products Electrical

machinery

Note: SITC commodities Imported from all countries,measured by U.S. dollar value.Source: United Nations (1993).

Generalindustrialmachinery

BEMs need machinery imports tobuild an industrial structure orupgrade an existing one. Thusseveral of the Asian BEMs' ma-chinery imports are in the textileand apparel industries. Roadvehicles, telecommunications, andelectronics and electrical machin-ery are in demand in the LatinAmerican BEMs, and machineryfor special industries is in demandin several others, for example,industrial food processing ma-chinery in Poland. To fuel theseindustries (literally), petroleumand petroleum products are need-ed—for the factories, equipment,workers' homes, workers' trans-portation, and so on.

Individually, some of theBEMs had quite different importprofiles than the group as a whole(see table 1). For example, Chi-

na's second-largest import commodity is textileyarns, which in turn support two of their majorexport industries—clothing and accessories,and textile yarn and fabrics. Combined, thesetwo industries accounted for 30 percent of

China's exports in 1992. India'sonly similarity with the BEMs'collective import profile is that itstop import commodity is petro-leum and petroleum products. Itssecond-largest import commodityis nonmetal minerals, which in-clude precious and semipreciousstones, primarily rough unsetdiamonds. Diamonds accountedfor 15 percent of India's exportsin 1992. Indonesia's imports alsovary substantially from thegroup's overall profile.

Another way in which theBEMs differed from each other wasin who their largest sources ofimports were (see table 2). Ascould be expected, several countrieshad a neighboring country amongtheir top three sources. For exam-ple, of all the goods that Chinaimports, Hong Kong was the singlelargest supplier, capturing over 25percent of the total. Of Argentina's

This collective import profile of the BEMsshows an emphasis on production rather thanconsumer goods, reflecting a desire to developthe capacity to produce their own goods forconsumption or export. Given this desire, the

4

ECONOMIC PERSPECTIVES

TABLE 1

Top commodities imported by selected BEMs, 1992

Value($U.S. billions)

China

$8.3 Machines for specialindustries

7.8 Textile yarns

4.9 Electrical machinery, NES'

4.5 Iron and steel

4.2 Plastic materials

35.6% of total imports

Indonesia $2.7 Machines for specialindustries

2.5 General industrialmachinery, NES'

2.1 Petroleum and products

1.7 Powergeneratingequipment

1.5 Iron and steel

38.3% of total imports

India

$6.6 Petroleum and products

2.8 Nonmetal mineral(manufactures), NES'

0.9 Inorganic chemicals

0.9 Iron and steel

0.8 Fertilizers (manufactures)

59.1% of total imports

Note: SITC commodities imported from all countries, measured byU.S. dollar value.

'Not elsewhere specified.

Source: United Nations (1993).

periods of economic slowdown.However, Germany still outper-formed the BEMs (on average)for the reason noted above.

Individually, BEM importgrowth ranged from a high of179 percent for Argentina to alow of 7 percent for South Afri-ca. In addition to Argentina,Mexico and Indonesia also hadabove-average import growth,rising 145 percent and 106 per-cent, respectively. South Afri-ca's weaker gains were likelydue to its overall stagnant eco-nomic growth that persistedthrough the early 1990s.

To summarize, the importprofile of the BEMs over the lastfew years indicates that they areindeed growth markets. Importgrowth in seven of the ten BEMsexceeded world import growth,the types of goods the BEMsimport are those most needed tosupport growing economies, andthe major industrialized countriesof the world have recognized theimportance of serving these mar-kets. The next section willpresent in more detail the exportpatterns of the U.S. and the Sev-enth District in terms of meetingthe BEMs' needs.

total imports, Brazil was the largest source, pro-viding 23 percent. In turn, Argentina was Bra-zil's third-largest source, providing 8 percent ofthe latter's imports.

