Conventional estimated equations have consistently underpredicted the US trade deficit in goods since 1982. This apparent breakdown of traditional relationships has motivated new approaches based on monopolistic competition, voluntary import restrictions, and import spillovers in disequilibrium models. In Discussion Paper No. 379, Research Fellow Michael Burda and Stefan Gerlach show that virtually all the deterioration of the US trade balance in goods in the 1980s has been in durables: capital goods, cars, consumer durables and durable industrial supplies.
From a surplus of 1% of GNP in 1980, the durables trade balance deteriorated rapidly, reaching a deficit of 2.5% of GNP in 1986. In contrast, the decline in the non-oil, non-durables balance has not been remarkable, given historical experience, and oil-based imports have held at about 2% of GNP throughout. The improvement since 1986 is also concentrated in durable goods. This calls into question the simplest `twin-deficit' explanation of the US trade deficit, Burda and Gerlach note. If it were due to a consumption boom induced by the federal deficit, the trade balance should worsen predominantly in consumer goods, but the deterioration in consumer durables is much less pronounced than in capital goods, and the deterioration in consumer non-durables is unremarkable.
Further disaggregation reveals that at least half the deterioration in the US durables deficit since 1982 can be explained by a large increase in imports of capital goods, historically a surplus account. In general, Burda and Gerlach note, the extent of deterioration appears to be inversely proportional to durability, with the most significant movements in capital goods, followed by cars, consumer durables and industrial durables. This suggests the importance of intertemporal aspects, since the timing of purchases is an additional decision variable in the demand for durable goods.
To test this hypothesis, the authors analyse a simple two-period optimizing model of the current account which highlights the responses of the durables and non-durables trade balances to changes in relative prices, other determinants of permanent income and the intertemporal price of durables. In periods in which current prices are low relative to the future, the model predicts that the trade balance in durable goods will worsen more than that in non-durables. Cointegration results indicate that intertemporal price movements are indeed an important determinant of both real durables imports and the durables trade balance. The estimates imply that a one percentage point fall in the intertemporal price of durables leads to a 1.4% increase in real durables imports and a deterioration of the durables trade balance of about 0.06% of GNP.
This effect could help explain the slow response of import prices and the consequent persistence of the US trade imbalance after the dollar depreciation of 1985-6, Burda and Gerlach conclude. Import-reducing policies will therefore be less effective than if the trade deficit were largely due to imports of non-durable consumption goods.

Intertemporal Prices and the US Trade Balance in Durable Goods
Michael C Burda and Stefan Gerlach

Discussion Paper No. 379, March 1990 (IM)