Roots of the trade crisis - includes related articles on strong & effective trade legislation

AFL-CIO American Federationist, The, April 18, 1987

Comparisons of 1980 and 1986 high-tech sales show a two-thirds drop in the U.S. trade surplus for accounting, computing and office machinery--including computers--a one-third drop in the surplus for plastics, and another drop of almost one-third for drugs and medicines.

U.S. INTERNATIONAL

FINANCIAL RELATIONS

AND TRADE

Related to the sharp drop in America's international trade position is the fact that America doesn't just buy imports, we also borrow a lot of money to pay for those imports.

In the 1980s, the United States has gone from being the largest creditor nation in the world to the largest debtor. The United States and its citizens owe approximately $300 billion to foreign governments, corporations, banks, and individuals. Someday that money must be paid back; in the meantime, we are saddled with hugh interest payments.

Current Account

Since 1976, the United States has had a merchandise trade deficit each year. But it didn't go into debt until 1982 because the investment income flow, plus income from services abroad by U.S. companies and citizens, outweighed the negative balances in trade, travel and transportation, and remittances abroad on pensions and other transfers.

However, starting in 1982, and in every year since, the trade imbalance overwhelmed the investment flow, and the U.S. balance on current account was negative, with the gap growing rapidly from year to year.

The current account deficits had to be made up by borrowing from other nations, and at the same time, the United States had to finance a huge and growing federal budget deficit. Foreigners rapidly increased their holdings of U.S. Treasury securities, helping to finance the budget deficit, and increased their direct investments in the United States by establishing and purchasing U.S. firms; by purchasing real estate, bonds, and corporate stocks; and by loans to U.S. companies. As the net investment position of the United States declined and that of foreign investors increased, the outflow of payments in the form of interest, dividends, and profits to foreigners advanced as loans and equity investments grew. This culminated in the United States becoming a net debtor nation in the amount of $107 billion in 1985 and $256 billion in the third quarter of 1986. Expectations are that the growth of the payments from the United States to foreigners in the form of interest, dividends, and profits will accelerate, enlarging the U.S. net debtor position to $800 billion by 1990.

This process will not go on indefinitely. Foreign lenders and investors will sooner or later lose confidence in U.S. investments or in the value of the dollar, which will decline as the U.S. economy slows and large trade deficits continue. Foreign creditors will then begin to draw back from U.S. loans and investments. If they sell off large amounts of U.S. securities, interest rates in the United States will rise, triggering a recession.

EXCHANGE RATES

AND TRADE

In the 1980s the United States experienced an extraordinary rise and fall in the foreign exchange value of the dollar. The dollar rose 87 percent against other major currencies in less than five years--July 1980 to February 1985--then dropped a sharp 40 percent over the two years since February 1985. Imports into the United States climbed drastically in the first period when a high-valued dollar could buy more foreign goods, but instead of declining as the dollar declined, our tradce deficit deteriorated dramatically from $123 billion in 1984 to $170 billion in 1986, the worst level ever recorded.