Trade Deficit Has Lethal Fallout

I do not know anything about how my car works, but when it starts making strange noises, I get nervous.

Similarly, Americans, who are largely indifferent to international economic issues, are experiencing a growing sense of unease: For much of the post-World War II era, America’s trade position was unassailable, but in the last several years it has slipped badly. Americans may not know exactly what the trade deficit is or what the driving forces behind it are, but they sense that something has gone profoundly wrong.

Their instincts are right. The trade deficit is palpable evidence of a sharp relative decline in America’s competitive capabilities. Until recently, we were the best--often the only--producers of the world’s most coveted goods. No longer. Our producers now face serious competition in industries as diverse as apparel, automobiles and computers. The competition comes not just from producers in low-wage countries but from producers in countries paying wages even higher than our own. In a growing number of products, “Made in America” is no longer synonymous with the best in quality and technology.

The trade deficit is also sobering evidence of our unresolved macroeconomic imbalance. We are spending more than we are producing and covering the gap with foreign products and foreign borrowing. If we continue to run a trade deficit of $100 billion to $120 billion for the next few years, as seems likely, our net foreign debt will hit $1 trillion by the early 1990s.

Foreign lending to the United States is not free. The debt establishes a lien on our future living standards. By the mid-1990s, we will owe foreign creditors about $60 billion to $75 billion a year in interest payments--money that will not be available to meet our many competing economic and social needs.

Debtor status restricts our policy choices in other ways. As long as we rely on foreign funds to finance our excessive national spending, we have to keep foreign investors calm and confident. This means policies to support the dollar, even though a lower dollar would improve the trade imbalance. And it means policies to bolster interest rates, even though lower interest rates would stimulate investment on which the nation’s long-run competitive position depends.

Our foreign policy options are also limited by our indebtedness. America’s policy discretion on such important issues as a long-term resolution of the Third World debt crisis, credit and trade flows with the Soviet Union and military burden sharing is hampered by a lack of funds and by the need to act in ways that keep our Japanese and European creditors happy. It is hard for a nation to act as a superpower when it is also a super-debtor.

Although Americans are right to worry about the trade deficit, they are often wrong in their diagnosis of its causes. Contrary to what many Americans think, domestic factors, not unfair trading practices abroad, are the main source of our problem.

For decades, we have under-invested in our physical, human and knowledge capital. We have allowed our productivity and technological advantages to disappear.

We have happily supported taxation and government spending priorities that have encouraged a live-for-today attitude. As a result, we have the lowest national saving rate among the advanced industrial nations, and we are forced to depend on foreign saving to finance a substantial fraction of our investment.

Americans who worry about the fact that foreigners are buying up the country’s prime real estate and productive assets should worry instead about the fact that we have put them up for sale in order to live well now without investing enough for the future.

Does this mean that American producers have not been hurt by unfair trading practices abroad or that more effective trade policies would not improve the trade deficit? The answer is “no” on both counts.

During the past 40 years, America’s markets have been more open than the markets of most of its trading partners. Protected and promoted by government policies, foreign producers in several countries, especially Japan, have built up the capacity, experience and technological know-how they needed to become fierce competitors. For too long, the United States has either overlooked the long-term implications of such foreign practices for American producers or responded only when severe harm has been sustained by them. America’s semiconductor industry is a classic illustration.

Perhaps because we can no longer afford to be the market of last resort for the rest of the world, we are becoming a lot tougher. Last year, we enacted a new trade bill to improve foreign-market access for U.S. goods, services and investments. The new bill is designed to combat unfair foreign practices before, not after, they injure American producers.

These are laudatory changes in our trade policy objectives, and the new legislation, if used wisely, could reduce barriers to trade to the benefit of producers around the world.

America’s new toughness on trade, however, is not without risk. Even as we champion freer and fairer trade, we have increased our own trade barriers. And we are relying more on bilateral trade deals to win larger market shares for our producers. Such deals promote “managed trade” arrangements that divide world markets on the basis of political clout rather than on the basis of economic efficiency. Domestic consumers and low-cost producers from developing countries are often the victims of such arrangements.

Finally, confrontational bilateral negotiations in which America uses the threat of closing its market to compel more open markets abroad can backfire, resulting in foreign retaliation and in a general deterioration of economic and political relations with our trading partners.

Given the magnitude of the nation’s trade deficit and the political realities that obtain, the risks that accompany a more activist trade policy are probably worth taking. However, there is one less tangible risk that outweighs all the rest: If we focus on unfair trading practices abroad, we may overlook our own responsibility for the trade imbalance.

It is always tempting to blame others for self-inflicted injury. I often blame my mechanic for problems with my car even when my failure to follow proper maintenance procedures is the real source of its difficulties. Similarly, many Americans would like to blame foreigners for the nation’s trade problem, when most of the fault lies at home.