TRADE CRISIS SOLUTION TANGLED BY VARIETY OF VIEWS

There is little doubt that the U.S. trade deficit is now the country's preeminent economic concern.

The startling string of trade deficits rung up by the United States in recent years has threatened to buckle the economy - stripping the nation of many of its primary industries and hindering technological advancement. If this deficit is not narrowed, economists warn, Americans face the prospect of a future in which living standards will be perceptively lower.Many basic U.S. industries will not recover and many of the jobs that have been lost will never be regained. Nations that seemed hopeless, poverty stricken outposts only 25 years ago, are now winning markets from U.S. companies in everything from grain to automobiles to computers.

Debate on the issue has been fierce in Washington, of course, but the widespread concern generated by the trade crisis has brought the discussion down from Capitol Hill to corporate board rooms and union halls.

Everyone agrees something must be done, but solutions have proven more elusive. In the past, the Reagan administration has rejected trade legislation, but under a Congress now controlled by the Democrats, administration officials have shown greater willingness to compromise.

Senate and House leaders promise that a trade bill will be on the president's desk by year's end. The nature of such legislation is still nebulous, but some proposals put forth include; improving the U.S. educational system, bringing reciprocal action against those countries refusing fair access to U.S. exports, increasing import tariffs and raising the number of import quotas.

While the merits and drawbacks of these plans are debated in this country, trade negotiators from the 92 member states of the General Agreement on Tariffs and Trade have started the first discussions of the newly launched Uruguay Round of trade talks.

U.S. Trade Representative Clayton Yeutter says that the future of the global trading network hinges on the outcome of these talks, and many economists, labor leaders and corporate officers agree with him.

The talks will take at least four years, during which time the United States will pass new trade laws. Just how these new laws might affect the GATT talks is open to speculation. Clearly, though, the world's trading landscape will be vastly altered in the coming years.

In a series of four articles written last December, Journal of Commerce Publisher Don C. Becker addressed the the trade deficit. He proposed a series of solutions to the problem and urged readers to respond, both to his articles and to the issue in general.

Export Council Hails

Becker Proposals

Your column of Dec. 11 was excellent. I have circulated it to all my fellow members of The President's Export Council.

There is a fairly comprehensive plan in existence for implementing your ideas and proposed policies. I am enclosing some background for your further information.

Please don't give up. Rather, let us all know how we can help.

Thanks for your public service.

Jim Jenkins, Member The President's Export Council U.S. Department of Commerce Washington

Editor's Note: The following are excerpts from a report sent by Mr. Jenkins

from the American Trade Expansion Association, of which Mr. Jenkins is president. In the report, the association calls for passage of the Trade Expansion Act. The principle thrust of the act is outlined below.

Foreign exporters to the United States may not bring anything of value into the United States except in a dollar amount equal to a carefully calculated preset percentage of the face value of U.S. Trade Expansion Stamps.

U.S. Trade Expansion Stamps are issues by Customs in denominations of, say $10,000 (and up) to foreign purchasers of U.S.-originated items in the aggregate value of the purchase in U.S. dollars as shown on the seller certified transfer instrument (invoice, bill of sale, contract or title) . . . Initially, some flexibility, other than dollar for dollar matching, may be desirable to avoid sudden, destructive displacements.

Such stamps are fully negotiable and transferable and are not made out to any specific person, company or nation. The recipient of a stamp can use it to cover the required percentage of the dollar value of his export to the United States, or he can sell it to someone else who wishes to export a thing of value to the United States . . .

Foreign retaliation against this new U.S. system could only come from those nations that presently suffer from a trade imbalance with the United States that is favorable to us and unfavorable to them. But, since these nations can earn foreign currency by selling the stamps they have received

from the importation of U.S. goods, they would have little or no incentive to retaliate. Nations such as Japan would have no recourse as means of retaliation except by invoking some kind of self-destructive protectionist measures that the United States could quickly and easily duplicate in turn specifically against them only . . .

The United States could exempt some commodities - essential strategic minerals, or military equipment - and even exempt some nations of origin.

