International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

CONCLUDING REMARKS

The primary danger emanating from the perception that large international imbalances exist is not that they will one day become unsustainable. Rather it is that global portfolio growth and diversification will make such "imbalances" too sustainable and their persistence, contrary to conventional expectations, will result in calls for unilateral measures to reduce imbalances that are seen, largely without foundation, as the result of "unfair" trade practices.

Such calls are already being heard in the United States. Once the false notion that bilateral balance ought to be the outcome of "fair" trade was embedded in the 1988 U.S. trade bill, the stage was set for considerable mischief. As anyone who understands basic trade theory knows, there is, a priori, no reason whatsoever why free trade should result in zero net flows between any two countries. Further, at any point in time, there is no reason to expect zero net flows of commodities or financial capital. Intertemporal gains from trade are just as likely to appear, especially in a decade of substantial progress toward unimpeded global capital flows, as are static gains from trade resulting from differences in factor endowments or tastes.

Once one accepts the notion that a persistent bilateral "imbalance" is, de facto, evidence of unfair trade practices, then loosing lawyers and bureaucrats on the "problem" (see the remarkable, presumptively titled Analysis of the U.S.-Japan Trade Problem by ACTN, 1989) leads to recommendations for export or import quotas or other protectionist measures if the goals of "results- oriented" trade policy are not met.

Naturally, this results-oriented approach to trade policy rejects the broader notion of sustainable "imbalances" due to identifiable exogenous causes. That position, by itself, would be debatable, but it would be consistent with the views of respected analysts such as Feldstein ( 1988) and Bergsten et al. ( 1987). But none of these advocates of the "unsustainable imbalances" view is, so far as I know, calling for managed trade. Rather, they call for further dollar depreciation, higher U.S. taxes, or enhanced U.S. saving--all measures aimed at reducing U.S. absorption and thereby reducing U.S. external "imbalances."

Advocacy of "managed" or "results-oriented" trade requires the unsustainable premise that for any pair of countries, the dollar value of its sales to the United States should equal the dollar value of its purchases from the United States. When this arbitrary premise is not satisfied, especially for U.S.-Japan trade, the "managed" or "results-oriented" approach to trade policy leads ultimately to the charge of "unfairness" and there from unilateral measures like import quotas or controls onto capital inflows.

A great irony that might arise from the large, multilateral international imbalances of the 1980s would see unilateral U.S. efforts to extinguish bilateral imbalances result in a reversal of the postwar trend toward trade liberalization and, ultimately, in unsustainability of the multilateral imbalances that created the ill-advised "results-oriented" approach to bilateral imbalances in the first

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