Category Archives: International

Mid-year Export Trends

By Bill Testa

Recently released data on U.S. foreign trade for July from the U.S. Census Bureau and U.S. Bureau of Economic Analysis (BEA) show an improvement in exports of U.S. goods. On a month-over-month basis, exports increased $1.8 billion, to $138.6 billion. This rise in exports—which helps to narrow the trade deficit—points to a stronger pace of U.S. gross domestic product (GDP) growth for the third quarter of 2014 relative to earlier this year.

July’s improvement in trade performance also bodes well for the economy of the Seventh Federal Reserve District. As seen below, exported manufactured goods make up a greater percentage of District production than of national production. Moreover, each District state’s ratio of manufactured export value to annual state output meets or surpasses the nation’s ratio of manufactured export value to GDP (7.1%). Notably, by this measure, Indiana and Michigan significantly exceed the nation as a whole, owing to their strong industry concentrations in transportation equipment (cars and trucks).

Looking more closely at July’s performance, one can see that the composition of July’s U.S. export growth favored District industries. As the Census/BEA trade report states: “The June to July increase in exports of goods reflected increases in automotive vehicles, parts, and engines ($1.7 billion); industrial supplies and materials ($1.3 billion); and capital goods ($0.4 billion).” In addition to the District economy’s high concentration in the export of transportation equipment, several District states also export significant amounts of capital goods: machinery and equipment such as agriculture, construction, and mining equipment, as well as computers and electronic equipment (see below). Moreover, several District states export chemicals, including both industrial chemicals and pharmaceuticals.

According to measures of export growth in first half of the year as compared to a year ago, not all industry categories have been holding up in 2014 (see below). Of particular note, machinery exports from Illinois, Michigan, and Wisconsin have been lagging compared to last year’s first half. And while automotive sales and production have been generally growing, transportation equipment exports from Michigan, Wisconsin, and Illinois recorded declines in first six months of 2014 over last year.

And so, if continued export growth can be sustained for the rest of this year and beyond, it will be welcome news for the District economy. Following a surge in growth during 2010–11 (see below), District (and U.S.) manufactured exports slumped in tandem with slowing growth in eurozone countries, which are important buyers of District manufactured goods. District manufactured export growth has also faltered on account of slower economic growth in China and in other lesser developed countries. Since global economic growth slowed down, global demands for commodities such as minerals and energy have eased, depressing Midwest exports of mining and construction equipment.


Rising District manufactured exports in 2014 would be consistent with modestly stronger global economic growth as compared with 2013.[1] As of its July forecast, the International Monetary Fund (IMF) expects global growth to be 3.4% this year, up from 3.2% in 2013 (see below). World economic growth is expected to further accelerate to 4.0% in 2015, according to the IMF. As our trading partners continue to experience faster economic growth, we can expect that their purchases of the District’s manufactured goods, such as machinery, transportation equipment, and industrial supplies, will begin to bolster the region’s manufacturing production.

Note: Thanks to Rebecca Friedman and Paul Traub for assistance.
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[1] Year to date through June, the five District state total of manufactured exports has risen 1.4% from $91.2 billion to $92.6 billion, according to Chicago Fed Staff calculations using data from the US Census Bureau, the Bureau of Economic Analysis, and Haver Anlalytics. (Return to text)

Economic Growth in the Near Term for the Industrial Midwest

What are the near-term prospects for economic growth in the industrial Midwest? In part because the Midwest is steeped in the production of durable goods, such as automobiles and machinery, its economy has long experienced more-pronounced swings over the business cycle than the overall U.S. economy. The current expansion following the Great Recession has been no exception. Until last year, the Midwest economy was generally outperforming the national economy. But weakness in manufacturing exports due to slowing global economic growth emerged in 2012.This weakness is giving those of us tracking the Midwest’s economic progress a reason for pause.

In order to better track the pace of the Midwest’s economic growth, the Chicago Fed unveiled its very own Midwest Economy Index, or MEI, in early 2011. The MEI shows that for the most part, the region’s economic growth has been exceeding its own long-run trend since mid-2010 (blue line in the chart below). At the same time, the so-called relative MEI—which provides a picture of Midwest growth conditions relative to those of the nation—has been indicating that regional economic growth has mostly been outperforming U.S. economic growth over the same period (red line in the chart below). And because the Midwest economy (as well as the national economy) still has ample slack four years after the Great Recession’s conclusion in mid-2009, many are still hoping—and perhaps still expecting—that the Midwest economy’s robust performance will continue.

Alas, if the past year has been any indication, the economic trends do not look favorable for the Midwest’s near-term prospects. As shown above, concurrent with the economic slowdown of the United States during 2012, the pace of the Midwest’s economic growth fell back into line with both its own long-run trend and its long-run relation to the nation’s economic performance. The manufacturing sector—whose level of production had fallen by more than 20% during the Great Recession—was leading the recovery, increasing its pace of production rapidly since the end of the downturn in mid-2009 through the early part of 2012. From June 2009 through April 2012, manufacturing output grew at an annualized rate of 6.1%. However, from April 2012 through May 2013, manufacturing output expanded at an annualized rate of 1.8%—more than a percentage point lower than its historical growth rate. Is this trend likely to continue?

The pace of the U.S. economic recovery, as well as that of the Midwest recovery, will depend partly on the pace of economic growth abroad, especially that of our major trading partners. No small part of the of the 2010–11 Midwest resurgence stemmed from the revival in manufacturing production for export abroad. In particular, manufacturing goods continue to account for a majority of U.S. and Midwest exports.

Export levels dropped off precipitously during the Great Recession (which lasted from the beginning of 2008 through mid-2009) before surging during the subsequent economic recovery. However, the pace of global economic growth slowed markedly during 2012, bringing down U.S. exports and reducing the overall pace of U.S. economic growth. The European financial crisis was partly responsible for the recessionary or nearly recessionary conditions in that part of the world last year. Meanwhile, China and the other Asian nations continued to grow in 2012, but at a slower pace than in previous years. The weakening conditions abroad are not expected to reverse course dramatically this year—and perhaps we will not see them improve markedly over next few years.

