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July 9, 1993
"A Tizzy Over Trade - Many Economists would Argue that a Bilateral Trade Deficit is Literally a Meaningless Statistic. A Nation's Overall Balance of Trade Matters, but Economics Offers No Reason that Trade Should Balance with Every Individual Trading Partner."
San Jose Mercury News
By Timothy Taylor
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AS ANYONE who is nearing a birthday divisible by 10 will admit, certain statistics can take on an illogical importance. At the economic summit in Tokyo, Bill Clinton has focused on a statistic undeserving of such attention: the bilateral U.S. trade deficit with Japan.

In fact, it has become a subtext of U.S. interaction with Japan that if only Japan would open its markets and trade fairly, the U.S. economy would benefit enormously.

Last weekend, for example, Clinton told a group of journalists that the drop in long-term interest rates sparked by his deficit-reduction plan would give the economy a boost of about $100 billion, which would sustain economic growth this year. But after that, in the paraphrase of David Broder in the Washington Post, Clinton argued that "further progress depends on finding ways to boost consumer demand and expand trade in other major countries." Clinton told the group, "You have to find new customers to produce new jobs."

Even as something to say over lunch, this theory of how to stimulate the U.S. economy is politically and economically bizarre.

Lest we forget, the main decline in interest rates happened before Clinton took office. Ten-year Treasury securities, for example, paid 9.4 percent in March 1989, and just 6.8 percent by the end of 1992. Clinton certainly can't claim credit for any comparable drop in interest rates.

Moreover, falling interest rates weren't too successful in stimulating the economy on behalf of George Bush's re-election bid, because even at the lower rates, banks were reluctant to lend. If lower interest rates do prod the economy forward this year, the legacy of Bush will deserve more credit than the promises of Clinton.

In Tokyo, Clinton has been pushing Japan to phase down its trade surpluses. While reducing trade barriers is a worthy goal, increasing U.S. exports to Japan isn't likely to offer much stimulus for the U.S. economy.

Japan's trade surplus with the United States is a shade under $50 billion. Imagine, for the sake of argument, that rising U.S. exports eliminated that surplus over four years. That's a boost of about $12 billion per year, which is about 0.2 percent of the $6.3 trillion U.S. gross domestic product. One- fifth of 1 percent shouldn't be ignored, but it's not the difference between gloom and prosperity, either.

But eliminating Japan's surplus with the United States isn't realistic; most of America's trade deficit with Japan doesn't have much to do with whether Japan's markets are open or not. For example, a study just published by Fred Bergsten and Marcus Noland of the Institute for International Economics found that Japanese market access barriers are limiting American merchandise exports by $9 billion to $18 billion per year -- roughly one- or two-fifths of Japan's overall trade surplus with the United States.

Noland has become a senior staff economist with Clinton's Council of Economic Advisers. But in their study, Bergsten and Noland offer two reasons why Japan's trade surplus with the United States will probably stay in the $40 billion-$50 billion range.

First, Japan has a triangular pattern of trade that involves importing primary products like oil and lumber and exporting manufactured products to other industrialized nations. Given this pattern, Japan will always tend to run a trade surplus with the United States -- to make up for its trade deficit with Saudi Arabia.

In fact, many economists would argue that a bilateral trade deficit is literally ameaningless statistic. A nation's overall balance of trade matters, but economics offers no reason that trade should balance with every individual trading partner.

Along with its pattern of trade, Japan also runs trade surpluses because as a nation, it produces more than it consumes, sells the excess abroad, and saves the rest. By contrast, the United States consumes more than it produces, imports the extra and borrows the money to do so.

Clinton has been arguing in Tokyo that Japan should consume more, while his deficit-cutting package pushes the United States to consume less. But unless or until such policies turn Japan into a consumption mecca, and the United States into a staunch saver, Japan will tend to run a trade surplus, while the United States runs a deficit.

The main argument for reducing Japan's trade barriers, or for pushing the General Agreement on Tariffs and Trade to reduce world trade barriers, is not a quick fix for the U.S. economy. The struggling Japanese and European economies aren't likely to suddenly demand enough U.S. exports to detonate a boom in the U.S. economy.

Instead, a free trade environment in Japan and around the world, along with a lower U.S. trade deficit, will lay a groundwork for sustained long-term growth. Clinton has clearly decided to be "tough" on Japan, which seems to mean being accusatory. Japan's trade barriers surely deserve criticism for distorting the world economy, but so do European trade barriers and America's budget deficits. By monotonously pounding away on the evils of Tokyo trade bureaucrats, Clinton is contributing to the illusion that America's economic woes are all made in Japan. Moreover, I fear that he is giving shelter and comfort to those economic flat-earthers who believe that trade harms America's economy.

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