March 9, 1990
"The United States should Certainly Strive to Push Its Overall Trade Deficit
Closer to Balance, but It will Always have Trade Surpluses with Some Countries
and Deficits with Others. It is Silly to Pretend that the Goal should be Balance
with Every Individual Country. Figures belie Claim that Japan is Culprit for U.S.
San Jose Mercury News
By Timothy Taylor
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IT used to be that American politicians could act tough by voting to build
nuclear weapons and threatening to blow up the world in a retaliatory strike,
all the while pointing to the Soviet Union as the cause of their actions.
But recent events in the Soviet Union and Eastern Europe have meant that politicians
can't win easy applause any more by kicking communism around.
So today, politicians are threatening to vote for trade barriers and blow up
the world economy, all the while pointing to Japan as the culprit.
This is a peculiar metamorphosis. After all, Japan is a successful capitalist
democracy and a strong U.S. ally, not an impoverished communist dictatorship.
Yet, the hype and tension surrounding the recent talks between President George
Bush and Japanese Prime Minister Toshiki Kaifu made it seem that the U.S. trade
deficit is growing ever larger; that trade with Japan is the main factor in that
deficit; that Japan has been especially closed to U.S. exports; that imports of
Japanese origin are increasing sharply; that the trade imbalance between the U.S.
and Japan is the key issue in the world economy; and that reforming the Japanese
economy is the most direct way to solve America's trade problems.
All these points are simply wrong. The evidence won't alter the prejudices
of those who are interested in whipping up a frenzy against Japan. But if you
are willing to adjust your opinions to accommodate the facts, consider a few of
The U.S. trade deficit blossomed from $36 billion in 1982 to $159 billion in
1987. The main reason is that enormous federal budget deficits allowed this country
to suck in imports and consume more than it was producing.
But in the later part of the 1980s, budget deficits were reduced somewhat and
the value of the dollar on foreign exchange markets declined, making U.S. exports
cheaper and imports more costly. The trade deficit is now down to $112 billion.
That's still too high, but at least the trend is in the right direction. Moreover,
it illustrates that reducing the budget deficit does have a substantial effect
in reducing the trade deficit.
Japanese trade barriers were clearly not the source of the U.S. trade deficit.
Japan bought only 9.8 percent of U.S. exports in 1982, but purchased 12.1 percent
Of course, the Japanese economy isn't open to many U.S. exports. But the United
States government has helped to set up barriers to many Japanese products, too,
like cars, steel and semiconductors. In fact, most countries have their share
of trade barriers, and U.S. exporters have been having better luck expanding their
sales in Japan during the 1980s than they have had elsewhere in the world.
The invasion of imports from Japan is news, but a little dated. When the U.S.
was splurging on consumption and importing in the mid-1980s, Japan's share of
total U.S. imports rose from 15.2 percent in 1982 to 21.9 percent in 1986. But
for the last three years, U.S. imports from other places have been growing faster
than imports from Japan. By 1989, Japanese imports had fallen to 19.7 percent
of total U.S. imports.
Perhaps most troublesome of all, the recent hubbub over Japanese trade seems
to be focusing on a number with very limited economic significance: the "bilateral
trade deficit" between Japan and the United States, which rose as high as
$57 billion in 1987, but has fallen by about one-eighth in the last two years.
The underlying assumption of the current talks seems to be that the bilateral
deficit should be zero, which is economic nonsense. The United States should certainly
strive to push its overall trade deficit closer to balance, but it will always
have trade surpluses with some countries and deficits with others. It is silly
to pretend that the goal should be balance with every individual country.
It is surely true that Japan manages its economy in ways that penalize consumers
and benefit certain businesses. But let's face it, American politicians are not
upset because Japanese consumers are getting a bad deal. What politicians do care
about is having some country to blame for the U.S. trade deficit, and some country
to talk tough about.
As a result, the main threat to the system of fairly free trade that has served
the world economy so well in the last few decades doesn't come from Japan, but
from the U.S. government.
The true danger is that American politicians may whip themselves into a frenzy
against Japan. Eventually, once the politicians have persuaded themselves that
it is "politically necessary" to take a "tough" and "pragmatic"
stance, they may lash out and do something grievously stupid that will truly injure
free trade. Japanese trade barriers are real, just as U.S. and European trade
barriers are real, and such barriers should be the subject of ongoing negotiations.
But the main underlying cause of America's trade deficit is that the U.S. government
has now run budget deficits of greater than $120 billion for the last nine years.
|U.S.-JAPAN TRADE IN 1980S
|The U.S. trade deficit has declined from 1987, as budget deficits
were reduced and the value of the dollar shrunk. Japan's proportional consumption
of U.S. exports has grown, while Japanese products accounted for a slightly smaller
share of total U.S. imports last year.
Total U.S. trade
Japan as share
Japan as share
(sl) In billions of dollars
Source: Alicia H. Munnell, "Why Has Productivity Growth Declined? Productivity
and Public Investment," New England Economic Review, January-February 1990.
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