Total import growth for the BEMs over the1988-92 period was nearly 59 percent. Bycomparison, total world imports grew 32 per-cent, and among the industrialized countries,U.S. imports grew by 21 percent, Japan's by 25percent, and Germany's by 63 percent. Germa-ny's spectacular increase can be attributed tothe country's reunification and the increaseddemand resulting from the effort to bring theformer East Germany up to par with the rest ofthe country. (East Germany was not includedin the 1988 data). In addition, the BEMs as awhole registered a higher average annual im-port growth rate than did either the U.S. orJapan, both of which have experienced recent

U.S. exports to the BEMs

Over the 1987-94 period, U.S. exports tothe BEMs grew $65 billion, or 177 percent, foran average annual compound gain of 16 per-cent. U.S. exports to the rest of the world grewby 95 percent over the same period, for anaverage annual compound gain of 10 percent.With the exception of two industries—miningof quarry nonmetal minerals (such as sand orclay) and lumber and wood products—BEMexport growth by industry exceeded U.S. ex-port growth to the rest of the world. The ma-chinery industries did particularly well in termsof absolute increase. Both electrical and non-electrical machinery increased by over $11billion each, and transportation equipmentincreased by nearly $10 billion.

In terms of market share, the BEMs grewfrom 15 percent of total U.S. exports in 1987 to

FEDERAL RESERVE BANK OF CHICAGO 5

TABLE 2

BEMs' largest import trading partners, 1992

BEMLargestpartner

Imports($U.S. billions)

Importshare

(percent)

Argentina Brazil $3.3 22.5

Brazil U.S. 5.4 23.2

China Hong Kong 20.5 25.5

India U.S. 2.3 9.6

Indonesia Japan 6.0 22.0

So. Korea Japan 19.5 23.9

Mexico U.S. 30.1 62.9

Poland Germany 3.8 23.9

South Africa Germany 3.0 16.4

Turkey Germany 3.8 16.4

Note: This table should be read as follows: Brazil is Argentina'ssingle largest source of imports, supplying $3.3 billion worth ofgoods, or 22.5 percent of Argentina's total imports.

Source: United Nations (1993).

FIGURE 3

Top U.S. exports to all BEMs combined, 1993

Industrialorganic chemicals

Low-value goods

Data processingequipment

Aircraftand parts

Note: By SIC commodities.Source: U.S. Department of Commerce (1994b).

20 percent in 1994. While all the BEMs hadpositive growth over the period, Argentina,Indonesia, and Mexico had the largest percent-age increases, at 310 percent, 266 percent, and247 percent, respectively. However, U.S. ex-ports to Mexico in many ways stand out fromthose to other BEMs because of certain charac-teristics unique to Mexico. One major factor isthat Mexico is a free trade partner of the U.S.The U.S., Mexico, and Canada havea formal trade agreement that fostersfree and open trade among ourcountries and includes rules andagreements that go beyond GATT.In addition, U.S. trade with Mexicois augmented by their proximity toeach other. Thus, while U.S. exportgrowth to the combined BEMs hasoutpaced export growth to the restof the world, the Mexican market isespecially significant.

While Mexico is by far thelargest BEM export market for theU.S., South Korea, China, andBrazil are also major markets forthe U.S. The South Korean marketis the largest of the three, nearlydouble the size of the Chinese orBrazilian markets in 1994. The topexport industries to South Korea in1994 were electrical machinery,nonelectrical machinery, and trans-

portation equipment. On a moredetailed basis, in 1993 (the latestyear for which such data are nowavailable), the top exports toSouth Korea were semiconduc-tors, aircraft, and meat products.The top exports to China wereaircraft, motor vehicles, andradio and TV equipment; those toBrazil were data processingequipment, aircraft, and industri-al organic chemicals. (See figure3 and table 3 for the top U.S.goods exported to the BEMs as agroup and individually in 1993.)

Seventh District trade withthe BEMs

Exports to the BEMs fromthe Seventh District states in-creased by $5.6 billion, or 152percent, over the 1987-94 period.

By contrast, exports to the rest of the worldgrew 90 percent. Almost all industries hadpositive export growth to the BEMs, with theexception of forestry, scrap and waste, and thetwo mining industries. Nonelectrical machin-ery, electrical machinery, and chemicals hadthe largest absolute increases, accounting for60 percent of the District's total export in-crease to the BEMs over the period.