Thus, in these and in an infinite variety of other ways much more subtle, we could pursue the best interests of the United States without impact on the federal budget . . .

"Dumping" of subsidized foreign items into the U.S. marketplace could not take place because no trade surplus nation would use up what stamps they had already earned simply for dumping purposes. The anti-dumping provisions of GATT, like all other provisions of GATT, would remain in full force and effect.

The only difference would be that, at long last, the United States would finally have a free market, free trade, non-tariff export expansion system of its own, which might or might not be duplicated by other nations suffering

from a negative trade balance.

US Trade Deficit

Not Necessarily Bad

I read your recent columns on the U.S. trade deficit and possible solutions with great interest. Unfortunately, I disagree with almost everything you say,

from your presumption that the trade deficit is necessarily a bad thing, to your proposed solutions, which I believe would make the U.S. economic situation far worse.

First, what does the trade deficit really represent? Well, in your first article entitled "Deficit Poses Greatest Challenge" you never get around to telling us, although the reader could tell from the article's tone that you think the trade deficit is a terrible thing. But is it really so bad? I don't think so.

The trade deficit should not be viewed as being positive or negative in and of itself. Indeed, the United States ran a trade deficit during the economic boom of the "roaring twenties" while running a surplus during the ''great depression." The deficit is not subject to any hard and fast economic rules and therefore it cannot be glibly implied that the tradedeficit is bad without discussing the reasons that brought it about.

The obvious source of our trade deficit is a combination of President Reagan's success in stimulating the economy and Paul Volcker's success in curbing inflation. This policy mix made the dollar the currency of choice around the world, causing increased capital inflows into the United States. The current U.S. economic expansion has demanded a disproportionate share of the world's resources and this leads to a trade deficit. Our trade deficit is therefore a sign of economic strength, not weakness.

As to your solution to limit imports to a percentage of exports, I really don't know when I have heard a more dangerous proposal. To think that such a system is desirable, or even workable, is absurd. It reveals a gross misunderstanding of the fundamentals of international trade. The only thing more absurd is the proposal to appoint Lee Iacocca - industrial welfare queen - as a secretary of trade.

By definition the international accounts must balance. It is a simple concept but worth going over. Whatever funds flow out of the United States must eventually be returned. But foreigners don't buy just newly produced items, they also buy U.S. assets. Therefore, a simple way of understanding the trade deficit is this: If foreigners are buying more U.S. assets than U.S. citizens are buying of foreign assets, then the value of U.S. imports must be larger than the value of its exports.

But who does this really hurt? You make much of our trade deficit with Japan, but the fact is that it hurts them much more than it hurts us. Japan's refusal to open its markets fully has lowered the standard of living that its people could otherwise enjoy. It's a fact that the Japanese must devote more of their household budgets for food purchases and housing. It's also a fact that the Japanese goods distribution system is pathetically archaic, more appropriate for a second-rate economic power than a first-rate one. It may help to keep foreigners out of the Japanese market but it's hard to see how the Japanese people benefit from such an inefficient set-up. Just because the Japanese shoot themselves in the foot doesn't mean we have to shoot ourselves in the leg to get even.

Moreover your claim that an import-export formula would throw Japan's economy into a tailspin (unless phased in) neglects the effect of such a policy on our own economy. Even if phased in, such a policy would hurt the Japanese economy and hurt the U.S. consumer - the U.S. protectionists love to forget - by raising prices.

I'll just touch on one last point, although there are several more I could go into, and that is why do you believe our position as a debtor nation is such a terrible thing? I mean, you even go so far as to compare the United States with Latin American debtor nations! But there is big difference: their debt is in dollars while our debt is in dollars. Because U.S. debts are denominated in dollars it really doesn't matter where they are held or to whom they are owed. However, it matters a great deal to the Brazilians that they have to pay their debts in dollars.