The effects of slower global growth can be seen in the performance of the Midwest’s exports. As seen below, the growth of manufactured exports in the Seventh Federal Reserve District (which comprises all of Iowa and majors parts of Illinois, Indiana, Michigan, and Wisconsin) had been climbing since the recessionary year of 2009—and doing so at a faster pace than the overall United States. Since early last year, however, exports in both the Seventh District and the nation have leveled off, with the Seventh District’s pace giving back previous gains on the nation’s (see chart below).

Source: U.S. Census Bureau/Haver Analytics.

Source: U.S. Census Bureau/Haver Analytics.

The four largest manufacturing export sectors in the Seventh District—which account for over two-thirds of the total value of its manufacturing exports—are as follows: chemicals, machinery, computers/electronics, and transportation (see table below). The distribution of these four industries are not, however, uniform across the Seventh District states; there are notable differences from state to state. For example, the transportation equipment sector holds the lion’s share of exports from Michigan, although much of this trade is destined for nearby Canada, where it will ultimately be reexported to the United States. Machinery exports dominate Iowa, Illinois, and Wisconsin—much of it is made up of agricultural, manufacturing, and mining equipment that is destined for regions throughout the world.

Looking further at trends by individual industrial sector reveals sources of weakness and strength for the Seventh District’s export performance (see chart below). The effects of weakened demand for mined commodities (such as coal and metals) and slower global economic growth in general are evident in the sharp reduction of the machinery sector’s exports. In contrast, the transportation sector’s exports have continued to climb. This largely reflects continued strength in light vehicle sales (i.e., car and light truck sales) in North America (and South America) rather than demand for these vehicles in Europe and Asia.

Source: Haver Analytics.

Despite strength in the transportation sector, the outlook for renewed growth in exports of manufactured goods is not robust in the near term. For the remainder of the current year, forecasts of global economic growth are weak, and they have recently been revised downward (see chart below). In the International Monetary Fund’s (IMF) most recent twice-yearly forecast, it lowered its forecast of global growth to 3.3% from 3.5%. The IMF also cut its 2014 forecast for global growth to 4.0% from 4.1%. By contrast, the global pace of growth in 2006 (before the Great Recession) and 2010 (soon after the Great Recession) exceeded 5%.

For the Midwest region, then, hopes of improvements in its manufacturing output lie with countertrends in domestic spending. In addition to the automotive sector being on the upswing, home construction activity has begun to climb nationally, albeit from very low levels. U.S. home completions have risen by over 30% (200,000 units at a seasonally adjusted annual rate) in the first quarter of 2013 relative to both 2012 and 2011. Historically, new home construction tends to spur new light vehicle sales, especially those of pickup trucks. So, too, sales of home-building materials, such as gypsum board, cement, and prefab housing components, are pulled up by home construction. To these may be added sales of home fixtures and appliances, although a large share of such goods are now shipped into the Midwest from other U.S. regions and imported from abroad.

Declining federal defense procurement due to sequestration, as well as other sources of budget retrenchment (including state–local government financial stress), will also weigh on Midwest manufacturing. For the most part, however, the Seventh District states rank low in per capita spending amounts of federal government procurement, so that lower federal spending will not be felt to the same degree as in many other parts of the country.[1] In the Seventh District, the largest manufacturing-related segment affected by reduced spending on federal defense procurements is trucks and military vehicles: Companies, including Oshkosh Truck Corporation (in Wisconsin), Navistar (in Illinois), and some automotive compaines are likely to be affected by reduced federal defense procurement spending.

Generally, those of us living in the Midwest do have reason for concern when national and global factors weigh on the domestic manufacturing outlook. Now is no exception.

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[1]For fiscal year 2010, all Seventh District states except Wisconsin ranked below 35th in per capita procurement spending from the federal government. Wisconsin ranked 14th that year. (Return to text)

Mexico’s Growing Role in the North American Auto Industry

Thomas Klier

Mexico’s auto industry has experienced tremendous growth since the mid-1980s. Last year, 19% of all light vehicles produced in North America originated in Mexico (see table 1). That is up sharply from 20 years ago and puts Mexico ahead of Canada in terms of the number of vehicles produced.

Table 1: Distribution of light vehicle production in North America

Source: Author’s calculations based on data from Wards Auto Infobank.

On May 30, a panel of distinguished experts gathered at an event hosted by the Detroit branch of the Chicago Fed to discuss factors behind Mexico’s growth as a vehicle producer.

Most of the presentations are available here.

Also, see a recent Chicago Fed Letter on the same topic.

Mexico has a long history of vehicle production; by the late-1930s Ford, GM, and Chrysler were producing vehicles in the country. Over the years, the Mexican auto industry was shaped by economic development policies put in place by the Mexican government. Starting in the mid-1960s, a policy of import substitution favored production of vehicles and parts within Mexico. A number of years later, the policy focus changed to export promotion, which encouraged Mexican producers to seek international markets for their products. In 1995, Mexico, the U.S., and Canada signed the North American Free Trade Agreement (Nafta). It established a framework and set out a timetable for boosting trade among the three countries. In the process, Mexico has become a very attractive export platform for North, Central, and South America (see table 2). In fact, the country has negotiated more than 40 free trade agreements, more than any other North American country. In addition, Mexico has benefited from a general improvement in its manufacturing competitiveness during the past few years. Its productivity-adjusted wages are the lowest among major manufacturing countries, it is an energy rich country, and it has a history of manufacturing (35% of the country’s GDP is represented by manufacturing).

Table 2: Light vehicle exports from Mexico by destination region

Source: Brendan Case, Alan Ohnsman, and Craig Trudell, 2012, “Automakers boost investing on vehicle factories in Mexico,” Bloomberg, November 13, available at www.bloomberg.com/news/2012-11-14/automakers-boost-investing-on-vehicle-factories-in-mexico.html.

In that context, it comes as no surprise that last year Mexico exported 83% of its light vehicle production. In fact, growing exports explain nearly all of the growth in Mexican light vehicle production during the last 30 years or so. Mexican light vehicle production is up by 2.4 million units since 1985. During the same time, its light vehicle exports rose by 2.3 million units. Lately it has been foreign-headquartered vehicle producers, such as Nissan, VW, Mazda, and Honda that have announced expansions of their Mexican production operations, continuing the upward trend of Mexican light vehicle exports.

