These Articles are Abridged Versions of Papers to be Delivered Today and Tomorrow at the Conference on U.S. Competitiveness, Jointly Sponsored by the New York Stock Exchange, the U.S. Senate Subcommittee on International Trade and Harvard University.
Correct trade policy should aim not for a particular numerical value in a trade balance, but for a set of sustainable international trade and capital flows compatible with domestic goals relating to growth, employment, inflation, and the distribution of income. Nonetheless, the fact is that in the 1970's for the first time in the twentieth century the United States recorded a trade deficit. Although the American dollar has declined rapidly in value since 1971 with the floating of exchange rates, the American trade balance has grown significantly worse since that time, in part because of high American inflation.
From 1950 to 1977 output per manhour increased at an average annual rate of 2.4 percent in the U.S. and 5.2 percent in other major industrial countries. The American problem results not simply from continued relative decline of productivity compared to other major countries, but because the price of exports relative to all manufactured goods has declined in many countries like Japan but this is not true for the United States.
Most trade studies use demand models, but more attention needs to be given to supply problems. When a foreign producer penetrates a new market, he is likely to invest substantial resources in familiarizing the market with his product. I will take time to establish a service capability, acquire a reputation, and pry customers loose from their old familiar habits. These effects would not be reflected in price but they will shift the demand curve. One cannot simply reverse penetration of markets by price adjustments.
If past trends continue, not only trade balances but the U.S. current account could move into substantial deficit in the 1980's. The prospective surpluses in agricultural trade and investment income could be more that offset, by the cost of oil imports and manufactured goods. An extrapolation of present U.S. and foreign growth paths implies a continued erosion of the U.S. manufactured goods trade balance. There are many factors which might influence the outcome in either direction; but if present trends continue, it will be essential to find a coordinated program to change both the levels and composition of production and expenditure.
We also need policies to facilitate the movement of resources from activities in which the U.S. is losing comparative advantage. Small amounts of aid to affected industries will not be adequate to reverse the trends, and this suggests the need for more active efforts to aid the adjustment process of American industries losing their comparative advantage.
Robert Lawrence is a research associate at The Brookings Institution.