Trade Deficit Needs More Than Quick Fix
Should we be worried about the U.S. trade deficit now that Japan and West Germany have said “nuts” to Treasury Secretary James Baker’s demand that they juice up their economies and make the world a better place for U.S. exports?
No, save your worries for long-term questions on U.S. competitiveness. In the short term, the trade deficit is going to shrink, and the U.S. and world economies might well revive sufficiently to spread a little cheer even to the less developed countries. With the declining dollar making imports more expensive and U.S. exports more attractive, the trade deficit will shrink by $30 billion to $40 billion (from $170 billion) in 1987, estimates Director C. Fred Bergsten of the Institute of International Economics, and by a like amount in 1988.
Japan and Germany, despite their arguments at recent meetings in Washington, will help by stimulating their domestic economies, thereby making a market for more of the world’s goods. Why will they do it? Enlightened self interest, says Neal Soss, chief economist of First Boston Corp. If they do not do something, they risk a buyer’s strike by their big U.S. customer. That is, if imports continue to push U.S. workers out of jobs, the 1988 presidential election campaign (which begins in 1987 if it hasn’t already) will turn into one long debate on protectionism--with the forces of higher tariffs and import restrictions almost certain to win.
Pickup in World Trade
Therefore, watch for a pickup in world trade, after four years in which the United States ran big deficits in order to buy other countries’ goods. And watch also for Japan, which has accumulated dollars with its trade surpluses, to become a major international lender and investor, almost certainly channeling money to such growing--and once again creditworthy--countries as Brazil.
So much for the good news. For beyond the short term, the United States faces a problem of competitiveness--and not just in automobiles and steel. The real competitive challenge shaping up is in the advanced technologies that are the pride and glory of our entrepreneurial economy: computers and electronics, biotechnology, advanced materials (new kinds of metals and plastics and glass) and optics, the industry that brings us fiber cables, which transmit information much faster than old-fashioned copper telephone wire.
The United States leads in all of those industries, says a recent report in Fortune magazine, except optics--where Japan has taken the lead in a technology first developed at California Institute of Technology. The Fortune report is not gloomy but it is sober, giving clear warning that we must step up our efforts in high technology.
Less Innovation
We are not talking here about some distant future. Unemployment is now rising, and economic growth is so slow that economists debate whether we are falling into a recession. Why is the economy slow? One reason is that we are not innovating enough, not coming up with the new developments at the pace we did in, say, the 1940s and ‘50s, when, to take one example, Bell Labs invented the transistor and in less than a decade a handful of U.S. companies turned the invention into the semiconductor industry.
By some estimates, innovation accounts for 40% of an economy’s growth, and almost half of its gains in productivity--which means making the pie bigger so there is more for all. We haven’t been increasing productivity lately, and things are getting tight.
Meanwhile, across the Pacific, one of our leading competitors is working hard at the new industries, which depend on knowledge and information rather than raw materials or labor.
“In a world dominated by these industries, Japan will no longer be a resource-poor, vulnerable trading nation but one of the world’s best-endowed countries,” writes scholar Chalmers Johnson of the University of California at Berkeley in explaining Japan’s determined expansion in telecommunications.
Note well: Telecommunications is an industry pioneered by Americans in which our equipment and technology is second to none. Yet Japan is building its own global industry rather than buying from us. This is not competition according to the rules of economics that say the most efficient producer gets the business. Rather it’s a race to dominate those industries that will confer world economic leadership, and broad opportunity for a nation’s young people, into the next century.
So we are challenged; how are we responding? Optimists, at the Center for the Study of American Business in St. Louis, note an upturn in research spending by industry; pessimists, at UC Berkeley’s business school, worry that California is slipping even in high tech. Mostly, though, we seem only to wring our hands over an education system gone soft while tolerating capital markets that reward speculation and penalize investment. And that’s not good enough.
