Uncle Sam Wants Your VCR…

…and your camera, your car, the shirt off your back-all in an insane war on imports.


Is it Rambo leaping forth from Japanese screens and onto the streets of Tokyo? Or Bruce Springsteen in a "Born in the USA" rant?

No, it's just Lee Iacocca again, huffing and puffing his macho American theme and denouncing the "closed society" of Japan—where he has sold more than half a million books and bought tons of autos and engines from Mitsubishi.

Is it a U.S. cast for the Kabuki theater?

No, it's merely the American Chamber of Commerce putting on a show in Tokyo early in 1986.

Is it Conan the Barbarian, bursting out of a Shinjuku billboard?

No, it's just Sen. John Danforth (R) of Missouri, the swashbuckling preacher of "reciprocal trade." With a heavy note of Hollywood menace, he declared at the Chamber's conference: "In 1984, Japan exported more than 80 percent of its entire production of cameras, watches, VCRs, and microwave ovens. These Japanese products have two things in common: They are attractive to consumers everywhere and they are totally unnecessary."

Is it the madman from "Death Wish 3"?

No, don't worry, it's merely Danforth's Missouri colleague, Sen. Tom Eagleton (D), chiming in: "We lost our shoe industry, we are losing our textile industry," and now, he implied, we are losing not only our manufacturing but also our minds. He, too, threatened new barriers to Japanese goods and exalted the noble inanity of a balance of trade.

Everywhere, the trade-balance refrain is repeated. Clyde V. Prestowitz of the U.S. Department of Commerce issued dire warnings about the magnitude of the U.S. trade imbalance—the goods we imported in 1985 were worth nearly $150 billion more than the goods we exported. Without trade restrictions, he concluded, the United States may go bankrupt. Just like that.

Japan is invariably spotlighted as the villain. As Sen. Lloyd Bentsen of Texas (D) puts it poetically: "The Japanese are ripping out the heart of U.S. industry and destroying it piece by piece." Other analysts write of Japan's "deep cultural resistance to foreign goods" and cite polls showing that Japanese citizens prefer to buy products made in their own country. Unlike Americans?

Winston Churchill once wrote, "Man will occasionally stumble over the truth." An American businessman—or even an American politician—disembarking from a Japanese Airlines 747 at Narita and taking a bus into the Shinjuku Hyatt Regency across the street from the Tokyo Hilton and down the street from American Express and Kentucky Fried Chicken, passing Japanese offices full of IBM equipment and bookstores and newsstands selling diverse American publications, and finding friendly Japanese everywhere who speak English and an English channel on the TV, might pause to consider for a moment the contrary plight of a Japanese visitor arriving at Kennedy Airport in New York.

Might the American visitor—even the American senator—stumble momentarily in his insular assurance that Japan is hostile to American goods? Of course, Churchill added that having tripped over the truth, "most of the time [the man] will pick himself up and continue on"…perhaps to the auditorium, where he will denounce once again the closed economy of Japan.

A Japanese consumer shaving with his Schick, drinking a cup of Maxwell House before leaving for work, wolfing down honey-dips at Mister Donut or a hamburger at McDonald's, getting a six-pack of Coca-Cola and a box of Kleenex at the 7-Eleven, signing his name with a Sheaffer, walking along the Ginza under a huge Hollywood billboard of Charles Bronson, on his way to Computerland in his new Levis, might be forgiven for wondering what the problem is.

Of course, he might not want Iacocca's overpriced "K" car, with the steering wheel on the wrong side. But he would sympathize with Danforth's assertion that "there is nothing wrong with the steering wheel on our beef." More beef imports would be fine with our Japanese consumer. Nor, he might add, after savoring a thimbleful of orange juice at the Okura for 1,000 yen, would there be anything wrong with access to more California citrus fruits. The Japanese do lead the world in purchases of American agricultural produce, including beef and oranges. But partly because of an island fear of food embargoes—and mostly because of the political clout of farmers (an Oriental peculiarity no doubt hard for Westerners to comprehend)—the Japanese consumer suffers from quotas on these products.

