Competitiveness Involves More Than Trade Deficit

The sudden upsurge of public interest in “competitiveness” clearly has been triggered by the fact that America’s merchandise balance-of-trade deficit reached a record $170 billion at the end of 1986.

This trade deficit has performed a useful political role in shaking the nation from its complacency. But the only policies that make sense in trying to make America more competitive are those that we should undertake even if we were not worried about foreign competition.

Competitiveness has to do with how the performance of the American economy compares to that of other rich nations. This can be measured in three ways.

The most obvious is the rate of economic growth.

A second is the growth of the gross national product per capita, which divides a nation’s GNP by the number of people in that country. The former measure is more appropriate if one views competitiveness as a measure of national economic strength, the latter if one is interested in comparing the rate of increase in national living standards.

A third useful indicator of competitiveness is productivity. This measures a nation’s ability to generate increased wealth per worker each year, and is strongly influenced by such factors as the amount of investment in new plant and equipment and the skill level of the work force.

How does recent U.S. performance compare to that of Japan and West Germany, our two major competitors? Between 1979 and 1985 the American economy grew on average only half as rapidly as Japan’s, though somewhat more rapidly than West Germany’s. However, based on the other two indicators, America clearly was in third place. Our average growth in gross national product per capita was only one-third that of Japan, while Japan’s productivity grew five times as rapidly as the United States’. West Germany also performed better than the United States, although not by as much as Japan.

While it is certainly encouraging that it did not take a major recession for Americans to become concerned about the long-term performance of their economy, there is a danger in focusing on the trade deficit as a symptom of our nation’s economic difficulties. For there are any number of ways in which the United States could easily reduce or even eliminate its merchandise balance-of-trade deficit--none of which would mean that our economy has become any more “competitive.”

The most obvious is to encourage a still further decline in the value of the dollar against the currencies of major U.S. trading partners. Although many Americans seem to prefer foreign-produced goods, at some point, if the dollar were to sink low enough, we would purchase far fewer foreign products and foreigners would substantially increase their consumption of American produced goods and services.

To take an extreme example, if the yen were valued at 15 to the dollar instead of 150, our trade deficit with Japan would vanish overnight. Unfortunately, this also would mean a major decline in American living standards. We would each have to work 10 times as hard to purchase an equivalent “basket” of Japanese products. And each Japanese would have to work only one-tenth as long to purchase the same amount of American-made products.

Our trade deficit also would decline if American workers and investors were willing to accept substantially lower wages and profits than their counterparts in other nations. Just as an individual employee can become “competitive” by being willing to work for lower wages, so would American firms become more “competitive” if they lowered their prices. But the result would be the same: a decline in our standard of living. Any nation can improve its trading position if it is willing to become poorer.

America can never hope to dominate the world economy as it did in the quarter-century after World War II. Nor should it want to. The recovery of Europe and Japan and the industrialization of nations such as Taiwan, South Korea and Brazil should be cause for celebration. In any event, given the relative size of its population, America will likely always have the world’s largest gross national product.

A more realistic and responsible goal is to improve on our own undistinguished economic record of the last 15 years. We need to figure out how and why America was able to grow twice as rapidly during the 1960s as it has grown during the 1980s. Why have our annual gains in productivity since 1973 averaged less than one-third what they were between 1947 and 1973? Why has our annual investment in new plant and equipment been declining since the late 1960s?

Returning to the growth rates of the 1960s would not necessarily make America more “competitive.” That would depend on how our performance compared to other nations’. But it would certainly make us richer than we would otherwise have been.