Not as visible but at least as important is the ongoing growth of motor vehicle parts suppliers in Mexico. Companies large and small continue to invest in order to keep up with growing demand for parts in vehicle assembly in Mexico, as well as to feed the supply chain north of the border. Supply chain linkages, however, extend in both directions. Due to the integrated nature of the North American auto industry, growth in Mexico’s vehicle assembly has resulted in growing U.S. motor vehicle parts exports to our neighbor to the south.

Mexico’s Growing Role in the North American Auto Industry

Thomas Klier

Mexico’s auto industry has experienced tremendous growth since the mid-1980s. Last year, 19% of all light vehicles produced in North America originated in Mexico (see table 1). That is up sharply from 20 years ago and puts Mexico ahead of Canada in terms of the number of vehicles produced.

Table 1: Distribution of light vehicle production in North America

Source: Author’s calculations based on data from Wards Auto Infobank.

On May 30, a panel of distinguished experts gathered at an event hosted by the Detroit branch of the Chicago Fed to discuss factors behind Mexico’s growth as a vehicle producer.

Most of the presentations are available here.

Also, see a recent Chicago Fed Letter on the same topic.

Mexico has a long history of vehicle production; by the late-1930s Ford, GM, and Chrysler were producing vehicles in the country. Over the years, the Mexican auto industry was shaped by economic development policies put in place by the Mexican government. Starting in the mid-1960s, a policy of import substitution favored production of vehicles and parts within Mexico. A number of years later, the policy focus changed to export promotion, which encouraged Mexican producers to seek international markets for their products. In 1995, Mexico, the U.S., and Canada signed the North American Free Trade Agreement (Nafta). It established a framework and set out a timetable for boosting trade among the three countries. In the process, Mexico has become a very attractive export platform for North, Central, and South America (see table 2). In fact, the country has negotiated more than 40 free trade agreements, more than any other North American country. In addition, Mexico has benefited from a general improvement in its manufacturing competitiveness during the past few years. Its productivity-adjusted wages are the lowest among major manufacturing countries, it is an energy rich country, and it has a history of manufacturing (35% of the country’s GDP is represented by manufacturing).

Table 2: Light vehicle exports from Mexico by destination region

Source: Brendan Case, Alan Ohnsman, and Craig Trudell, 2012, “Automakers boost investing on vehicle factories in Mexico,” Bloomberg, November 13, available at www.bloomberg.com/news/2012-11-14/automakers-boost-investing-on-vehicle-factories-in-mexico.html.

In that context, it comes as no surprise that last year Mexico exported 83% of its light vehicle production. In fact, growing exports explain nearly all of the growth in Mexican light vehicle production during the last 30 years or so. Mexican light vehicle production is up by 2.4 million units since 1985. During the same time, its light vehicle exports rose by 2.3 million units. Lately it has been foreign-headquartered vehicle producers, such as Nissan, VW, Mazda, and Honda that have announced expansions of their Mexican production operations, continuing the upward trend of Mexican light vehicle exports.

Not as visible but at least as important is the ongoing growth of motor vehicle parts suppliers in Mexico. Companies large and small continue to invest in order to keep up with growing demand for parts in vehicle assembly in Mexico, as well as to feed the supply chain north of the border. Supply chain linkages, however, extend in both directions. Due to the integrated nature of the North American auto industry, growth in Mexico’s vehicle assembly has resulted in growing U.S. motor vehicle parts exports to our neighbor to the south.

New Issues in Immigration Research

By Maude Toussaint-Comeau

Over the past few decades, U.S. immigrant groups have abandoned a longstanding pattern of settling predominantly in major urban areas. Rather, their residential areas have expanded and diversified to rural locales and smaller metropolitan areas, along with the traditional settlement areas in big cities such as New York, Chicago, Los Angeles, Miami, and Boston. And within these big cities, immigrants are also now living in larger numbers in suburban communities.

In the 7th District, which includes most of Illinois, Indiana, Iowa, Michigan, and Wisconsin, immigrants are expanding their presence from the bigger cities to their peripheries and into rural areas. Immigrants are attracted by job growth, more affordable housing, better performing schools, and safer neighborhoods (Wilson and Singer, 2011).[1] This demographic transformation has heightened racial, ethnic, and linguistic diversity throughout the Seventh District.

While the geographical expansion of the immigrant diaspora offers more employment opportunities and greater access to goods and services, immigrants also face greater uncertainties. Communities that are unaccustomed or unprepared for inflows of foreigners sometimes view newcomers as a drain on resources and a threat to native employment.

For economists, these changes raise questions about the effects of immigration on local communities. Traditionally, economists have largely focused on the impact of inflows of immigrants on labor markets. However, we now look at other socioeconomic outcomes and issues in receiving localities. The pressure on local housing prices is one such outcome. This issue has become all the more important in the aftermath of the recent housing crisis, the worst in U.S. history. Adverse effects of the crisis have been widespread but not evenly distributed, neither geographically nor across different racial and ethnic groups. Researchers are seeking to understand how the increasingly widespread immigrant communities are navigating the crisis, as well as the role of immigrant housing demand in the housing market overall.[2]

In this blog, I discuss the changes in the foreign-born population in the Seventh District during the first decade of the 2000s and review new research on immigration from a workshop organized by the Journal of Regional Sciences (JRS) held at the Federal Reserve Bank of Chicago on November 7–8, 2011. The workshop brought together researchers to discuss new frontiers and directions for the study of immigration. A special issue of the JRS, to be published in February 2013, compiles selected contributions from the workshop.

Foreign-born in the Seventh District

The foreign-born demographic accounts for 13% of the U.S. population (Chart 1), and is expected to provide for most of the population gains in the coming decades (not shown) (Passel and Cohn, 2008).[3] In our District, 8% of the population is foreign born. Illinois, in particular, has remained an exceptionally strong magnet for immigrants among District states, with 14% of its population foreign born.

