Us Automobile Industry Competitive Decline

U.S. trade deficits

Abstract (Summary)

It is argued that the current US trade deficit is neither due to unfair trade practices, nor is it due to high unit labor costs and low productivity. The trade deficit reflects an imbalance of national saving below investment. US prosperity in a competitive world depends on US productivity growth and the country's ability to maintain a stable economic environment. The US must grapple with the hard issues of devising the means to boost productivity with policies that: 1. foster greater private capital formation, 2. increase investment in infrastructure, 3. expand research and development expenditures, 4. improve the quality of education, and 5. stimulate entrepreneurial activity.

This paper will discuss our trade deficit and what it implies about our ability to compete globally.

We've had this trade deficit for over a decade. Some people, and a number of policymakers, see this as a symptom that we've lost our edge in international competition. Here's their diagnosis of the problem: Foreign competitors are able to take markets away from U.S. producers because they have some important advantages. In particular, they have lower wages, superior technology, and "unfair" trade practices.

What's their prescription to fix the problem and return U.S. industries to competitive health? They'd like to see the government try to manage international competition by taking a more protectionist stance and targeting certain industries for special support.

My own view is that this analysis is off the mark. I do not think the trade deficit is due to lower wages, superior technology, and "unfair" trade practices abroad. On the contrary, I think we can find the sources of the trade deficit in certain macroeconomic fundamentals--namely, our own government budget deficit and our investment and saving patterns. Moreover, I don't think the trade deficit is necessarily the best way to judge our competitiveness. There are more important factors to consider. In particular, I would point to price competitiveness and productivity.

DIMENSIONS OF THE TRADE DEFICIT

Let me begin by looking at just how bad the trade deficit is. First, I think it's a mistake to focus too much on the most recent numbers, which haven't been too good. The reason it's a mistake is that the source of the problem is more cyclical than it is structural. The U.S. has been in recovery for a while now. But many of our industrial trading partners are still in recession. So the recent bulge in our trade deficit is largely due to the fact that, as we continue to grow and import more, the weakness abroad is hurting our exports.

Now let me look at the longer view. Although the trade deficit has persisted for over a decade, the situation is much better now than it was in the mid-1980s. The merchandise trade deficit fell from a peak of $160 billion in 1987 to $96 billion in 1992. Relative to GDP, it declined from 3.5 percent to 1.6 percent. The current account deficit, which includes trade in services, improved even more dramatically. It dropped from a deficit of $167 billion in 1987 to $62 billion in 1992--or from 3.5 percent of GDP to 1 percent of GDP.(1)

Why the turnaround? Because over the past six years, U.S. exports have surged. From 1986 through 1992 the total value of U.S. merchandise exports almost doubled, growing more than 12 percent per year.(2) In volume terms, exports grew almost as fast, averaging more than 10 percent per year.(3) A major source of strength in this export growth has been manufactures.(4) And it's notable that this sector has continued to show strength even during the worldwide economic slowdown of the past few years.(5) So the big picture on the trade deficit is that the situation is better than it was in the mid-1980s, because U.S. exports have surged since then.

UNFAIR TRADE PRACTICES

Now let me look at the problem of "unfair trade practices." By this I mean such things as government support of selected industries through export subsidies and trade protection. The evidence is clear that virtually all countries, including the U.S., impose at least some restrictions on imports and provide government support for exports. Still, there's no evidence that the U.S. trade deficits of the 1980s were caused by greater foreign trade barriers or other unfair trade practices. First of all, between 1981 and 1987, when the deficit was at its peak, the deterioration in our trade position was pervasive. It spread uniformly and roughly proportionately across capital goods, automotive products, and