Your solutions are really nothing but protectionism flying under the flag of "fair" trade. If there is any word that should be drummed out of the public policy lexicon it is the word "fair." If the United States' trading partners are generous enough (and stupid enough) to subsidize their industries to the benefit of the U.S. consumer, then we should be smart enough to accept their largesse. In short, the United States must keep its borders open for free trade, even if other countries refuse to do likewise.

Robert K. Dornan U.S. Congressman 38th District, California

Articles Will Help

Motivate the Public

I certainly agree with you that our trade deficit is a major problem, probably the major problem facing our country today. I am pleased to see that you, through your publication, are adding your voice to the growing number expressing both concern with the problem and dismay that our elected officials continue virtually to ignore it.

I wish you great success in moving public opinion toward an action program that will help to reach improvements in the overall trade deficit situation.

Robert E. Fowler Jr. President, Rubbermaid Inc. Wooster, Ohio

Pa. Senator Maps

Protectionism Views

My analysis of the problem is in many respects similar to yours. Indeed, I believe there is probably a broad consensus in the Senate on the problems but considerable divergence on what tactics to pursue in attacking them.

I favor a strong approach, as you suggest, and am enclosing a copy of my opening statement at a recent Finance Committee trade hearing. It describes my views in greater detail.

John Heinz Senator, Pennsylvania

Editor's Note: The following are excerpts from Sen. Heinz's statement.

Without question the best-known protectionist nation is Japan. The United States has had market opening or trade barrier negotiations with them on electronics, pharmaceuticals, tobacco, aluminum, medical equipment, telecommunications, forest products, transportation machinery, semiconductors, leather, computers, wine and liquor, chocolate, construction services and numerous agricultural products. All with at best modest benefit . . . .

Although the dollar has dropped approximately 25 percent from its peak against a basket of currencies, it has not dropped significantly against a number of very important currencies: Canada, Singapore, Korea, Taiwan and Hong Kong.

Against our 17 largest trading partners, the dollar has depreciated only 4 percent from its peak in February 1985. Against the seven largest of those trading partners which now account for 61 percent of our trade, the dollar didn't go down; it went up 11 percent . . . .

Development means the continuing expansion of new producers, but it does not guarantee an equal growth of consumption. The result is gain for some at the expense of more market-oriented producers. So far the chief victim has been the United States . . . .

The consequences of all this are beginning to show. Since 1973, Americans have been living higher on the hog while they've been getting poorer. Since 1973, real per capital manufacturing wages have declined approximately 14 percent. Real manufacturing wages today are lower than they were in 1961.

And in the present system, if we run out of gas, everybody's car stalls - unless we have a more equitable division of responsibility in the trading system. The best basis for that is the market system. That is what is behind the concern in Congress for trade legislation: The creation of a regime that really does enforce the notion of free trade. We don't have it now. And we desperately need it.

That means we have to move vigorously to attack unfair trade practices wherever we find them. Of course it is true that from an extreme short-term perspective that will make only a modest difference in the trade deficit. But just as it took 20 or 30 years for us to get where we are now, if we really want the long-term benefits of comparative advantage and the free market it's going to take 10 or 15 years to see them, even if we could create the perfect conditions tomorrow . . . .

That is what is driving trade legislation in Congress - not just frustration over the present but real concern for the future. Much of what has happened is irreversible. Jobs lost will never be regained. Dead industries will not be resurrected. That means, obviously, adjustment legislation will be a major part of what we do. That is the proper way to way to address the short term.

But salvaging the long term will be the core of our work.

Senator Welcomes

Insightful Comments

Your insightful comments will be useful to me as we attempt to deal with this pressing issue.

William Proxmire Senator, Wisconsin

House Speaker Adds

Views on Situation

Thank you for the opportunity to submit some of my own thoughts for publication in The Journal of Commerce.

Enclosed please find a copy of a recent speech I delivered to the Council on Competitiveness, an industry coalition founded to help deal with the

alarming trade situation.

Jim Wright, Texas, Speaker, House of Representatives

The following are excerpts from Rep. Wright's speech.

Arguments about laissez faire doctrine and "free trade" vs. ''protectionis m" are simplistic and misleading. The issues are more complex than that. Trade to be free must be fair. Reciprocity to have meaning must be real. . . .