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ECONOMIC PERSPECTIVES

TABLE 3

Top five U.S. exports to the BEMS, 1993(by U.S. dollar value)

1993 exports(millions)

Percentof total SIC commodity

1993 exports(millions)

Percentof total SIC commodity

Argentina $3,775.7 Total Mexico $41,581.1 Total

349.7 9.3 Automated data processing machines 4,188.4 10.1 Motor vehicle parts, accessories160.2 4.2 Aircraft 1,538.1 3.7 Low-value goods

129.2 3.4 Low-value goods 996.4 2.4 Automated data processing machines126.2 3.3 Industrial organic chemicals NEC' 916.5 2.2 Electrical equipment-internal combustion engines113.0 3.0 Motor vehicles & car bodies 906.3 2.2 Electronic components NEC'

Brazil $6,058.0 Total Poland $911.6 Total

467.0 7.7 Automated data processing machines 142.4 15.6 Low-value goods461.4 7.6 Aircraft 140.4 15.4 Aircraft299.9 5.0 Industrial organic chemicals NEC' 85.8 9.4 Corn228.4 3.8 Motor vehicles & car bodies 46.4 5.1 Oil field machinery and equipment

227.5 3.8 Metallurgical bituminous coal 35.1 3.9 Chicken cuts

China $8,762.8 Total South Africa $2,188.4 Total2,029.7 23.2 Aircraft 272.2 12.4 Aircraft

645.9 7.4 Motor vehicles and car bodies 129.1 5.9 Automated data processing machines

331.3 3.8 Radio, TV, & communication equipment 94.9 4.3 Low-value goods292.8 3.3 Nitrogenous fertilizers 85.7 3.9 Wheat274.2 3.1 Wheat 72.6 3.3 Industrial organic chemicals NEC°

India $2,778.1 Total South Korea $14,782.0 Total

581.6 20.9 Aircraft 1,235.1 8.4 Semiconductors, related devices180.2 6.5 Steam, gas, hydraulic turbines 1,052.1 7.1 Aircraft175.1 6.3 Nitrogenous fertilizers 695.9 4.7 Meatpacking plants

117.9 4.2 Aircraft parts 592.0 4.0 Scrap and waste81.5 2.9 Industrial organic chemicals NEC' 498.2 3.4 Industrial organic chemicals NEC'

Indonesia $2,770.3 Total Turkey $3,428.9 Total

667.9 24.1 Aircraft 758.8 22.1 Aircraft142.6 5.1 Cotton 292.0 8.5 Aircraft parts112.4 4.1 Petroleum refining 154.2 4.5 Scrap and waste106.7 3.9 Soybeans 153.0 4.5 Aircraft engines

100.4 3.6 Oil field machinery & equipment 136.9 4.0 Cigarettes

Note: Throughout this table, total means total U.S. exports to that country.'Not elsewhere classified.Source: U.S. Department of Commerce (1994b).

The BEMs' share of Seventh District ex-ports has also grown. In 1987, exports to theBEMs comprised 10 percent of total Districtexports; by 1994, that share had risen to 13percent. The largest BEM export markets forthe District were Mexico, South Korea, andChina, which together comprised three-fourthsof the District's exports to the BEMs in 1994.However, as the fastest-growing markets, Indo-nesia, Argentina, and Brazil had the largestpercentage increases over the period: 425 per-cent, 334 percent, and 249 percent, respective-ly. Like the U.S., exports to Mexico tended todominate the profile of District exports to theBEMs as a group because of the large shareMexico consumes—nearly half of all Districtexports to the BEMs.

An interesting development in the Districtbetween 1987 and 1994 was that transporta-tion equipment declined as a share of totalDistrict exports. This was true for total Dis-trict exports as well as District exports to theBEMs. In 1987, transportation equipmentexports comprised 38 percent of total Districtexports; by 1994, their share had fallen to lessthan 30 percent. While transportation wasstill the top export industry for the District asa whole in dollar value, other major industriessuch as nonelectrical machinery, electricalmachinery, and chemicals were either gainingor maintaining market share (see table 4).

District exports to the BEMs show an evenmore pronounced pattern of change. In dollarvalue, transportation equipment exports fell inrank from first in 1987 to third in 1994. Also,their market share fell from 32 percent of totalDistrict exports to less than 17 percent. Thispattern was heavily driven by trade with Mexi-co, where transportation exports (largely autoparts) fell from 49 percent of the total to 21percent. Another significant change occurred inelectrical machinery exports, which grew fromabout 11 percent of total District exports to theBEMs to almost 17 percent.

