Trade Barriers Would Hurt US along with the Rest of the World

By Samuelson, Robert J. | American Banker, June 4, 1986 | Go to article overview

Trade Barriers Would Hurt US along with the Rest of the World


Samuelson, Robert J., American Banker


Trade Barriers Would Hurt US Along with the Rest of World

THIS IS PRECISELY THE wrong time to adopt trade restrictions. Since early 1985, the dollar has depreciated about 30% against major foreign currencies. Import prices are rising, and American exports are regaining competitiveness in world markets. Both trends put upward pressures on U.S. prices: The first raises prices directly, and the second tightens supply conditions in the United States. The way to check inflation and sustain the economic recovery is to maintain vigorous competition. Import restrictions reduce competition.

The trade legislation passed overwhelmingly by the House of Representatives in late May ignores this logic. Under the guise of opening foreign markets to U.S. exporters, the bill would require the President to slap import restrictions on uncooperative trading partners. The legislation panders to a nationalistic urge to get even with foreigners. But effective import restrictions wouldn't automatically achieve their avowed purpose of creating more U.S. jobs. Instead, they threaten to fan inflation and hurt the recovery.

No one denies the immensity of the trade deficits. Between 1980 and 1985, they ballooned from $36 billion to $148 billion. Nor does anyone dispute the suffering of workers and businesses that have lost export markets or been battered by imports. The Agriculture Department recently estimated that U.S. farm exports would drop for the sixth consecutive year to 37% below the 1981 level. Finally, other countries clearly maintain practices that hurt U.S. exports or subsidize their own exports.

But the connection between these dreary realities is artificial. Discriminatory trade practices aimed at Americans haven't exploded in the past five years and can't explain the massive U.S. trade deficits. They stem primarily from changes in worldwide economic conditions in the 1980s. Three have been especially important: The U.S. economy grew faster than the rest of the world's, increasing U.S. imports; the dollar's appreciation up until early 1985 made U.S. exports more expensive and U.S. imports less expensive; and the Third World debt crisis dramatically reduced U.S. exports to Latin America.

One illusion of the House trade bill is that a better trade balance means more jobs. Not necessarily. The last year of a trade surplus, 1975, was also a year of high unemployment. It's true that the lopsided trade deficit has cost jobs and profits in parts of the economy. But the flood of imports -- by helping check inflation -- also contributed to a prolonged economic recovery, which has increased jobs. On balance, it's hard to say whether the trade deficit has cost jobs or not.

The 1980s' experience also refutes the notion that trade restrictions can correct a rising trade deficit. Despite free trade rhetoric, President Reagan has run the most protectionist administration since World War II. It has acted to protect steel, autos, textiles and apparel, motorcycles and, most recently, machine tools. Trade complaints filed at the U.S. International Trade Commission have soared.

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