But, coming from a U.S. Congress that keeps Alaskan oil away from Japan and protects sugar beets "for reasons of national security," that imposes a special system of price controls on oranges and frequently acts to restrict beef imports from Argentina and Australia—and plans to subsidize American farmers by tens of billions of dollars during the next five years of supposed budget-balancing fiscal austerity—Senator Danforth might allow the Japanese their political crotchets. After all, when all is said and done, the average Japanese citizen, in his "closed society," purchases some three times as much U.S.brand-name merchandise in proportion to his income—and two times as much in absolute terms—as the "open-door Americans" buy Japanese.

The fact that Americans are more resistant to foreign goods than the Japanese never penetrates to the precincts of Washington. With American politicians raving about a trade war, with Speaker of the House Tip O'Neill threatening "to get the Japanese and get 'em good," and with the normally genteel author Theodore White, shortly before he died, invoking memories of Bataan and Pearl Harbor in an explanation of Japanese export policy, it is the Japanese—not the Americans—who can plausibly charge xenophobia. But it is the Americans who claim to be aggrieved, losing jobs, suffering the slings and arrows of Japanese industrial policy, crucified for their belief in "free trade."

In a speech in March, economist Lester Thurow depicted the deficit in the trade account in harrowing terms and compared the U.S. economy, in some detail, to Mexico's currently precarious situation. It seems the trade imbalance has made the United States a "net debtor," and soon enough we will slide down a slippery slope, with deputations of grim reapers from the International Monetary Fund trooping over to the U.S. Treasury, demanding adoption of austerity policies: devaluations, higher taxes; a zero-sum society at last. One pictures wetbacks swimming south, led by Senator Bentsen and Professor Thurow.

Welcome to wonderland: the fantasy world of American politics and economics. It would not be a serious problem but for one uncomfortable fact. The underlying premises of this world of fantasy are accepted in economics classes and political conferences around the globe, from Great Britain to Japan and from MIT to MITI.

Everywhere the dismal science of macroeconomics casts its Keynesian shadow, intelligent people begin babbling in tongues; they prattle in terms of gigantic numbers—gross national products, budgetary deficits, money supplies, and aggregate demand—as if these raw quantities captured the essence of economic life. They speak of balancing exports and imports as if that goal embodied some cardinal virtue in itself, like balancing our diets or our tires, or as if the balance of payments constituted the final scorecard of an international tournament of trade. Beclouded with these illusions, world capitalism is now stumbling toward a gigantic trap of austerity programs, monetary restrictions, protectionist barriers, and tax increases that promise to enforce some fantasy of "balance" but in fact would lead to economic breakdown and decline.

The pursuit of trade balance originated in the dim days of old, when a deficit would dictate a laborious transfer of precious gold bullion on clipper ships across treacherous seas. Today, however, capital bounces off satellites around the globe in split seconds. A country with attractive capital markets, declining tax rates, and rapid economic growth will tend to run a surplus in its capital account (people will want to send it money) and a deficit in its trade account (its people will be able to buy more than they produce).

The new American tax rates, once they are fully installed, will make the United States a mecca for capital and growth. But unless they are copied by our competitors, they may also lead to a continued imbalance of trade. Should we be worried?

The fear for the future of American manufacturing is overwrought. In recent years, the United States has increased its share of world manufacturing exports. The recent economic boom showed a recovery in manufacturing some three times as fast as in services. And while employment in manufacturing, as in farming, has declined as a share of total employment, manufacturing has maintained its share of U.S. economic activity at just below 25 percent for the last 20 years.

In fact, a trade deficit may well be a symbol of a healthy economy. Far from destroying jobs, it may create them. Certainly, on the evidence from the United States, a better case could be made that trade surpluses destroy jobs, particularly in manufacturing.

Over the last decade, for example, the United States ran its largest surpluses in manufacturing trade in the years 1979, 1980, and 1981. During this period the country lost a total of 1.43 million manufacturing jobs. Over the following three years, on the other hand, the United States ran a manufacturing trade deficit, largely with Japan, of approximately $160 billion. But overall employment soared by 8 million jobs, and manufacturing employment grew by over a million.