Several positive things can be said aboutthis change in the District's export profile.First, compared with the past, the fortunes ofthe auto industry will have a smaller impact onthe District during both lean times and goodtimes. Second, less concentration of exportsalong industry lines suggests that overall Dis-trict export performance will not be so closelytied to one or two industries. Finally, Districtexports will tend to correspond—even more

than U.S. exports as a whole—to those indus-tries in which BEM purchases are experiencingsignificant growth.

U.S. agricultural exports to the BEMs

U.S. agricultural exports make an impor-tant contribution to farm income as well as toour nation's trade balance. The U.S. Depart-ment of Agriculture (USDA) reported that 17percent of the value of U.S. agricultural produc-tion was exported last year, accounting for atenth of the value of all U.S. exports and gener-ating a major positive contribution to the mer-chandise trade balance.' Furthermore, currentdevelopments suggest that foreign markets willbecome even more important to U.S. agricul-ture. The budget constraints so prominent inthe 1995 farm bill debate and the trend towardsgreater market orientation portend a decrease inthe level of federal spending on programs thatsupport farm prices and income. Slow popula-tion growth in the U.S. will continue to be asignificant constraint on future gains in domes-tic food demand. Moreover, biogenetic re-search promises to augment strides in agricul-tural productivity. Given these factors, farmersand agribusinesses must increasingly look toforeign markets as an outlet for continued gainsin output and as a vehicle to maintain or im-prove income levels.

The states of the Seventh District make animportant contribution to both agriculturaloutput and trade. Farms in these states accountfor a substantial share of the nation's domesticlivestock, milk, corn, and soybean production.The high level of output propelled Districtstates into an 18 percent share of U.S. farmcommodity receipts in 1993 and also providedraw material to a sizable food processing sec-tor. District states also play an important rolein international agricultural trade. The USDAestimates that the five states together accountedfor over a fifth of the value of U.S. agriculturalexports in 1993.'

The BEMs represent a major market forU.S. agriculture. From 1987 through 1994,their share of foreign sales of U.S. agriculturalproducts rose from 14 percent to 20 percent.Moreover, the potential for future gains issignificant, as rising incomes and internationalagreements that liberalize trade are expected toboost purchases of U.S. agricultural products.Among the BEMs, the top three buyers of U.S.agricultural products are Mexico, South Korea,

8 ECONOMIC PERSPECTIVES

TABLE 4

A. Top five District export industries to the world, 1987 and 1994

Ranked by1987 value

1987value

Industry Ranked bymarket share' 1994 value

1994value

Industrymarket share'

Transportation

(billions) (percent)

Transportation

(billions) (percent)

equipment $14.0 38.1 equipment $21.4 29.6

Nonelectrical Nonelectricalmachinery 7.8 21.2 machinery 15.8 21.9

Electrical machinery 2.9 8.0 Electrical machinery 8.6 12.0

Chemicals 2.9 7.8 Chemicals 6.4 8.9

Fabricated metals 2.1 5.7 Measuring instruments 3.4 4.7

B. Top five District export industries to the BEMs, 1987 and 1994

Ranked by1987 value

1987value

Industry Ranked by 1994market share' 1994 value value

Industrymarket share'

Transportation

(billions) (percent) (billions)

Nonelectrical

(percent)

equipment $1.2 32.1 machinery $2.4 26.0

Nonelectrical Electricalmachinery 0.9 24.2 machinery 1.6 16.8

Electrical machinery 0.4 10.8 Transportation equipment 1.5 16.5

Chemicals 0.4 9.6 Chemicals 1.1 11.4

Measuring instruments 0.2 5.0 Food & kindred products 0.5 5.9

'Industry market share is that industry's share of total District exports.

Source: Massachusetts Institute for Social and Economic Research 11992 and 1995).

and China. These three nations accounted forover 80 percent of total U.S. agricultural ex-ports to the BEMs from 1987 through 1994.Sales to Mexico increased nearly four timesduring this period, while those to China tri-pled. But the most rapid growth rates in U.S.agricultural sales were to the relatively smallermarkets of Argentina, Brazil, and Indonesia.(Agricultural exports to South Africa also rosequickly, but this was due to a severe droughtin that nation.)