The House will start by introducing as H.R. 3, the text of the trade bill we passed last year. That bill passed with bipartisan support, by 295-115, more than enough to override a veto. It isn't necessary to apologize to anyone for that bill, despite a certain amount of reflexive, knee-jerk editorial criticism. It was not and is not a "protectionist" bill, but precisely the reverse. The Gephardt provision is not punitive. It is designed not as protectionism or retaliation but to create incentives for others to abandon the studied protectionism which many of them currently practice against American goods. . . .

The House-passed trade bill may possibly have caused a previously reluctant administration to become belatedly more serious on this vital issue.

Our solutions depend upon truly enlightened policies of education and training, research and development, national savings rates and capital investment, the relationships between capital and labor, between private industry and government.

Business, labor and government must form a tripartite social compact to turn this trade deficit around. Restoring America to productive preeminence in the world marketplace will take time, energy and innovation. Most of all, it will take leadership from industry and government.

We need to ease export controls, invest in an educational renaissance in which math, science and foreign language instruction flourishes at all levels, and to expand retraining and trade adjustment assistance programs for displaced workers and industries. . . .

Government's function is to create a climate conducive to success. . . .

The government can assist in reclaiming the lead, but it cannot force business or labor to do so. International competition and enlightened self- interest, I hope, will spur to life the natural competitive, creative, expansionist instincts that have always epitomized America.

The solution lies in expanded U.S. exports in an expanding world economy, not in shutting out imports in a contracting world economy.

Balanced Trade Policy

Can Avert Problems

I agree fully that the year 1987 is a year where the issue of the trade deficits with the resultant market devaluations and revaluations will capture the front row.

I am not an economist to advise on the cure of trade deficits, but just like any other family man I never forgot that a prudent head of family spends within his budget.

The answer to this problem seems, therefore, to be that imports should be to the extent of exports or close to them, over a spread of years, so that trading partners may not find themselves in a most disadvantageous situation.

Constantine Moushoutas Ambassador Permanent Representative of Cyprus To the United Nations

Import-Export Link

Not Beneficial to US

Journal of Commerce Publisher Don Becker, in a Dec. 11 column, suggests tying imports to exports as a means of cutting the U.S. trade deficit. If a country sold the U.S. $100 million worth of goods, Mr. Becker would require it to buy $80 million worth from the United States - or face loss of its trading privileges.

Mr. Becker would convert the principle of free trade into an air-raid shelter to keep the splinters of creative destruction from hitting various interest groups unable or unwilling to compete in world markets.

Any and every form of protectionism is a malignant blow against our liberty to spend our earnings as we please. And allegations that trade imbalances with any one nation reduce our overall employment or harm our economy are just incorrect.

I have run an imbalance of trade with my grocer since being old enough to cross the street alone. I keep giving my grocer greenbacks and he gives me food. Never has he bought anything from me - and I am none the worse off for it. And should the grocer lose his good business sense and begin selling me products below his cost, it will be he who bankrupts himself - while I take home more groceries for fewer dollars.

One should not expect trade between nations to be any different. Ignore the fact that the Japanese buy large quantities of coal and farm products from the United States. Assume for a moment that the Japanese refuse to buy any product from us. Still, we are better off buying whatever they wish to sell us, so long as it is less expensive than domestically produced goods. The reason is that the paychecks of Americans go further, increasing our standard of living. If we save $1,000 on a Japanese-produced motor car, we will spend it on something else, perhaps American-made personal computers or more groceries - or save it, allowing it to be loaned to build a domestic plant producing goods or services that are competitive in world markets.

Yes, when we buy foreign goods some Americans working in non-competitive domestic industries will be out of work - but new jobs will be created in computer manufacturing and food processing. And in the unlikely event that trade deficits cause us to lose more jobs than we gain, our society still will be better off. Some of the consumer savings may have to go toward relief payments and job retraining for our unemployed - but the remainder is ours to spend as we please. Dollars that go offshore eventually will come home to create new and more efficient employment.