By contrast, Japan, with its 1984 trade surplus of $35 billion, created, proportionate to population, less than 10 percent of the new jobs created in the United States in that year. In 1985, Japan's trade surplus rose again, and this time the United States created proportionately four times as many jobs as Japan. In fact, throughout the entire postwar era in the United States, there has been a strong correlation between trade deficits and employment growth.

Nonetheless, nearly every major economist will tell you that "net exports" contribute to something called "aggregate demand" and thus enhance economic growth and job creation. This Keynesian maxim leads to the idea that industrial policies—specifically, government spending to promote exports or to foster investment in export-oriented firms—are fiendishly effective. Using Keynesian models, government policymakers around the globe-from West Germany to Washington, D.C.—see trade surpluses as a testimony to moral rectitude and job creation.

In order to understand why there is no special virtue in a trade surplus, it is necessary to transcend the idea that economic growth is somehow driven by "demand." A supply-side economist will insist that buying power—"aggregate demand"—is impotent to impel growth. What matters is the willingness and ability of particular workers and entrepreneurs to expand and improve their productive efforts and the willingness of new producers to enter the economy.

On the most basic level, the very concept of people as "consumers" or demanders is deceptive and patronizing. Income cannot long exceed output. Consumption springs not from a willingness to spend money but from a willingness to spend effort. Economic policy must focus first, last, and always on enhancing the incentives and capabilities of producers.

Imports often increase those incentives and capabilities. People do not produce for "money." They work in order to be able to buy goods and services. On the margin, where the economy grows, they very often work to buy foreign goods. Contrary to Senator Danforth's charge that VCRs and other Japanese imports are "totally unnececessary," they are probably the most motivational items in the U.S.economy today. They increase the marginal value of American incomes and enhance the productivity and incentives of American workers.

Similarly, imports of capital equipment enhance the ability of American workers and entrepreneurs to expand their efforts. In earlier decades, equipment flowed disproportionately from the United States to Japan's semiconductor and automobile industries. Thus a vast imbalance of trade in capital goods made possible the rise of those Japanese industries. Now, the balance has shifted, and the availability of ingenious new capital equipment from Japan enhances opportunity in the U.S. economy.

Far from hurting the sales of U.S.-made capital equipment, imports of capital goods require and enable the use of complementary capital and labor. Economic progress and opportunity in the United States, from Detroit to the Silicon Valley, would slacken drastically without the availability of foreign equipment and other supplies. For example, General Motor's futuristic Saturn project, designed to produce a new generation of cheaper and better automobiles, could not succeed without Japanese machine tools and other devices. From Fujitsu-Fanuc's robots to Kyocera's ceramic chip packages, imports stimulate the use of U.S. capital equipment and enhance the real competitiveness of the U.S. economy.

Equipment producers in this country should not try to "catch up" with Japan. They must try to create new capital goods that respond to the needs of the future. If instead they afflict their U.S. customers with second-best gear, they merely spread the problems of the producers of capital goods to the producers of final products.

If the U.S. senators want something to worry about, they should focus not on trade balance but on trade volume—not on the brisk and valuable exchanges of goods and capital between the United States and Japan but on the general stagnation of world commerce, including trade between the United States and Asia. In a recent cover story, Fortune magazine actually presented the slowdown of the Japanese economy this year as a "rare opportunity for the U.S." But a slowdown in Japan and Asia reduces incentives for real productive effort in the United States. Trade is not a zero-sum game, and its contraction is bad for everyone.

An obvious inhibition on the volume of trade is the widespread resort to protectionism in an attempt to achieve trade balance. Equally destructive is erratic monetary policy based on pursuing deceptive aggregates such as the so-called money supply. At present, with all producer and wholesale price indexes showing worldwide deflation, monetary policy is too tight in all industrial nations. In a perverse effort to refight the war against inflation while prices plummet, government monetary officials in the leading industrial nations are risking a major deflationary crisis.

Not only is the price of money too high around the globe, so is the price of government. The price of government is called the tax rate, and tax rates are the most important single price in any economy. If tax rates are kept too high, the entire system suffers from this extortionate cost of production, and trade volume declines. The upward drift of real tax rates around the world is the chief long-term cause of the decline in global commerce and the chief cause of America's export problem.