Much of the growth in the value of agricul-tural exports to the BEMs stemmed from risingsales of value-added processed products, atrend that is reflected in agricultural exports toother nations as well. Since 1985, the share ofU.S. agricultural exports made up of theseproducts has been growing.' Processed prod-ucts include meat, poultry, dairy products, fatsand oils, beverages, and a wide variety of otherconsumer food products. Foreign sales ofprocessed products have actually exceeded theexport value of bulk agricultural commodities(such as wheat, cotton, and other crops) since1991. In general, bulk exports have suffered asthe effects of more favorable exchange rates

have been offset by greater competition fromother nations as well as weakened foreigndemand. In contrast, U.S. sales of processedproducts have benefited from reduced tradebarriers, income growth in many developingnations, a growing taste for Western foods, andthe convenience offered by processed foods.Furthermore, the transport of perishable fooditems has been aided by advancements in tech-nology that improved cost-effectiveness andreduced the potential for spoilage.'

From 1987 through 1994, the processedshare of U.S. agricultural exports to the BEMsrose from a third to nearly half. The majorprocessed exports are red meat and poultry,which together accounted for a fifth of thevalue of U.S. agricultural sales to the BEMsfrom 1989 through 1993, the latest year forwhich individual industry data are available.Mexico and South Korea are by far the largestbuyers. But while exports of red meat to theBEMs tended to rise from 1989 to 1992, asharp drop in 1993 pushed the value back downto the level of five years earlier. In comparison,the value of U.S. poultry exports made briskgains-particularly to Mexico, China, and

FEDERAL RESERVE RANK OF CHICAGO 9

Poland—and continued to climb even as salesof red meat faltered.

A host of other processed products export-ed to the BEMs made only modest individualcontributions to total sales, yet together ac-counted for 21 percent of the aggregate figurefrom 1989 through 1993. The most importantare soybean oil, animal fats and oils, milledcorn products, and milk powder. Those prod-ucts experiencing the most rapid export growthinclude soft drinks, ice cream and cheese, pota-to chips and snacks, and breakfast foods. Overthe period, the BEMs increased their purchasesof all processed products other than red meatand poultry by a remarkable 50 percent. Incomparison, purchases of red meat and poultryrose by a more modest 20 percent.

Among the major bulk commodities, salesof wheat and cotton to the BEMs generallydeclined from 1989 through 1993. The drop inwheat exports was largely attributable to Chi-na, which reduced its purchases by roughly 75percent. Cotton export sales not only declinedoverall but shifted away from South Korea andChina toward Mexico and Brazil. The value ofU.S. corn exports to the BEMs also suffered aserious decline from $1.2 billion to $288 mil-lion. This stemmed mostly from a steady de-cline in sales to South Korea and Mexico.China supplanted the U.S. as South Korea'smajor supplier, but China's recent switch fromcorn exporter to importer will give the U.S. anopportunity to recapture market share. U.S.sales of corn to Mexico suffered partly becauseof past Mexican policy that encouraged domes-tic production and erected trade barriers insu-lating Mexican producers from foreign compe-tition. But reform of those policies and theimplementation of the North American FreeTrade Agreement (NAFTA) helped revive U.S.corn exports to Mexico last year. In contrast towheat, cotton, and corn, the value of soybeanexports fared much better, rising by over one-third. Most of it went to Mexico and SouthKorea, though sales to Indonesia also regis-tered strong gains.

What share of agricultural exports to theBEMs is produced within Seventh District states?Though data on state-level exports to the BEMsare available, they must be interpreted with cau-tion for two reasons. First, the data are aggregatedalong broad product categories rather than byindividual commodities. More importantly,exporters may assemble commodities at a central

location (such as a major port) and then reportthat site as the point of origin of shipments.'"Consequently, the data on agricultural exportsoriginating from District states tend to be under-stated, while those from states with major portsare likely inflated. Nevertheless, some insightmay be gained regarding District agriculturalexports to the BEMs by examining the trends inthese data.

From 1987 through 1994, the value ofDistrict agricultural exports to the BEMs tri-pled, a much faster increase than sales to therest of the world. Nearly all the gain in Districtexports to the BEMs stemmed from crops andprocessed products rather than forestry prod-ucts, fish, or live animals. However, there wasconsiderable difference between the sales pat-tern of bulk commodities and that of processedproducts. While the export value of processedproducts to the BEMs generally gained steadilyfrom year to year, District crop exports experi-enced wide swings. As an example, China'sdisplacement of the U.S. as the primary cornsupplier to South Korea was likely responsiblefor the sharp decline in District crop exports tothe BEMs in 1991.