Neither should there be concern if the Japanese "flood" our market with motor cars they allegedly sell below cost. If the Japanese - out of a sense of friendship in recognition of our good deeds following World War II - decide to bestow on Americans a free automobile, should we reject the gift, demanding, instead, to pay for it?

Why, then should Americans be concerned if the Japanese are selling their automobiles at less than the cost of manufacture? Consider the difference a gift. It is the Japanese who will bankrupt their economy by such unwise business practices. American consumers merely will be better off. A $1,000 reduction in the price we pay for a motor car equates to a considerably larger before-tax wage increase. I have yet to hear an American complain about being paid too much.

I do hear Americans complain about not being paid enough, however. Limiting the array of goods available in the United States causes the prices of the fewer available goods to increase, which equates to a reduction in wages.

Voluntary restraints on the number of Japanese automobiles available for sale here already have caused the price of American- and Japanese-manufactur ed vehicles to rise. We are all paying more for automobiles, we have less to spend on other products - which does reduce job op portunities. Evidence is strong that protectionism neither improves domestic productivity nor makes employment any more secure.

It is unrestrained competition from foreign manufacturers that causes our own industry to become more efficient - and that is good.

Finally, if Japan - or any nation - continues to sell us goods and buys nothing in return, we score an economic coup. We send them little pieces of green paper and they return products we can use. Obviously, the Japanese are not so stupid. If they do not use those dollars to buy U.S.-made goods, they spend them elsewhere.

My grocer does not use the dollars I spend in his store to buy things from me. But he does use those dollars to buy things from someone else. Eventually, those dollars are returned to me. Money never has and never will be exchanged solely for the purpose of imprisoning it in cash registers or bank vaults.

Japan sends some of the dollars we exchange for their motor cars to buy our coal, farm products and airplanes. Japanese tourists bring back other

dollars. Other dollars are sent by the Japanese to the Middle East for oil, where Arab states repatriate those dollars in exchange for U.S.-made computers, consulting services, medicines and defense goods. By limiting our overseas purchases, we deny ourselves a better standard of living and prevent other nations from buying the things we have to sell. Those purchases from overseas also create a very vibrant economy at the various ports, most of which would be devastated economically if clamps were placed on free trade.

I am stumped as to how I might be better off by refusing to buy from my grocer simply because he doesn't buy from me. Surely, there would be little public support for requiring the individual states to run a trade balance with each other. Imagine New York barring trade with New Jersey unless New Jersey residents purchase an equal dollar value of goods and services from New York. It must then follow that restrictions on international free trade are equally inefficient. Indeed, international free trade has an important side benefit: When goods cross borders, armies usually do not.

Liberty is a most fragile commodity. There is no excuse for a government charged with protecting the liberty of its citizens to chip away at that very liberty by denying free trade. Protectionism is not in the best interests of Americans - even when it is offered in response to protectionism by other nations. Hopefully, Mr. Becker will rethink his position.

Frank N. Wilner Washington, D.C.

Editor's Note: Mr. Wilner is a transportation economist.

Debates in Congress

Expected to Be Lively

I agree with you that the debate on trade policy will be a dominant issue in the 100th Congress and I expect that there will be some lively exchanges over the next year in particular.

I welcome The Journal of Commerce's active role and look forward to reading more of your articles.

Thomas J. Downey Member of Congress 2nd District, New York

Treatment of Issue

Pleases Avid Fan

I am an avid fan of The Journal of Commerce and have high regard for your thoughtful treatment of this serious economic issue.

Albert G. Bustamante Member of Congress 23rd District, Texas

Oil Import Issue

Is Indeed Critical

You are right on target; this is a critical issue.

In presentations advocating an import fee on oil, I have often pointed out the perils that increased oil imports pose both for the military and economic security of the nation.

I don't believe the trade deficit implications of the growing U.S. dependency on imported oil are widely understood. That would be a good topic for one of your future columns.

George P. Mitchell, President Mitchell Energy & Development Corp. The Woodlands, Texas

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