Debunking the trade policy myths - Clayton Yeutter's address before the Graduate School of Business at the University of Pittsburgh on September 17, 1987 - transcript

US Department of State Bulletin, Dec, 1987

Debunking the Trade Policy Myths International trade is an appropriate topic for the first lecture in this series. Now more than ever, trade policy is at center stage in Washington, D.C. President Reagan is deeply involved in the formulation of trade policy, and Congress has shown its interest in the issue by drafting a trade bill that is turning into one of the most complicated pieces of legislation ever written.

This omnibus trade bill is more than 1,000 pages long. Over one-quarter of the Members of Congress will be on the House-Senate conference that is trying to draft a final version of the bill. The record size of this committee demonstrates that Congress believes trade to be one of its highest priorities.

Clearly the reason for the intense interest in trade policy is the massive U.S. trade deficit, which last year reached a record $163 billion. No one in Washington--clearly not the Administration--takes this situation lightly. The size of this deficit is unacceptable, and it must be reduced as rapidly as possible.

But we have got to be responsible in our efforts to bring the trade deficit under control. Trade policy is too important an issue for any of us to indulge in quick fixes, self-delusions, or political demagoguery. Before we can reduce the trade deficit, we have got to make a cold, hard, honest appraisal of what is causing it.

Four Myths

Many of the most widely held beliefs about international trade are simply untrue. Some of these myths are perpetrated by those seeking special protection for certain industries. Others take hold because people sometimes cannot see the forest for the trees and get distracted by minor aspects of trade policy. Regardless of where they come from, it is time to debunk them.

One major myth that has taken root, particularly in Washington, is the belief that passing a trade bill will reduce the trade deficit. But Congress can no more legislate a lower trade deficit than it can order the sun to rise in the west and set in the east. Trade flows are determined by fundamental economic conditions throughout the world, including many outside the control of the United States.

For example, the strength of the dollar against the currencies of our trading partners in the early 1980s made foreign goods relatively cheap and American products relatively expensive. This naturally increased the attractiveness of imports while hindering American exports.

Furthermore over the past 5 years, U.S. economic growth has outpaced that of almost all our trading partners. As a result, demand for goods, both foreign and domestic, has increased faster here. Since our trading partners are not buying as much as we are, our producers have had difficulty increasing their exports. This phenomenon is particularly true among nations with high debt burdens. Some of them were among our best customers in the past, but in order to service their debts, they must have significant trade surpluses.

All of this is not to say that Congress should forget about a trade bill. In fact, legislation that strengthens the hand of our trade negotiators would be helfpul. But no one should conclude that this trade bill--or any trade bill-- will significantly alter trade balances.

Another common myth is the belief that unfair trade practices of other countries cause much of our trade deficit. It would be convenient and psychologically reassuring to blame our problems on foreigners, but all economists agree that unfair trade practices account for only a small percentage of our trade deficit--perhaps 10% or 15% of the total. Clearly even that small amount is too high, and we are fighting to bring the percentage down to zero. But even if we did do so, the trade deficit would still be very large indeed.

Still another myth is the assertion that the trade deficit has ruined the U.S. economy, particularly for the manufacturing sector. In fact, we are enjoying the longest peacetime economic expansion in our history. The economy has grown for 57 straight months, creating more than 13 million jobs. Our unemployment rate is 5.9%, the lowest in 8 years. And a record 65.6% of the U.S. population is gainfully employed.

Despite this good news, there are those who say America is deindustrializing, that we are becoming a service economy only. Actually we may well be on the verge of a major boom in manufacturing production and exports. Many firms and their workers have gone through difficult readjustments in the past few years. The tough decisions they made to streamline operations should be about to pay off. Business investment in new plants and equipment has been strong, research and development spending has been up, and the currency realignment we have experienced should make U.S. goods highly competitive in world markets.

Those who claim the United States is deindustrializing point to job losses in basic industries. But other manufacturing industries have offset those losses by hiring additional workers. There are nearly as many Americans employed in manufacturing as there were 10 years ago and more than there were 20 years ago.