A closer look at the larger BEMs

It should be clear by now that the BEMsare not a homogeneous group. While theyhave some similarities, such as in the types ofgoods they import, individually they appear topresent unique challenges for U.S. export pro-motion and market strategies. Collectivelythey exhibit considerable growth potential, butseveral of them already are large export mar-kets for U.S. goods, namely Mexico, China,South Korea, and Brazil. Following is a closerlook at these four markets.

MexicoOne clear signal of Mexico's economic

reform efforts was its becoming a participant inGATT in 1986. Since then, the country hasmade significant strides in opening its economyby lowering tariffs (which in some cases wereas high as 100 percent), by privatizing many ofits state-owned industries, and by reducingbarriers to foreign investment. Between 1986and 1992, Mexico's total imports rose an aver-age of 25 percent per year. Road vehicles andmachinery (including electrical, general indus-trial, and machines for special industries) areMexico's largest import items. Machineryimports cover a broad spectrum including

10 ECONOMIC PERSPECTIVES

telecommunications equipment, metalworkingmachinery, textile and leather machinery, andcivil engineering equipment such as shovelsand excavating equipment.

U.S. exports to Mexico have increased 247percent over 1987-94, the third-largest per-centage increase of the BEMs. The U.S. isMexico's largest trading partner, with approxi-mately 70 percent of all imports coming fromthe U.S. and approximately 80 percent of allexports going to the U.S. Not suprisingly, ourexports to Mexico are in the industries fromwhich Mexico imports the most—electrical andnonelectrical machinery, and transportationequipment. Nearly half of all U.S. exports toMexico are in these three industries.

In 1993, the U.S., Canada, and Mexicobecame signatories to NAFTA, which furtherreduced tariffs between them. As a result, in1994 U.S. exports to Mexico increased by 22percent, or $9 billion from the prior year. Thehorizon has been clouded, however, by thepeso devaluation in late 1994.

South KoreaIn terms of imports, South Korea is the

largest of the BEMs, importing approximately$81 billion in goods in 1992. Yet import re-strictions still impede trade with South Korea.Policies to reduce barriers have resulted in lessformal barriers including still-high tariffs, par-ticularly on agricultural products, as well asemergency tariffs and adjustment tariffs." An-other major barrier is a restriction to import oncredit. U.S. exporters estimate they could in-crease exports to South Korea by nearly one-third if this restriction were not in place.12

Between 1987 and 1994, U.S. exports toSouth Korea grew by 123 percent. Over thatperiod, exports from all industries except agri-cultural crops increased. Electrical and non-electrical machinery exports increased by over$2 billion each, while transportation equip-ment exports grew by $1.5 billion. The toptwo U.S. exports to South Korea in 1993 weresemiconductors and aircraft, accounting forover 15 percent of all U.S. exports to SouthKorea in that year.

ChinaU.S. exporters have historically found it

difficult to trade with China. In 1991, China'simport licensing system covered about half oftheir imports (by volume), including consumergoods, raw materials, and production equip-

ment. 13 China also restricts imports by meansof quotas, embargoes on certain consumergoods, and stricter quality standards and testingfor imports versus domestic products.

In 1992, China's imports topped $80.5billion, up $25 billion from 1988.1 4 The coun-try is the second-largest import market of theBEMs, led only by South Korea. Its largestimport commodities in 1992 were machineryfor special industries such as textile and leathermanufacturing, and machinery related to weav-ing and felt manufacturing. Textile machineryand textile yarns accounted for nearly 20 per-cent of its imports.

U.S. commodity exports to China grewby 166 percent over the 1987-94 period, withtransportation equipment, nonelectrical ma-chinery, and chemicals the largest exportindustries in the latter year. At a more de-tailed level, the top U.S. export to China in1993 was aircraft, accounting for nearly one-fourth of all exports to China in that year.Motor vehicles and car bodies were the nextlargest export, accounting for over 7 percentof total exports to that country.

Despite the considerable growth in U.S.exports to China in recent years, they com-prised less than 2 percent of all U.S. exports in1994. In an effort to broaden market access forU.S. exports, especially in telecommunications,insurance, and agriculture, the United Statesand China agreed in March 1995 to an eight-point plan to open the latter's market to U.S.goods. The agreement included U.S. supportof China's accession to the newly formedWorld Trade Organization.

