The 'virtuous circle' of trade and growth
A change in attitude toward world trade among American businessmen, workers, and farmers has become apparent. These people are angry at what imports are doing to their prospects, particularly because they believe that the competition is unfair. This change in attitude is symptomatic of other disturbing developments worldwide.
Governments across the world are retreating from one of the fundamental economic principles of the postwar era - that freer trade benefits all nations and that protectionism must be resisted. Many of my colleagues in Congress are questioning the very standards of trade conduct established in the postwar era. They argue that freer trade is not fairer trade. Countless protectionist bills were introduced in the 97th Congress. More will be considered in the 98th Congress. Companies are filing petitions with the government every day against what they see as unfair competition from foreign companies. This, too, is likely to increase in the months ahead.
In a time of growing demand for protection, we must try to see how important world trade is and how an upsurge in protectionism may affect us.
From 1950 through 1975, the merchandise trade of the industrial countries grew an average of 8 percent every year, a rate which contributed mightily to historically rapid economic growth of 4 percent a year. The resulting integration of the world economy enhanced prosperity in all major trading countries, leading to more employment and higher real income and wages. When growth in the industrial countries rose more than 2 percent per year, non-oil imports tended to rise three times as fast. There was a ''vir-tuous circle'' linking trade and economic growth: growth stimulated trade, which stimulated growth, and so on.
America's stake in the health of the global economy has grown significantly as the global economy has grown. In fact, our exports in the latter part of the 1970s grew twice as fast as world trade itself. As a share of United States gross national product, exports of merchandise doubled between 1970 and 1979 and now make up 8 percent. One in every three acres of agricultural production is exported. One in every eight jobs in manufacturing is tied to exports. Nearly 20 percent of our total production of goods is exported.
Imports have also risen rapidly. About 20 percent of US consumption is supplied by imports, and imports form an integral part of America's production process.
The remarkable groundswell of world trade began to subside in the late 1970s. By 1981, the volume of trade was not increasing. In 1982, it may even have shrunk. The reasons are clear. Very limited economic growth produces a negative effect, with trade tending to decline more than the shortfall in growth. Such a fall in trade further erodes national economies, producing a further decline in trade, and so on.
In other words, there is a ''vicious circle'' as well as a ''virtuous'' one. Our experience today stands in marked contrast to our post-war experience. It is reminiscent of the 1930s.
Such a situation understandably increases the pressure to restrict trade. The problem is that trade restrictions tend to steepen the downward spiral. All governments have responded to this pressure. The European Community and the US have restricted steel imports. The US has negotiated ''voluntary'' agreements to restrain imports of color television sets from Japan, South Korea, and Taiwan. France, Italy, Great Britain, and West Germany have increased their protection of shipbuilding in the form of higher subsidies. Almost every industrial nation has raised barriers against Japanese automo-biles.
Economic analysis demonstrates the benefits of trade and the costs of protection. Yet, almost 12 million Americans are unemployed. Some 16.5 percent of all blue-collar workers are without jobs, and an astounding 24.1 percent of all automobile workers are idle. How much is due to imports is hard to tell, but it is clear that too many are suffering in this recession. What is also clear is that we must respond decisively to a disastrous situation. There are at least four things we should do.
First and foremost, we must shift domestic economic policies so that interest rates come down and stay down. Large budget deficits and tight money have kept both interest rates and the relative value of the dollar far too high. Thus, imports have been much cheaper, and our export competitiveness has been damaged. Interest rates have fallen substantially over the past few months, but they are still too high. Unless Congress can do something about deficits, interest rates are not likely to fall any further. In fact, they may rise. This would keep the dollar too strong and would cause further erosion of our competitive position.
Second, the President and Congress must insist upon fairer relations with America's trading partners, who often subsidize exports and target individual industries for special aid. Such practices enable them to penetrate foreign markets. Our partners also raise a variety of hidden and not-so-hidden barriers to our exports. We need to meet this challenge squarely.
These issues can be addressed through the framework of the General Agreement on Trade and Tariffs (GATT). American representatives protested against unfair trade practices in recent GATT meetings. We need to strengthen the GATT framework. Our negotiators must make it clear that we will no longer tolerate the unfair practices of others. Ours is still the world's largest market, and there is no reason why the threat to close off some of the market could not be used as leverage. Unless we can convince others that their protectionism is risky, we will never get the desired results.
Third, we must promote exports aggressively. This means encouraging the formation of export trading companies, removing domestic impediments to exports, increasing export credit assistance, and negotiating multilateral trade agreements to cover investment and services, areas in which the US has a competitive advantage.
Finally, we need to provide relief to those industries and workers most affected by imports. We must do so in a way that avoids retaliation. We also need to ensure that whatever steps we take to protect our industries and workers are temporary, not permanent, parts of our trade policy.
Freer trade is easier to support in a growing global economy than in a stagnating one. The recession is forcing the US to step back somewhat from its commitment to freer trade, but we must move carefully or else we will jeopardize a trading system which has helped us greatly in the past.