The System Responds to Exchange Rate and Trade Balance Disequilibria, 1985-1986
I will not stand by and watch American businesses fail because of unfair trading practices abroad. I will not stand by and watch American workers lose their jobs because other nations do not play by the rules.
-- PresidentRonald Reagan, 1985
I'm fed up with those in Washington who talk like Rambo but act like Bambi where trade is concerned.
-- SenatorJohn Glenn, 1986
The U.S. trade and exchange rate positions occasionally sink into structural disequilibria. Twice in the post-World War II period an overvalued dollar has caused a major deterioration in the trade account. On both occasions, the resulting Sturm und Drang sent shock waves across the bow of U.S. international economic policy that dwarfed the relatively gentle vibrations of incrementalism that usually characterizes the policymaking process.
In August 1971, President Nixon decisively dealt with the first of these two exchange rate disequilibria by suddenly and unexpectedly using his executive authority to the maximum in imposing the so-called New Economic Policy. The closing of the gold window and imposition of an import surcharge eventually produced an unprecedented series of negotiations that culminated in massive exchange rate realignments as well as agreement to initiate the Tokyo Round of multilateral trade negotiations. Indirectly, this dramatic presidential action had the effect of inducing a real, albeit short-lived, adjustment in the U.S. trade balance, mainly through dollar devaluation. The aftermath of the New Economic Policy also had the effect of extinguishing the protectionist fires that were raging