BrazilUntil 1990, Brazil's trade policy in regard

to imports was highly restrictive. From 1980to 1992, annual import growth was nil, andimport tariffs averaged 78 percent's Howev-er, economic reforms begun in 1989 havehelped expand trade. In 1993, imports in-creased by over $5 billion, or 25 percent overthe prior year. Average tariffs have been re-duced to 14 percent. 1 6

As a result, between 1987 and 1994, U.S.exports to Brazil increased by 101 percent.According to various newspaper reports, Bra-zil offers several key market opportunities toU.S. companies, particularly in the computerand textile manufacturing industries. With apopulation of 155 million, the country's com-puter market is expected to quadruple from

FEDERAL RESERVE BANK OF CHICAGO 11

TABLE 5

Seventh District overseas trade offices, 1994

Illinois Indiana Iowa Michigan Wisconsin

Belgium Canada' Germany Belgium Canada'

Hong Kong China Japan Canada Germany

Hungary Japan Hong Kong Hong Kong

Japan Mexico Japan Japan

Mexico Netherlands Mexico Mexico

Poland So. Korea South Africa So. Korea

Taiwan

'Indiana, Wisconsin, and Pennsylvania share a Canadian tradeoffice in Toronto.

2.5 million units in 1994 to 10 million by theend of the decade.' Another growth industryfor U.S. exports will be textiles and textilemanufacturing equipment. In the city ofFortaleza alone, 45 new textile and clothingcompanies are expected to open.' U.S. cottonexports to Brazil have already increased dra-matically, from $5 million to $85 million overthe 1989-93 period.

U.S. export promotion initiatives:Advocacy and assistance

Various government agencies provideexport assistance to U.S. firms in search offoreign sales. To date, these efforts have tend-ed to be fragmented and confusing to users.For example, certain programs are availableonly to small businesses or new businesses butnot to large or established ones, and vice versa;other programs are available only to specificindustries or for purposes of job creation. Toaddress this problem, the U.S. Department ofCommerce opened export assistance centers in1994 in Chicago, Baltimore, Los Angeles, andMiami. These are "one-stop shops" that pro-vide exporters and potential exporters withinformation to help them enter new markets orbuild on existing ones. The centers providetrade leads, information on overseas-relatedtrade shows, and information on major projectand procurement opportunities abroad. Inaddition, they offer information and assistanceon the various trade finance programs availableat the federal level, help exporters determinethe right program for them, assist with paper-work, and provide ongoing support. Nearly adozen more such centers are scheduled to openin 1995.

Another recent effort by Commerce was toopen an in-house information center and clear-

inghouse for advocacy requests.' These advo-cacy efforts represent a coordinated interagen-cy initiative by the federal government to helpAmerican firms compete and win major con-tracts such as infrastructure projects with BEMgovernments or joint ventures with BEM firms.The center maintains information on majorprojects and procurement opportunities world-wide and tracks advocacy requests.'

Export promotion efforts at the state levelare similar to federal efforts but provide moreone-on-one support and are geared more towardhelping small and medium-sized businesses.Most states also have overseas trade offices inkey markets to help facilitate the process at theother end, as well as to generate new trade leads,host trade shows, and promote their states'exports. Table 5 lists the overseas offices of theSeventh District states. Note that most of thestates have at least two offices in the BEMs.

The USDA also operates several agricul-tural export promotion programs. The twolargest and best-known are the Export En-hancement Program (EEP) and an export creditguarantee program. The EEP offers "bonus"payments to U.S. exporters that enable them tomeet the subsidized prices offered by othernations, particularly the European Union. Overtime, implementation of GATT will reduce theamount of direct subsidies that member nationsmay use to promote agricultural exports. Theexport credit guarantee program provides fed-eral guarantees to private lenders involved infinancing purchases of U.S. agricultural com-modities from abroad. Unlike the EEP, there isno specific outlay unless a borrower defaultsand the lender incurs a loss. Moreover, thisprogram is not affected by GATT. Finally, theUSDA also operates separate programs to sup-

port exports of soybean oil, cot-tonseed oil, and dairy products,and to promote the sale of pro-cessed products in general.

