For years I have run a trade deficit with my hairdresser. I didn't give it a moment's thought until I came to Washington and learned that bilateral deficits were terrible.
The obvious solution was to decrease my purchases from him. I stayed home
from the office one day and applied my own color. Clients angry over my absence, ruined towels and the plumber's bill for a new sink taught me the meaning of comparative advantage and the benefits of trade. Determined to manage my deficit, I tried visiting my hairdresser less often. Despite my best intentions, I find that as I get older my need for his services increases.Luckily, I need look no further for a solution than the daily newspapers where trade policy-makers and commentators provide many suggestions for dealing with bilateral deficits. I visited my hairdresser and demanded that he buy my legal services. His arrogant refusal to retain me to franchise his business was unfair.
My next step was to seek government assistance. My visits to the board of cosmetology and local health and safety officials began to worry him. The clincher was the Internal Revenue Service. Threats of retaliation have been effective. My hairdresser now understands that he must be more open and fair and has agreed to buy my services.
We have succeeded in equalizing our trade relationship, and I no longer worry about my deficit. My hairdresser and his former lawyer, however, are a lot worse off for it.
My story, while apocryphal, is also instructive: There is nothing wrong with bilateral trade deficits. My hairdresser and I are able to maintain our relationship because because I pay him money, which he uses in trade relationships where he runs deficits.
The same principle applies to countries: There is no reason to expect bilateral trade flows between countries to be equal. Japan, as one would expect, runs trade deficits with major suppliers and surpluses with major customers.
The widespread concern with bilateral deficits, particularly in Congress where it is sometimes an obsession, is unfortunate. In 1989 the United States ran a bilateral trade deficit with Japan of $50 billion and global deficit of $115 billion.
Congress attempted a "quick fix" in the 1988 Trade Act by ordering the U.S. Trade Representative to identify countries engaging in the most egregious unfair trade practices for potential "Super 301 investigations,' ' and to retaliate against a country's exports if satisfactory progress is not made in eliminating trade barriers. The idea is to increase U.S.exports and to reduce bilateral deficits.
Increasing access to foreign markets by eliminating unfair trade barriers is a laudable goal, but it is unlikely to cause a significant change in bilateral trade flows. That's because unfair trade practices are probably no more than a minor cause of bilateral trade deficits.
In spite of the evidence, however, many believe that we have bilateral deficits because our markets are more open than foreign markets. This belief manifests itself in rhetoric about "level playing fields" and "fair trade."
The assertion that U.S. markets are more open is questionable. A recent Federal Trade Commission study found that the United States has completely reversed the progress toward free trade that has been made multilaterally during the postwar period. The study concludes that the U.S. economy is less open today than it was in 1946 as a result of the proliferation of U.S. non- tariff barriers, including quotas on steel, autos and textiles.
Our country has more serious and real economic problems that require our attention. The root of our problem is our preference for spending more than we earn while saving and investing very little. These problems show up in the federal budget deficit, slower economic growth, increasing illiteracy and the trade deficit.
The Structural Impediments Initiative talks - bilateral negotiations between the United States and Japan, which recently resulted in an agreement designed to remove structural barriers to trade - presented the administration with an excellent opportunity to address these problems.
Unfortunately, in this country the focus has been on structural problems in Japan, not here. Indeed, there is an increasing tendency to judge the success of these negotiations by the number of concessions Japan makes, rather than the headway the United States makes in eliminating its own structural problems, such as spending too much and saving too little.
Blaming our economic problems on unfair foreign trade practices and putting too much emphasis on trade policy is far easier than significant reform. As Mark Twain wryly observed, "Nothing so needs reforming as other people's habits." Sure there are unfair trade practices, but the serious economic problems, and their solutions, are within us.