With the Great Recession and accompanying high unemployment rates in the first decade of the current century, the growth rate in the immigrant population in the Seventh District slowed from the rapid influx seen in the 1990s, the largest on record (Chart 2). This reflected the slowing national trend. Chart 3 distinguishes the growth in foreign-born populations in each Seventh District state’s largest metropolitan area relative to the rest of the state. The slower growth in the foreign-born population in the Chicago metropolitan area relative to the rest of the state is consistent with research that has noted the ongoing outward sprawl of this metropolitan area (Johnson, 2007).[4] In large metropolitan areas where economic growth has been lagging the state’s economic growth and where unemployment has been relatively high, the increase in the foreign-born population has tended to lag that for the remainder of the state. This is also the case for Milwaukee and Detroit (Chart 3).[5]

Source: US Census Bureau, Summary File 1990 and 2000 US Decennial Censuses; 2010 estimates from the US Census Bureau’s American Community Surveys.

Click to enlarge

Source: US Census Bureau, Summary File 1990 and 2000 US Decennial Censuses; 2010 estimates from the US Census Bureau’s American Community Surveys.

Click to enlarge

Source: US Census Bureau, Summary File 2000 US Decennial Censuses; 2010 estimates from the US Census Bureau’s American Community Surveys.

Click to enlarge

Implications for localized markets: New research findings

Research areas such as those examined in the JRS offer useful insights into the potential roles of immigrants in local housing markets, neighborhood characteristics, and local businesses’ survival and growth.

Among other pertinent findings of the studies in the JRS, one article finds that in an area in Europe that experienced a housing boom during the 2000s, about one-third of the increase in house prices and in the available housing stock between 2000 and 2010 can be explained by immigration. (Saiz, 2007, estimated similar effects for the U.S).[6] As the stock of housing is often owned by natives to a large degree, significant shifts in wealth are identified as a possible outcome of large-scale immigration.

Another article found that immigrants can have both positive and negative impacts on communities. On the one hand, the paper identified a positive effect of cultural diversity on average housing prices (e.g., ethnic food restaurants). But other costs associated with immigrant agglomeration may offset some of the positive effects.

Another article looks at whether a high population density of immigrants generates negative outcomes such as increased crime. The analysis reveals that the presence of a large population of immigrants, especially if from the same country, generates much lower crime rates. Accordingly, despite some public perception to the contrary, “enclaves” of immigrants may actually provide an effective way to reduce crime.

Impact on firms

The survival of firms and retention of employees are especially important during times of economic slowdown. One article examines whether businesses lay off native-born workers in response to an abundance of (potentially lower-cost) immigrant workers. The study shows that cities with large inflows of immigrants absorb them by significantly increasing the number of business establishments. The expansion of the number of firms is consistent with the lack of any negative effect of immigrants on wages identified in the literature (see, e.g., Card, 2009).[7] Other research presented in the JRS uses a unique database of immigrants matched to firms in Georgia. It analyzes whether hiring “undocumented” workers increases the probability of survival of a firm. It shows that these firms save on costs (i.e., labor) and have a significantly lower probability of exiting the market, especially if they are in sectors that produce labor-intensive goods.

New approach to studying impact of immigration

The new approach to the study of immigration’s effects acknowledges the diversity (heterogeneity) of skills that immigrants bring. The picture emerging from the studies in the JRS is that the local amenities of cities may be significantly affected by the presence of immigrants. Immigrants bring to urban areas important dynamics of population growth which affect housing values, among other things, and which have wealth implications for the entire community.

The findings in the JRS articles on immigrants and firms are consistent with previous findings that immigration has the potential to stimulate investment and increase the size of the economy without crowding out native workers in some instances. The analysis of undocumented immigrants, their specific characteristics, and their impact on firms has only recently become possible with new and unique firm-level data and offers an interesting avenue of research to be developed.

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[1]Wilson, Jill H. and Audrey Singer (2011). “Immigrants in 2010 Metropolitan America: A Decade of Change,” Brookings, Metropolitan Policy Program at Brookings, State of Metropolitan America/Immigration, October 2011 (Return to text)

[2](e.g., for a study of Hispanic neighborhoods in Chicago and the foreclosure crisis see, Martinez, Martha A. (2009). “The Housing Crisis and Latino Home Ownership in Chicago,” Institute for Latino Studies, University of Notre Dame, October 2009. (Return to text)

[3]Passel, J. and D’Vera Cohn (2008). U.S. Population Projections: 2005-2050,” Pew Research (Return to text)

[4]Johnson, Kenneth M. (2007). “Demographic Trends in Metropolitan Chicago at Mid-Decade,” Working Papers on Recreation, Amenities, Forests and Demographic Change. No. 6. (Return to text)

[5]For details on the ethnic and immigrant concentration in smaller geographies see University of Chicago Map Collection for Chicago Census Maps depicting neighborhood level data on the ethnic diversity and location concentration patterns in Chicago. For similar depiction of ethnic/immigrant neighborhoods in Detroit (e.g., Corktown/Irish; Greektown; Dearborn/Arab; and Mexican town), see here. (Return to text)

[6]Saiz, Albert (2007). “Immigration and housing rents in American cities,” Journal of Urban Economics, Elsevier, vol. 61(2), pages 345-371, March. (Return to text)

[7] Card, David (2009). “Immigration and Inequality,” American Economic Review, Papers and Proceedings, 99, 1–21. (Return to text)

Global Services and Midwest Prospects

Many have highlighted the importance of increasing foreign purchases of goods produced in the United States as a path to economic growth. In 2009, President Obama called for a doubling of U.S. exports of goods and services within five years, accompanied by the announcement of a National Export Initiative. So far, this goal remains reachable. Since the economic recovery began in mid-2009, U.S. exports have grown at a robust annualized average of 9.1 percent.

The economic recovery and accompanying export growth have been good news for the Midwest. As an important goods producer of both exported manufactured and agricultural products, the region has benefited from enhanced income and economic activity.

But goods are not the only possible exports from the United States. In a series of papers and a recent book, economist J. Bradford Jensen asserts that we should be emphasizing services rather than manufactured goods in assessing and promoting the nation’s export prospects. Further, the United States is particularly suited to export knowledge and skill-intensive services, much as it does manufactured goods of that nature. These would include business and professional services, such as accounting, software, management, public relations, advertising, R&D (research and development), construction, architecture, design, and specialized financial services.