Summary

This article examined therecent U.S. experience in exportsales to the ten nations identifiedby the Department of Commerceas potential growth markets. Spe-cifically, we assessed the currentsize and growth potential of theten BEMs as export markets, andwe put the current U.S. presence

12 ECONOMIC PERSPECTIVES

in these markets into perspective. We also ex-amined the role played by Seventh District firmsin supplying these markets. A separate discus-sion of U.S agricultural exports to the BEMswas included because of agriculture's importantcontribution to the U.S. trade balance and be-cause of the large share of U.S. agriculturalproduction held by Seventh District states.

The ten BEMs clearly represent an impor-tant outlet for many types of U.S. products.Recognizing this, U.S. exporters have alreadymade inroads into these markets. U.S. exportsales to the BEMs have posted significant gainsin recent years, accounting for an ever-largershare of total U.S. exports. Most industrieshave increased their sales to the BEMs, thoughthey have not shared equally in the overall gain.Furthermore, the rise in U.S. exports to theBEMs has generally outpaced the increase inexports to the rest of the world. In addition,the U.S. share of BEM imports indicates thatAmerican exporters are holding their ownagainst tough competitors from nations such asJapan and Germany. This is true despite thefact that the U.S. is the leading supplier to onlythree of the BEMs.

In 1994, of all U.S. industries, the nonelec-trical, electrical, and transportation equipmentindustries registered the largest sales to theBEMs. These industries also accounted for halfof the export sales gain to the BEMs from 1987through 1994. However, several other indus-tries experienced even more rapid growth overthis period. This underscores two importantpoints. First, the U.S. is responding to theBEMs' current requirements, which are char-acteristic of developing nations. As the econ-omies of these nations grow and evolve, theirneeds and wants will change. The challengeto U.S. industry is to anticipate and respond to

these potential shifts in demand. To a largeextent, this will determine whether we canmaintain or increase current levels of exportsales to the BEMs. Second, the rapid growthof these markets holds promise for smallerfirms, as more opportunities are available inrapidly expanding markets.'

Exports from the Seventh District states tothe BEMs also rose more quickly than those tothe rest of the world from 1987 through 1994.However, the growth of Seventh District ex-ports tended to lag that of the U.S. in general.While Mexico, South Korea, and China werethe major customers for Seventh District prod-ucts, sales to Indonesia, Argentina, and Brazilexperienced the fastest growth. Furthermore,of total District export sales to the BEMs, pro-cessed food products moved into the top fiveindustries, reflecting rising incomes and thegrowing demand for U.S. agricultural productsin these nations.

Among the industries exporting agricultur-al products to the BEMs, processed productshave showed the steadiest growth in recentyears and seem better positioned to achievefuture gains than bulk agricultural commodi-ties. This is true because the factors drivingforeign demand for processed products aremore lasting than the year-to-year productionand price variations that tend to exert a rela-tively greater influence over imports of bulkcommodities.

In conclusion, it is clear that there are manyopportunities for U.S. exporters in the emergingmarkets. While several industries have madesubstantial inroads into these markets, consider-able potential for future growth appears to lie inother industries as well.'

NOTES

'U.S. Department of Commerce (1994a).

2 "The big emerging markets" (1994).

3 Ibid.

'Coughlin and Cartwright (1987) found evidence thatstate export promotion expenditures support manufactur-ing export levels.

6 Capehart (1994) and Carter (1994).

7 U.S. Department of Agriculture (1994).

'Greene (1994).

9 Tse (1993).

"Coughlin and Mandelbaum (1991).

"U.S. Department of State (1994b).

12 Ibid.

13 U.S. Department of State (1994a).

"This section uses United Nations data as the source ofChina's imports and excludes the province of Taiwan.

"Brooke (1994b).

FEDERAL RESERVE BANK OF CHICAGO 13

''Brooke (1994c).

''Brooke (1994a).

19 U.S. Department of Commerce (1994a).

20 U.S. Department of Commerce (1993).

"'Lyon (1995).

"Firms that are considering entering these markets mayreceive further information by contacting a U.S. exportassistance center.

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Brooke, James, "Denim and jeans pour out ofnortheastern Brazil," New York Times, April 7,1994a, sec. D, p. 7.

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14 ECONOMIC PERSPECTIVES