The Implications of Developing Trends in Trade Policy
Ostry, Sylvia, Business Economics
At present the world trade system is characterized by uncertainty. As the U.S. budget deficit recedes as a issue, trade policies will rise in priority. Major issues will be the U.S.-Japanese bilateral trade deficit and targeting specific industries instead of broad industrial policies. Regional trading blocs are expected to develop, but their policies cannot be forecast at this time. Global corporations must function in this uncertain environment.
THE CENTRAL POINT of this paper is that the governing characteristic of the world trading system at present is mounting and pervasive uncertainty. This uncertainty is the product of the separate but interrelated decisions of the main actors who together shape the international economy -- the governments of the triad of the U.S., Japan and the European Community -- and the global corporations. None of these has a clear strategic view of what the system as a whole should be. Hence the pervasive uncertainty.
Let me first sketch out the major background factors and then raise some policy questions.
MACRO BACKGROUND FACTORS
The world trading system of the 1980s has been affected as much by macroeconomic or financial forces and policies as by the micro factors that are its traditional domain. As is well known, a powerful force fueling protectionist pressures in the U.S. in the first half of the decade was the wide swing in exchange rates and the rapid deterioration in the U.S. trade balance stemming from incompatible macro policy positions among the key industrialized countries of the G-7. The improvement in current account positions and exchange rate realignment since 1985 has been attributed in large part to the initiation and evolution of policy coordination in the G-7 since the Plaza Accord of that year.
While the full fury of the protectionist pressures has abated, and the Omnibus Trade Act of 1988 is an improvement over most of its 300-plus ancestors of the earlier part of the decade, some of its provisions suggest that U.S. trade policy is set on a new course, a subject to which I'll return later. During the next few years, once again, a key element in how this is exemplified is likely to be the current account positions of the U.S. and its main trading partners.
The U.S. Budget Deficit
There are several reasons for this assessment. The first relates to the U.S. fiscal deficit. Throughout the policy debate of the 1980s, a near-universal agreement existed among policymakers in the G-7 that a necessary (even for some, sufficient) "solution" to the problem of the current account imbalances was a sustained and significant reduction in the U.S. fiscal deficit. That consensus view is fast eroding, both internationally and domestically in the U.S.
On the international front, while standard communique rhetoric still scolds the U.S. for lack of decisive action on the fiscal front, the heat has dissipated. The fiscal-solution-to-the-world's-problems tone has evaporated. The reason is made quite clear in the most recent OECD Outlook: "In the more open international financial environment of the past decade, current account imbalances have proved financable on a large scale, and for longer, than would have been expected earlier." The threat of a dollar crisis -- the best international argument to spur U.S. budget action -- has become embarrassingly less credible in the face of reasonable exchange rate stability and, indeed, recent dollar strengthening. The heat has gone out of the issue. But the problem of current account sustainability should be redefined. The urgent issue is not financial but political sustainability.
On the domestic front in the U.S., the fiscal-deficit-doesn't-matter school has attracted more and more adherents and is certainly gaining strength in public opinion. As Brookings head Charles Schulze recently observed, "The left of center finds common ground with the supply siders of the far right" in arriving "at a common set of conclusions deemphasizing the importance of the deficit. …