As shown in the charts, the services share of U.S. exports has been growing—from 19.6 percent in 1980 to 29.3 percent in 2011. And the value of services exports has increased dramatically in the past several decades.

Source: U.S. Bureau of Economic Analysis.

Note: Export values adjusted by deflator for GDP.

Source: U.S. Bureau of Economic Analysis.

The extent of data available for specific segments of the services sector has been improving, but it remains inferior to the level of coverage for goods exports. The table illustrates the growth of the specific services exports that are reported by the U.S. Bureau of Economic Analysis.

Note: See link for footnote remarks

As shown here, many service exports have been growing very rapidly. For this reason, analysts like Jensen find the trends encouraging. The prospects for further export growth in these sectors seem bright, because the U.S. has tended to specialize in manufacturing industries that are also skill intensive, such as capital goods machinery and aerospace. As many developing countries continue to grow, they are likely to need just such skill-intensive services. Because many of these services segments need employees who are highly skilled, further expansion of their U.S. operations to serve growing global markets would create more high-paying jobs and income in the U.S.

Still, it is far from a foregone conclusion that robust export growth will materialize. That is largely because receiving countries have placed many restrictions on services imports, including cumbersome occupational standards and licensing, procurement favoritism by home governments, and limited or inadequate protections on intellectual property, such as patents and invention. As cited by this year’s Council of Economic Advisers, a recent study[1] estimated that “the aggregate level of discrimination against services imports in important emerging markets such as China, India, and Indonesia is equivalent to a tariff on these imports of more than 60 percent.” Accordingly, the further opening of global trade in the services arena will require much more international negotiation and agreement.

If services exports do grow markedly in years to come, does the Midwest region have a stake in this growth? If so, it is most likely to be found in the region’s large urban economies. Typically, large city economies have come to specialize in business and professional services. For instance, the Chicago area has been celebrated as a “global city,” in part because of its strong position and linkages in business and professional services, its corporate headquarters of multinational companies, and its world-leading risk contract exchanges and clearing operations.

The still dominant position of Chicago in exchange-traded derivative products is easy to document. Per figures cited by World Business Chicago, for example, Chicago exchanges including the CME and Chicago Board Options Exchange, account for 16 percent of the exchange-traded derivatives activity that takes place around the world.

However, more generally, details on globally traded services are hard to come by. Since data on services exports by individual city are sparse, some researchers have taken an indirect approach to appraising the position of cities in global commercial services. For example, Peter J. Taylor and Robert E. Lang construct city-by-city indexes of global connectivity among the most prominent offices of multinational firms in key services sectors. These service sectors include accounting, advertising, banking/finance, insurance, law, and management consulting. City rankings are constructed by accumulating the size of offices of these prominent firms (if any) in each city. In “Global Network Connectivity,” Chicago is ranks seventh behind Singapore, Tokyo, Paris, Hong Kong, New York, and London. Detroit ranks 85th; and Indianapolis 114th.

In another study, J. Bradford Jensen and Lori Kletzer examine the extent to which specific service industry employment is more concentrated than total employment across metropolitan areas. The notion here is that if, for example, the Chicago area employs more per people (as a share of work force) than the national average, the city’s economy is likely exporting these services. That is, Chicago employs a disproportionate share of workers in financial services not because Chicago area residents consume more financial services, but rather because they work for firms that export financial services to other parts of the nation or the world.

Taking a similar approach, we constructed local area indexes of employment concentration for those service sectors that are reported by the BEA to be internationally traded. The next chart identifies major metropolitan areas of the Seventh District by their employment concentration in these industries. An index value greater than one indicates an employment concentration that exceeds the U.S. average. For example, an index value of 1.20 indicates that the city contains 20 percent more of employment in a particular industry than the U.S. average. In turn, the implication is that those index values greater than one suggest the extent that the metropolitan area exports the service to its surrounding region or elsewhere, nationally or internationally.

Employment data for the core Chicago area are reported with the greatest detail.[2] We see that Chicago continues to be a city with many highly skilled industries, such as management consulting, education, and financial services, as well as its more traditional industries, freight transportation and warehousing.

Source: BLS/Haver Analytics.

Such industry detail is not available for other large metropolitan areas in the Seventh District. However, the following table, with data from aggregated employment categories, shows that these MSAs are also highly concentrated in exportable services.

*Categories include utilities sectors.

Source: U.S. Bureau of Labor Statistics/Haver Analytics.

However, such data give us little detail about which particular services are actually exported abroad rather than sold to neighboring cities, states or regions of the U.S. Accordingly, rather than employment concentration by industry, alternative data sources can give us better insights. Tourism is a case in point. During the course of their visits, foreigners spend on travel and local goods and services, which in turn give rise to domestic jobs and income. The table below ranks cities by their international visitors. As seen, visits are highly skewed toward New York City and a handful of other large MSAs. Chicago ranks 10th in 2001 by the number of visitors from abroad, with 4.3 percent of total visits. Still, this is roughly proportional to the Chicago area’s share of national population.

Source: Office of Travel and Tourism Industries.

U.S. colleges and universities are a leading service sector on the world stage. In turn, students studying here from abroad generate income for domestic workers and households. Per below, all five District states rank highly in hosting international students. Such students give rise to local income in tuition payments, as well as in local living costs for themselves and sometimes for their family members. In examining the largest individual institutions, we see that these benefits accrue not just to the District’s large metropolitan areas, but also to a number of smaller cities.

Source: Institute of International Education.

Source: Institute of International Education.

In conclusion, the Midwest has long known of its global linkages through exports of manufactured goods and foodstuffs. Perhaps one day the region’s exports of services will challenge the importance of its traded goods. With this possibility in mind, the region will want a voice in U.S. negotiations of global agreements that open up services to trade and protect U.S. services exports from unreasonable obstacles abroad. Closer to home, service-oriented cities of the Midwest will continue re-shape their infrastructure and public services to complement emerging services trade.

Note: Thank you to Norman Wang for assistance.

