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

Competitiveness

The President's trade program is sound and effective. We have had a number of major victories over the past 2 years that will reduce the trade deficit. A major question is, when will we see a turnaround?

By some measurements, the deficit has begun to decline. In terms of amount of quantities of products imported and exported, the deficit peaked last September and has been declining ever since. When trade flows are measured in constant dollars--with exchange rate adjustments and inflation factored out--imports have decreased 1.9% since September 1986 while exports have risen 8.8%.

Many of these improvements are masked by the decline of the dollar--the so-called J-curve effect. As import prices rise, it appears that imports themselves are increasing when they are actually declining. This paradox will not be resolved until import volume falls faster than import prices are rising.

Many people thought that the depreciation of the dollar alone would reverse our trade deficit--and would do it much better before now. While exchange rate shifts have already had a significant effect on trade flows and will continue to do so in the months ahead, this alone will not solve our trade problems. Foreign producers are tenaciously holding onto market share in the United States in the face of declining profits. Moreover for many consumers, both here and abroad, price is only one factor in a purchase decision; quality, reliability, service, and marketing all have an effect on consumer decisions.

In other words, American producers are going to have to become more competitive in every way if they want to increase market share here and abroad. Competitiveness is a battle that has to be refought every day in the modern world's dynamic economy. That is why the President launched his own broad-based competitiveness initiative earlier this year with many important elements, ranging from educational reforms and worker retraining efforts to better protection for intellectual property, increased investment in research and development, and continued government deregulation.

President Reagan's initiative is not designed to shield Americans from competition but to enable them to meet the challenges of the coming decades. In announcing his initiative, the President declared that we want America still to be number one by the year 2000. To do that, our nation must make the best use of its human and capital resources; we must remain a nation in perpetual pursuit of excellence in all respects.

Trade LEgislation

Last winter "competitiveness" was the buzzword of the season in Washington. As the House and Senate began the process of writing a trade bill, there were solemn pledges that the legislation would enhance America's competitiveness.

Many of those good intentions were forgotten during the actual bill-writing process. Certainly there are helpful provisions in the bill; in fact, a number of the proposals from the President's competitiveness initiative have been incorporated into the congressional efforts. But too much of the trade bill would hurt the nation's competitiveness or undermine the President's strategy for liberalizing international trade.