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March 9, 1990 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 them. 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 in 1989. 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.
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© 2010 Timothy Taylor |