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[1]Hufbauer, Gary, Jeffrey Schott, and Woan Foong Wong, 2010. Figuring Out the Doha Round, Washington D.C., Peterson Institute for International Economics.(Return to text)

[2] These data are for the Chicago metropolitan division of the Chicago MSA.(Return to text)

Export Effects of a European Slowdown on the Midwest

By Britton Lombardi and Bill Testa

As the U.S. economy has shown signs of recovery, attention has shifted to the European sovereign debt crisis and its impact on European economic activity, along with its spillover effects on the rest of the world. In the Midwest, where the manufacturing sector has been leading the ongoing economic recovery, concern has arisen that another recession in Europe could dampen economic activity here too.

What effect might a European recession have on international trade and the manufacturing sector in the Midwest? What do we know from past experience about the sensitivity of trade to changes in economic activity? A recent paper from Chicago Fed economist Meredith Crowley studied the causes of recent trade collapses, especially the Great Trade Collapse during 2008 and 2009. Crowley tested three factors that could potentially affect international trade: declining aggregate demand, financing difficulties, and rising trade barriers. In the past five of six U.S. recessions, the U.S. and the world suffered trade declines as economic activity fell in the two to four quarters before the trough of these recessions. Crowley notes that the elasticity of imports for the U.S. ranged from 1.5 to slightly more than 2 , which implies that imports respond more than proportionally to changes in income and demand (an elasticity of 1 would indicate a proportional response). Based on her own and others’ research, she concludes that a drop in demand is the most important factor in determining trade declines. Trade financing exerts a more modest affect on trade, while rising trade barriers have not been an issue recently.

We might expect similar declines in European demand for imported goods from the U.S. and elsewhere in response to a recession there. How would such developments be felt outside of Europe? To get a sense of how the Midwest, specifically the Seventh District, might be affected, we can ask how exposed the region currently is to trade with Europe—since any drop-off in trade is likely to be somewhat in proportion to current trading patterns. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin. As seen below in Chart 1, exports to Europe grew for both the U.S. and the Seventh District during the 2000s, but still accounted for less than 2% of GDP for the U.S. and of gross state product (GSP) for the Seventh District in 2010. Therefore, exports to Europe account for a relatively small portion of the region’s economic activity. For 2010, the region’s exports to Europe were worth $31.5 billion, including agriculture and livestock products, oil, gas, minerals, and ores, as well as manufactured goods[1].

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Comparing U.S. regions (Chart 2), the Great Lakes region (which includes Illinois, Indiana, Michigan, and Wisconsin, but adds Ohio and excludes Iowa) lies close to the middle in terms of export exposure to Europe. The Seventh District’s export-to-GSP percentage is almost identical to that of the Great Lakes region, at 1.88% versus 1.91%. The Mideast has the greatest exposure to Europe, with exports accounting for 2.65% of GSP, while the Plains have the least exposure, with only about 1.4% of GSP going to Europe.

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What do we export to Europe? As shown in Chart 3, chemicals, machinery and transportation equipment, and computer and electronics account for about 70% of all Seventh District exports to Europe. How does the District’s overall export mix compare with other U.S. regions’?

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The Seventh District’s exports to Europe tend to be more heavily concentrated in three product categories—chemicals, nonelectrical machinery, and transportation equipment. Of our top 10 categories, we overlap with the rest of the U.S. in six of them (Table 1, non-overlapping categories highlighted in red).

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More importantly, our top trade categories are in sectors (industrial goods, such as machinery and equipment, and industrial chemicals) whose sales tend to rise and fall disproportionately with swings in overall business activity. A recent National Bureau of Economic Research working paper noted the procyclical nature of traded goods, specifically durable manufactured goods, and again found that the majority of the decline in international trade was due to a decline in demand for manufactured goods. The authors also find that the decline in the trade of durable goods versus nondurable goods (soft goods like food and clothing) accounted for a larger portion of the decline in total manufactured goods demand in both the recent Great Trade Collapse and the 2001 recession. Therefore, the Seventh District’s reliance on nonelectrical machinery as a top export (21.1% of total exports) could make our region somewhat more susceptible to the negative effects of a European recession than the rest of the U.S., where nonelectrical machinery accounts for a smaller proportion of exports (7.4%).

So, although the Seventh District economy’s exposure to Europe through the export channel is somewhat limited, a slowdown in Europe may be expected to hurt our region’s exports more than those of other regions that export less sensitive products. Exports and imports have historically been sensitive to overall economic conditions. In some cases, such as the 2008–09 global recession, trade declines can be severe.

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[1]Export data is pulled from the International Trade Administration’s TradeStats Express. Of total Seventh District world manufacturing exports, Seventh District sends about 48% to North America (Mexico and Canada), 19% to Europe, 17% to Asia and 7% to South America. For information on the District’s major trading partners by individual nation, see this blog. (Return to text)

Rebalancing and exports

Exports of goods and services have garnered much attention in recent months. For one reason, export growth has been leading the economic recovery in the United States. As several Asian and Latin American economies have begun to recover recently and strongly, they have begun to buy U.S. goods and services. The figure below shows annualized quarterly rates of export growth from the United States. The global recession of 2008–09 resulted in plunging U.S. exports to the rest of the world. However, the economic recovery during 2009–10 has been accompanied by robust export growth and world trade. Though currency swings may have contributed to U.S. export volatility, global swings in overall economic growth were the dominant force behind this volatility. The second figure below illustrates that world economic growth rates plunged by more than half in 2009. The turnaround in global growth was equally sharp, spurring the recovery of U.S. exports abroad. A similar trend can be seen (below) in goods exports from the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin.

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Looking out over the longer term, many analysts foresee a fundamental reorientation of the U.S. economy toward production and exports—led by a shift in demand by developing nations for U.S. products and services. Over the past few decades, in the United States there has been strong growth in the consumption of goods and services, including imports from overseas, along with low household savings rates. Meanwhile, saving rates in nations such as China and other developing nations have been very high, while their consumption (and imports from the United States) have been relatively low. Given these fundamental misalignments, tomorrow’s realignments may include a U.S. economy that shifts its production capabilities toward serving overseas markets.

Assuming that these developments do materialize, how is the Seventh Federal Reserve District economy positioned to contribute to export growth? As it turns out, states of the Seventh District—Illinois, Indiana, Iowa, Michigan, and Wisconsin—are highly oriented toward goods production destined for overseas markets. In particular, the Seventh District economy is steeped in both manufactured goods and agricultural products that are sold abroad.

