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The Cost of Protectionism
| Article
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10558 |
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Section : |
CURRENT ISSUES
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| Issue
Date : |
2 / 1986 |
4,520 Words |
| Author
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Edward L. Hudgins
Edward L. Hudgins is Walker Senior Policy Analyst and deputy
director of economic policy studies at the Heritage
Foundation. |
The U.S. merchandise trade deficit in 1984 reached $123 billion, including a $37 billion deficit with Japan. Moreover the U.S. global trade deficit reached a record $148.5 billion in 1985, with a $49.7 billion deficit with Japan. The U.S.- Japanese trade gap has provoked strong emotional reactions in Congress and a torrent of protectionist proposals. The trouble is that these proposals would be very costly to the U.S. economy, consumers, and workers.
Concern over the trade deficit with Japan is, in a part, a reaction to its overall size. There is widespread confusion, however, about the actual meaning of the trade statistics. A merchandise trade deficit as such is not necessarily a problem; a new inflow of goods often accompanies a country's economic expansion. A merchandise deficit, moreover, typically is offset by other factors such as revenues paid by foreigners for banking, insurance and other services. The "current accounts balance" is a truer reflection of a nation's performance in the world marketplace. It includes service trade and interest income earned aboard. Even though the United States is now running a current accounts deficit, such a deficit cannot be maintained indefinably, and the market will adjust on its own with a lower dollar. Further, the current accounts balance ignores inflows of foreign capital, some of which goes to business investments creating jobs for Americans. The raw figures in short, mask a complex situation involving many benefits as well as costs.
Cause of Trade Deficit
The U.S. trade deficit is not primarily the result of Japanese trade restrictions. Studies indicate that if all Japanese restrictions were lifted, the trade gap would be cut initially by no more than $10 billion a year, and perhaps by as little as $6 billion to $8 billion. Yet the United States-Japan trade relationship is nonetheless central to the deficit debate. For one thing both nations are economic mega powers. For another, both typify the highest technology, most creative entrepreneurs in the world. If Tokyo and Washington get locked into a trade war, it will symbolize the collapse of the post-World War II era of liberalized trade and could trigger a global economic slowdown even a depression.
To defuse the particularly explosive trade situation, steps by Tokyo and Washington are needed,. The U.S. government, for instance, imposes restrictions on U.S. exports, while many U.S. business practices also impede exports. In particular, U.S. businessmen often pay too little attention to the needs and customs of foreign
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