The Trade Bill Is Wrong, and the Timing Is Worse
The latest trade figures make clear the shortsightedness of the trade legislation now before Congress.
The figures confirm that U.S. exports are beginning to grow again--a development that will spur protectionist pressures against our products in other countries. The last thing we ought to do is give those countries a pretext to act against us. Because it violates international trade rules, the trade legislation would do precisely that.
One of Congress’ fond illusions is that if you don’t like something, you can outlaw it. The House-passed trade bill takes that silly notion to its logical conclusion. In effect, it tries to outlaw the trade deficit. It orders the President to impose tariffs or quotas on countries that have large trade surpluses and are deemed to have “unfair” trade practices. Of course, other countries will find that we, too, have “unfair” trade practices. The bill risks a destructive cycle of protectionism.
And the timing could not be worse. If you are going to practice protectionism, at least pick a moment when your exports are slipping and imports are rapidly increasing. The worst moment is when your exports are rising and imports are receding. In those circumstances, protectionism may block imports that would have stopped anyway, while foreign retaliation actually hurts exports. Congress is embracing the wrong policy at the wrong time.
It’s clear that the dollar’s 40% depreciation since early 1985 is finally stimulating exports (by making them cheaper abroad) and discouraging imports (by making them more expensive to Americans). For months, there has been anecdotal evidence of the change. General Electric, for example, said it would make 500,000 color television sets in the United States rather than buying them in Japan. Now the trade data confirm the stories.
Superficially, the numbers don’t look impressive. In March, the monthly trade deficit narrowed to $13.6 billion from February’s $15.1 billion. The gain seems small compared with last year’s $166 billion deficit. In fact, the shift is stronger than it appears. First, the lower deficit resulted exclusively from higher exports; the dollar total of imports actually rose in March. And second, the dollar’s depreciation obscures the move away from imports and toward exports.
What’s at work here is a phenomenon that economists call the “J curve.” As the dollar depreciates, U.S. import prices tend to rise because foreign producers need to earn more dollars to convert into their domestic currencies and pay their local bills. Consequently, the total dollar cost of imports can rise when the volume is falling. For a while, higher import costs can offset any increase in exports. Thus, a currency depreciation affects a country’s trade balance like a J: First, the deficit gets worse; then, as exports grow, the balance turns up toward a surplus.
Consider an example. Japan sells us 1 million widgets at $1 apiece, with each widget costing 200 yen in Japan. The exchange rate is $1 to 200 yen. Now the dollar falls to $1 to 150 yen. The Japanese company needs to cover costs in yen and raises the widget price to $1.34 ($1.34 times 150 yen equals 201 yen). But at $1.34, we buy only 850,000 widgets. Widget demand is down 15% but the dollar cost is higher, $1.139 million ($1.34 times 850,000).
Precisely this process has masked the growth in U.S. exports and the decline in imports. The turnaround actually occurred in the third quarter of 1986. Until then, importers absorbed the dollar’s depreciation through lower profits with only modest price increases. But since then, import prices have risen more sharply and volumes have fallen about 5%. Meanwhile, export volumes have jumped about 10%.
What is important about this change is that import and export volumes actually affect economic growth and jobs in the United States. In sharp contrast to the period between 1980 and mid-1986, trade is now contributing positively to U.S. jobs and economic growth. Some economists even think we’ve reached the point on the “J curve” when the dollar trade deficit drops. Jerry Jasinowski, chief economist for the National Assn. of Manufacturers, predicts a $20-billion improvement in 1987.
What’s now desirable is a gradual decline in the U.S. deficit, with other countries stimulating the growth of their economies. This higher growth would create larger markets for U.S. exports while helping other nations offset export losses.
The trouble with the trade bills in Congress is that they distract attention from this problem. Eliminating “unfair” trade practices is a worthy goal, but not in a way that will embroil countries in protectionist squabbles. Unfair practices are not at the heart of today’s huge trade imbalances. These originated in the high dollar and the fast growth of the U.S. economy. As these forces unwind, a burst of American protectionism would only make an unstable world economy more unstable.
