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Trade and Protectionism: What Should be Done?
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12947 |
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Section : |
CURRENT ISSUES
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| Issue
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5 / 1987 |
3,867 Words |
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Lawrence J. Lau
Lawrence J. Lau is professor of economics at Stanford
University. |
The United States is the world's largest trading nation. It has also been the world's staunchest supporter of the principle of free trade in the General Agreement on Tariffs and Trade (GATT) immediately after World War II, through the Kennedy and Tokyo Rounds of multilateral tariff reductions of the 1960s and 1970s up to the latest Uruguay Round of trade negotiations, the United States has consistently been pressing for the liberalization of the worldwide exchange of goods and services.
The United States supports free trade on the grounds that voluntary exchange of goods and services always raises the welfare of all trading partners, permits the international specialization of production according to the principle of comparative advantage, and leads to the highest and best use of scarce resources for all. However, the series of unprecedented large trade deficits since 1984 has roused widespread protectionist sentiments in the United States. There are currently several trade bills pending in the U.S. Congress, including one submitted by the president, all intended to provide remedies to the problems perceived to be created by the large trade deficit.
From the end of World War II to 1980, real net exports (the difference between real exports and real imports of goods and services) of the United States fluctuated between positive (surplus) and negative (deficit). However, the largest real trade deficit (negative real net exports), which occurred in 1972, was less than $50 billion in 1982 prices (according to The Economic Report of the President 1987), or approximately 2 percent of the then real gross national product (GNP). However, beginning in 1984, the real trade deficit rose precipitously from $20 billion to $84 billion and then further to $108 billion in 1985 and $150 billion in 1986. As a percentage of real GNP, the real trade deficit went from 0.6 percent in 1983 to 4.1 percent in 1986 (see Table 1).
Many people in the United States became alarmed by the sheer magnitude as well as the suddenness of the increase in the real trade deficit. Some attributed the slowdown in the growth rate of the real GNP of the United States since 1984 (compared with the immediately preceding two-year period) to the large trade deficit. Some were concerned that the large trade deficit indicated that as a nation the United States expended far more - on consumption, investment, and government expenditures - than it produced and that this situation could not continue indefinitely. Some took the large trade deficit as another sign of declining competitiveness of U.S. exports in the world market. Others interpreted the large trade deficit
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