Before I illustrate the Seventh District’s export orientation, let me say a prior word about the available data. The U.S. Department of Commerce takes great effort in tracing manufactured exports back to their state of origin. In this way, an exported machine that is produced in Wisconsin, but shipped abroad from Seattle, will not be (mistakenly) attributed to the state of Washington. However, these procedures of tracing the origin of production can be somewhat misleading for raw agricultural exports from the Midwest. Agricultural products tend to be over-allocated to the port of shipment or last storage, rather than to their state of agricultural production. For this reason, the U.S. Department of Agriculture re-estimates the origin of agricultural commodities, assigning U.S. exports abroad back to the home state according to each state’s share of the commodity’s production. For example (and with simplification), total exports of corn from Iowa are estimated from Iowa’s share of U.S. corn production. Such adjustments can be very important for inland states, such as those of the Seventh District.

After making such state-of-origin adjustments for agricultural commodities, the Seventh District’s export orientation becomes more apparent[1]. Agricultural exports make up 9.1 percent of the nation’s exports; and they make up 14.4 percent of the District’s exports.

As a share of annual production, or gross state product, the figure below reveals that the Seventh District is marginally more export-oriented overall than the nation. For both the nation and the Seventh District, manufactured goods account for the lion’s share of exports, and this holds true for individual states. Still, Iowa is the exception such that agricultural exports rival manufactured goods exports for that state.

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Agricultural exports represent a larger share of output for each Seventh District state, save Michigan, relative to their share for the nation. For fiscal year 2008, the five states of the District accounted for 21 percent of the nation’s agricultural exports[2]. All five states were significant contributors. Overall, Iowa and Illinois ranked second and third in the nation—Iowa by virtue of leading the nation in soybean, feed grain, and livestock/meat exports. Illinois’s exports in these same categories also ranked very high, as did Indiana in soybeans and feed grains (table below).

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Agricultural exports from the District have expanded rapidly over the past decade. Continued economic growth in developing nations has led to richer diets in such countries, sharpening the demand for U.S. agricultural products (see table below). Because of the global recession, exports of agricultural products slowed in 2009, but they are now rising once again in 2010 as global economic recovery unfolds.

The Midwest and Seventh District manufacturing sectors are also major exporters. As set out in my previous blog entry, the District produces capital goods, heavy machinery, and transportation equipment needed by developing countries as they build their own economies. (See also the detailed tables at end of this article.) However, the data’s assignment of U.S. manufactured exports to individual states and localities should be viewed as suggestive only, rather than as definitive (with a high degree of accuracy). That is because exported goods are often composed of various components, which may be produced almost anywhere—their value often originates from many places. For example, a heavy truck exported from Wisconsin will contain manufactured parts and materials from other plants or production sites located in other states in the Midwest or in different regions of the country; such components for the truck may even originate from outside the United States. Moreover, the truck’s value is also composed of services such as research and development, design, and headquarters/administrative services—any of which may take place across a wide geography. For these reasons, the export orientation of the broad Seventh District (Midwest) economy, relative to that of any particular state, is the more important point to be taken from these data. Geoff Hewings and his co-authors have demonstrated that Midwest states (and their plants and businesses) trade intensively with one another in producing final output, such as global exports. Accordingly, we can be fairly sure that many of the manufactured exports from states in the region are made up of “value added” originating somewhere in the broader multistate region, if not the specific state to which its entire value is assigned.

The same point holds true for recent estimates that attribute exports to metropolitan areas. A current Brookings Institution study reports that ”metropolitan areas produce 84 percent of the nation’s exports, making them the points of leverage for scaling up trade with the wider world. The 100 largest metropolitan areas alone account for over 64 percent of the nation’s exports, including 75 percent of its service exports.” For Seventh District metropolitan areas, the table below extracts data from that report. According to these measures, four of the District’s metropolitan areas rank within the top 25 nationally: Chicago, Detroit, Indianapolis, and Milwaukee.

The ultimate destination of exports by metropolitan area is also reported (by the International Trade Administration). For example, in 2008, Canada remained Chicago’s and Indianapolis’s top export destination, but the number two and three destinations differed. For Indianapolis, France and Germany claimed the number two and three spots; for the Chicago area, Mexico and India claimed the next two spots.

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As the nation moves beyond the profound economic disruptions of the past few years, it seems likely that the emergent economy will differ in important ways. Throughout the past decade, the Seventh District’s economic production has been shifting toward goods destined for overseas markets. Currently, the District’s export orientation in manufactured goods is at least on par with that of the nation—and even more so with respect to agricultural production. An accelerated shift in the United States toward producing goods for overseas markets would likely have a large impact on much of the Seventh District’s economic base. In addition to its agricultural prowess, the District’s manufacturers produce important capital goods that are in high demand as world trade and developing economies expand.

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[1] We also adjust manufactured exports using the U.S. Department of Agriculture’s agricultural estimates. Many food products, such as milled grain and oils, are otherwise counted as manufactured. (Return to text)

[2] Chicago Fed Research Department staff estimates.

Foreign Born, Educational Attainment, and Entrepreneurship

By Britton Lombardi and Bill Testa

Attracting immigrants to the Midwest may be an especially lucrative objective from a regional economic development standpoint. As discussed in previous blog entries, the growth performance of metropolitan regions has been strongly linked with the educational attainment of its work force, especially college level attainment.

Educational attainment of the immigrant population in the U.S. tends to be skewed toward the high end (though it is also bifurcated—skewing toward the lower end as well). The high educational attainment of immigrants owes much to the top-notch university system found in both the Midwest and the nation, which brings many of the world’s brightest to our doors. Afterward, our market-based economy provides ample opportunities and rewards to talent, hard work, and new ideas of immigrant workers and entrepreneurs.

So far, even as the nation has experienced an upswing in immigration, the foreign born population in the Midwest lags well behind that of the nation. As the chart below suggests, the region’s large metropolitan areas host a much smaller share of foreign born, with the exception of Chicago.

