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America's Trade Gap Isn't Made In Japan


Economic Viewpoint

AMERICA'S TRADE GAP ISN'T MADE IN JAPAN

It is better to give than to receive, the Bible tells us. I never thought the maxim applied to insults, but politicians in both the U.S. and Japan apparently do--and are indulging themselves with gusto. Perhaps this rhetoric would benefit from a few facts.

Some Japanese leaders blame America's trade problems on our overweight, underworked, illiterate workers. Is it true? Let's concede the waistline point; after all, where else in the world is dieting big business? And thoughtful Americans have long argued that the illiterate fraction of our work force is disgracefully high. But the laziness charge simply won't stick. We may not match Japanese standards of workaholism, but Koreans probably feel the same way about the Japanese. This is all quite sensible. As societies prosper, one of the things they buy is more leisure. Compared with Europeans, Americans are real go-getters. And even the Japanese are lately discovering leisure as they grow richer.

On our side, Senator Ernest F. Hollings (D-S.C.) has raised the ante on tastelessness by touting the atomic bomb as an outstanding U.S. export to Japan! And what is Japan's alleged crime (in 1991, not 1941)? As one humorist observed, they have the audacity to sell us good cars at good prices. Why should that make us mad?

The answer, according to popular myth, is that Japanese trade restrictions contribute mightily to our trade deficit, which is, in turn, a major cause of U.S. unemployment. Unfortunately, the truth is that:

-- Trade deficits do not cause unemployment.

-- Our trade deficit is almost gone anyway.

-- Our trade problems are not made in Japan.

Let us take up these points in turn.

Economists insist that trade deficits mainly influence the allocation of employment--whether more Americans build cars or make pharmaceuticals--not the total volume of employment. The logic is simple. Total employment depends roughly on gross domestic product. Since a country can have the same GDP with either a trade deficit or a surplus, its trade position must have little to do with its overall employment.

Convinced? I thought not; no one ever is. So consider these facts: During 1988 and 1989, the U.S. economy was as close to the elusive goal of full employment as it is likely to get. The unemployment rate averaged 5.4%, the lowest since the 1960s. Yet the current-account deficit, the most comprehensive measure of our trade imbalance, averaged 2.3% of GDP in those two years. Are we really to believe that, had our trade been balanced, 2.3% more Americans would have held jobs then?

And here's another fact that seems to have gone unnoticed: Our trade deficit has almost disappeared. The current-account deficit, which ran as high as $160 billion in 1987, will probably come in near zero when 1991 data are complete. True, foreign payments for the Persian Gulf war make the 1991 accounts look misleadingly good. But the net-exports component of GDP, which reached -$143 billion in 1987, was only -$29 billion in 1991.

UNUSUAL YEAR? So why all the fuss over trade? The answer seems to be that America still has a $66 billion deficit in merchandise trade, about two-thirds of which is with Japan. But Japan is just one country, and merchandise is just part of the picture. Today, the U.S. is roughly back to the historic norm of a decade ago--when our overall trade was in balance despite chronic deficits in merchandise. We balanced the accounts--both then and now--with surpluses in services and in investment income. And we have run bilateral deficits with Japan for decades.

Yet political attention is riveted on U.S.-Japanese trade. It is said that our bilateral deficit with Japan stubbornly refuses to shrink because their markets are closed. Is it true? The Japanese are surely no angels. The country seems both allergic to imports and skillful at warding off irritants. But few thoughtful observers attribute much of our bilateral deficit to Japanese import restrictions. After all, most of the deficit is in automobiles, not rice. Who believes that a truly open Japan would buy lots of Chevys with left-handed drive?

Contrary to popular myth, America's bilateral deficit with Japan has danced almost in lockstep with our overall merchandise deficit for two decades. Look at recent history. Our merchandise trade deficit with the entire world rose 138% from 1983 to 1987, and our bilateral deficit with Japan rose 171%. Then, as our overall deficit declined 32% from 1987 to 1990, our deficit with Japan declined 27%. Expressed as shares of U.S. GDP, the two deficits have a near-perfect correlation.

Superficially, 1991 looks like a stark exception to the rule: The overall deficit fell sharply, but the deficit with Japan did not. However, we should not make too much of a single year, especially when the ink is barely dry on the data. Simple statistical analysis suggests that 1990, not 1991, may have been the unusual year. Given our overall trade deficit with the world in 1990, our deficit with Japan was surprisingly small by historical standards.

So let's tone down the rhetoric on both sides. Too many strident voices are citing too many noncauses of nonproblems.ALAN S. BLINDER


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