U.S. Loses Global Competitive Edge in Hi Tech

Every month, the U.S. trade deficit gathers attention as it jumps from record high to record high. For 2004, the trade deficit came dangerously close to 6 percent of gross domestic product (GDP). Its sheer size threatens the future stability of economic growth in the U.S., as its size is well above trade deficit levels of other countries that have experienced severe financial crises. We are often reassured that this is not a problem, since the U.S. remains at the forefront of innovation and modern technology in the global marketplace. We should thus use our competitive advantage to stay ahead of the rest of the world and ultimately shrink our trade deficit by concentrating on hi-tech product, where we enjoy a competitive edge globally. Unfortunately, this rosy prediction does not quite match reality. In 2004, the U.S. ran a $37 billion trade deficit in advanced technology products (ATP). To boot, our ATP deficit has sharply risen in the past few years as the U.S. loses ground in an area where it should be competitive.[1] Tomorrow’s release of trade deficit figures will show whether this unsettling trend has continued into 2005.

The deterioration in the U.S. trade balance in ATP is a rather recent phenomenon. Even when the overall trade balances experienced rising deficits, the ATP balance was positive, at least to 1999. From 1989 to 2000, the ATP balance remained above $10 billion each year and rose close to $40 billion in the mid-1990s. By 2002, the surpluses disappeared and the deficits rapidly grew. In 2004, the deficits approached $40 billion in nominal terms (figure 1).

Source for data is the U.S. Census Bureau’s Foreign Trade Statistics, located at http://www.census.gov/foreign-trade/statistics/country/index.html

Looking at ATP balances by product category shows a widening of deficits in five out of ten ATP categories (table 1). Of particular note, as of 2003 U.S. deficits in the information and communications category alone negated all other ATP category surpluses. In 2004, the net surpluses in the categories outside of information and communications technologies equaled only about half of the deficit in information and communications technologies.

However, deficits also widened in other important areas such as life sciences and optical electronics. In life science products, such as MRI machines, the deficit widened by $4.7 billion dollars over the course of two years. The deficit in this category explained almost half of the entire deficit in ATP in 2004. That is, the U.S. is losing ground on a broad basis in the global hi-tech competition.

Table 1: U.S. Net Trade Balance in Advanced Technology Products, 2002 to 2004

Notes: Source for data is the U.S. Census Bureau’s Foreign Trade Statistics, located at http://www.census.gov/foreign-trade/statistics/country/index.html and authors’ calculations. All data are in millions of current dollars. Categories correspond to those used by the U.S. Census Bureau.

Analyzing trade data on ATP by country also shows rapid changes in the past few years (table 2). Not only is the U.S. losing its competitive edge to such usual suspects as China and Japan, but it’s also losing ground to less obvious countries like Ireland and Mexico. Ultimately our ATP deficit with China sticks out above the rest, standing at about $36 billion in 2004, or roughly 3 ½ times the next largest deficit nation, Malaysia. Yet, even our deficit with Ireland still approached $10 billion in 2004. Further, although five of the ten largest deficit countries saw improvements from 2002 to 2004, the improvements were, in absolute terms, much smaller than the deterioration of the deficits for the other five countries. Deficits with China, Malaysia, South Korea, Mexico and Thailand widened by amounts between $0.7 billion and $24.5 billion. In comparison, deficits with Ireland, Japan, Taiwan, Indonesia and Singapore improved only between $0.1 billion and $1.3 billion from 2002 to 2004 – a fraction of the deterioration in the countries with widening deficits. The deterioration of the U.S. trade in ATP is thus not only broadly shared between product categories, but the deterioration also cuts across a wide range of trading partners.

Table 2: Top 10 Largest Advanced Technology Product Trade Deficits for 2004

Notes: Source for data is the U.S. Census Bureau’s Foreign Trade Statistics, located at http://www.census.gov/foreign-trade/statistics/country/index.html, and authors’ calculations. All data are in millions of current dollars. The countries are arranged according to the size of their 2004 deficits.

We can also combine the ATP data on product categories and deficit countries to understand the driving forces, in terms of products for the top deficit countries (figure 3). Specifically, we look at the five countries with the largest deficits in 2004, and in each country, we look at the three product categories in which the respective countries have the largest deficits or the smallest surpluses.

The data show some consistency with respect to deficit categories. In all five countries, the deficits in information and communications technology are among the three smallest trade balances. In fact, in four out of five countries, it is by far the largest ATP deficit. Also, the balances in opto-electronics rank among the three smallest trade balances in four of five countries. Further, in four countries, Japan being the exception, the largest ATP deficit also experienced the largest deterioration from 2002 to 2004.

However, there is also substantial variation among the components in each country’s bilateral ATP trade balance with the U.S. Four out of the five countries have at least one deficit category that is unique to them: nuclear technology in China, advanced materials in Malaysia, biotechnology in Ireland, and flexible manufacturing in Japan. Outside of information and communication technologies, there were at least three instances where bilateral trade deficits in particular product categories exceeded $1 billion in 2004: opto-electronics in China, and life sciences and flexible manufacturing in Japan. A cross-cutting look at countries and ATP categories confirms once again that the U.S. is losing its competitive edge on a broad basis.

Table 3: Three Smallest ATP Trade Balances of Top 5 Deficit Nations

Notes: Source for data is the U.S. Census Bureau’s Foreign Trade Statistics, located at http://www.census.gov/foreign-trade/statistics/country/index.html, and authors’ calculations. All data are in millions of current dollars. The categories are arranged according to the size of the 2004 deficits.

The U.S. has seen a sharp deterioration in its trade balance over the past few years. To regain control of this destabilizing force, the U.S. needs to increase its competitive edge globally. One area where the U.S. had hoped to build and expand this competitive edge was in hi-tech manufacturing sectors. However, the trends in recent years have shown this to be a false hope. The growing trade deficit in advanced technology products is an example of such trends. In the interest of economic stability, the U.S. must regain control of its slipping advantages in global competition in hi-tech products. A comprehensive innovation policy would be one place to start.

Christian E. Weller is senior economist and Tyler Tepfer is an economic policy intern at the Center for American Progress.