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A closer look below reveals that the Chicago metropolitan area has attracted both the highly educated and the less educated. The share of Chicago’s foreign born who hold a college degree is below the U.S. average. In contrast, in the remaining metropolitan areas of the Midwest, the foreign born population includes a greater share holding at least a bachelor’s degree in 2007. According to sample data from the U.S. Census Bureau, an incredible 50 percent of Pittsburgh’s working age population who were foreign born hold at least bachelor’s degree. Detroit, Cincinnati, St. Louis, and Columbus are not far behind.

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Overall, however, the foreign born tend to lift Chicago’s average college attainment due to the city’s high overall propensity to attract immigrants. The Detroit area also rates highly in this regard, coming close to the national average.

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Metropolitan areas in the region may also prize the foreign born for their tendency to start new businesses. The foreign born are, on average, business owners and self-employed at about the same rate as native born, though their experiences and bahaviors are quite varied. In a recent study, Maude Toussaint-Comeau finds that self-employment of immigrants varies by country of origin and by differences in personal and human capital characteristics. Immigrant-owned small businesses often contribute importantly to urban revitalization and community development.

Many more of the (immigrant) college educated concentrate their studies in technical and scientific fields than their native-born counterparts. A report estimates that in 2005, 41 percent of science PhD workers in computer, mathematical, architectural, engineering, and science occupations were foreign born. As a result, many fast-growing scientific and technical firms in IT and software have been founded by foreign born (and often U.S. educated) entrepreneurs. Another study estimated that between 1995 and 2005, 52.4 percent of the engineering and technology start-ups in Silicon Valley had one or more foreign born key founders. For our region’s foundering metropolitan economies, such firms would be truly welcome.

Our reading of the same data source above shows that entrepreneurship of the foreign born in the region’s metropolitan areas lies close to national averages. This is true of both college-educated foreign born and overall foreign born. Again, these tendencies vary across metropolitan areas.

However, the overall paucity of foreign born in the region tends to depress their importance as entrepreneurs. As the chart below suggests, again only Chicago manages to climb above the national average in this regard. The Detroit metropolitan area comes in a respectable second place.

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Competition in attracting technical and educated immigrants can be fierce. At a time when skilled and educated workers are most in demand in the U.S., our immigration policy focuses heavily on family re-unification rather than criteria related to occupation or skill. And, to the extent that we do allow immigration based on applicants’ job skills, we cap such visas at levels far below what employers require. In the past two years, the quota for H-1B (skill-based) visas was met quite quickly. For fiscal year 2007, the H-1B cap was met two months after the application process opened, and for fiscal 2008, the cap was met in just under one day.

Metropolitan areas in the region differ in their overt recruitment of the foreign born. One way involves enhancing the process of assimilation into the fabric of the area for recent immigrants and foreign born residents. Pittsburgh has created the Welcome Center for Immigrants and Internationals to create a welcoming environment and to provide necessary resources and information, such as advice for small business owners and career counseling services. Indianapolis organized the International Center of Indianapolis to provide relocation and training services to both attract and retain well-educated immigrants. Indianapolis, too, has developed a Welcoming Center that connects recent immigrants with well-established immigrants to facilitate community integration. In the Chicago area, the Chicago Council on Global Affairs organizes events, speakers, and task forces to raise international awareness and to expand Chicago’s perception as a top tier global city. One such program in the past included a Mexican American Task Force that provided recommendations to businesses, governments, and other interested parties of ways to utilize the strong Mexican community as an economic asset.

Metropolitan areas have also taken to outwardly promoting their international diversity and available opportunities. Many cities participate in “Sister Cities” programs to build relationships with foreign cities to increase their international profile and potentially attract foreign investment, as well as visitors. Just to list a few: Chicago has 27 sister cities spread out across the world, while Detroit has 7, Columbus 8, St. Louis 14, and Milwaukee 5. Additionally, metropolitan areas promote their diversity and opportunities through cultural festivals and events. For example, Pittsburgh held “Global Pittsburgh Celebration,” a month-long celebration that worked to raise awareness about Pittsburgh’s global assets and technology, as well as showcasing the abundant opportunities for foreign-born entrepreneurship and innovation in the area.

Exports and the 2008 Economic Slowdown

Back in the 1930s, policy makers perhaps contributed to the economic downturn by sharply lifting tariffs on imports into the U.S.—the infamous Smoot-Hawley legislation passed on June 17, 1930 that raised import tariffs on over 20,000 goods. In response to these policy actions, our trading partners raised tariffs (and nontariff barriers) on U.S. exports. If the U.S. intention was to keep jobs at home, the effect was probably to aggravate unemployment here and abroad.

In recent years, trading activity with other nations has been a definite engine of growth for the U.S. Exports are contributing much to an otherwise faltering pace of economic growth. Though exports comprise only 12.4 percent of U.S. output, export growth accounted for one-half of the nation’s (2.0) percent GDP growth in 2007; exports accounted for one-third of GDP growth over 2006 and 2007. Indeed, in every year since 2002, the growth of exports has added at least one-half percentage point to national output growth.

Per the graph below, export growth has similarly lifted incomes and output in the Seventh District. Overall, nominal export value climbed by $54.7 billion, or 58.7 percent, from 2003 through 2007, with every District state joining in the expansion. Per the table below, our NAFTA partners, Canada and Mexico continue to be our largest export destinations, with China growing rapidly over the 1997-2007 period.

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The strong role of our NAFTA partners as an export destination reminds us that growth in trade often comes about from the hard policy work involved in negotiating trade agreements with other countries. The graph below illustrates the growing number of countries that now receive exports from producers in Seventh District states. Each District state has added a fair number of trading partners since 1997.

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Aside from avoiding the (past) mistake of squelching international trade, the U.S. also has the opportunity to expand its export opportunities in the years ahead. Awaiting enabling legislation from the U.S. Congress, bilateral or two-nation agreements have been negotiated with Panama, Columbia and South Korea. To learn more about these agreements and those that have preceded it, one source of information is TradeAgreements.gov (this web site is a joint effort between the Departments of Agriculture, Commerce, State, Treasury and the Office of the United States Trade Representative).

Note: Vanessa Haleco-Meyer contributed to this weblog.