A further source of the declining volume of trade is management timidity and myopia. As in a country, so in an industry, leaders must be willing, over time, to push down price and increase value. When prices and profit margins are dropping fast, markets tend to expand as producers pursue high-volume, low-price strategies. With larger volumes, customers improve their knowledge of the good, use it more, and invent more applications for it, and its real value rises as its price drops.

With prices dropping and performance improving in the leading sectors of an economy, real incomes move up and create demand for other products and other industries. Work and investment incentives rise. Workers and entrepreneurs create new jobs and opportunities. Imports surge. This is real economic growth.

But when prices stop dropping—or the critical dimensions of value and quality stop rising faster than price—all these positive trends are reversed. In the end, trade slows and firms turn to politics to achieve what they cannot attain in the marketplace. At business conferences, there is more talk about "industrial policies" than about industrial products.

A key problem at present is automobiles. The industry uses commodity materials whose costs are presently declining, and it is turning to new technologies with rapidly improving ratios of cost and performance. So automobile prices should be following the fast-sinking trajectory of the experience curve, which dictates a 20 to 30 percent decline in costs for every doubling of cumulative unit sales. Instead, in this highly politicized industry, auto prices are coasting along comfortably with the consumer price index, which itself radically exaggerates real monetary inflation. By allowing real prices to drift upward, the auto industry is rapidly becoming part of the problem of international stagnation.

These rules of price and trade apply to all industries. The latest worry is that the United States is suffering from an influx of Japanese semiconductor chips. This is wrong. The Japanese semiconductors can save the industry by giving the American firms a vivid sense of competitive realities and by helping reduce prices in the computer industry, which is the key semiconductor market in the United States.

The semiconductor executives should have learnt from the experience of the automobile industry. The effects of protection weaker industries cascade through the economy and end up jeopardizing the strongest sectors. Thus "trigger prices" and other devices protecting the steel industry raised the costs of production for American makers of automobiles—as well as machine tools, construction gear, and farm equipment.

Soon, there arose demands for the protection of these industries, beginning with the car companies because of their political clout. And so we came to have various quota systems imposed on foreign automobile makers. But the results were not as wonderful as Lee Iacocca and his buddies envisioned.

When Japanese auto producers were prevented by quotas from going for large volumes at low prices, they moved up-market to sell smaller volumes of higher-priced cars. Rather than competing against the Americans at their point of weakness—and thus dramatically improving the range of value in the automobile market—the Japanese moved up to compete with the Americans at their point of strength. American purchasers sent more money to Japan, but they didn't even get more cars.

In addition, since consumers didn't get more value at lower prices, they didn't have more money to spend on other products where U.S. producers excelled. They did not receive new incentives to work and save. Protection unnecessarily weakened the strongest parts of the U.S. economy in an attempt to save the weakest.

It doesn't take too much prescience to predict a similar outcome for chips. The labyrinthine new price-fixing agreement between the United States and Japan on semiconductor memories ironically penalizes the top U.S. memory producer, Texas Instruments, which fabricates its memory chips in Miho, Japan. It also penalizes U.S. computer firms that manufacture in the United States. Commodity memory chips such as DRAMs (Dynamic Random Access Memories) account for up to a third of the cost of computers. The new trade accord allows Japanese computer firms to acquire memory chips at half the cost that U.S. producers must incur. The final irony is that the agreement will fail to help American chip firms in any lasting way.

Diverted from commodity memory chips such as DRAMs, Japanese companies will focus on the less vulnerable parts of the U.S. industry. Not only are the U.S. semiconductor industry's best customers—the computer firms—hurt by such protection, so are the best semiconductor producers.

The preceding, three-year-long surge of chip imports from Japanese conglomerates does partly reflect U.S. inferiority to Japan in manufacturing disciplines. America is still a country that prefers lawyers to engineers, teaches more students social adjustment and sex education than physics or calculus, and double-taxes the returns to savings out of fear of "inequality" between the prodigal and thrifty. But these problems offer no reason for a dismal retreat to protectionism or government subsidies.

Although large companies are crucial to the production of commodity products, the ultimate sources of competitiveness and growth are startups pursuing new technologies. Leading business magazines continue to proclaim that the end of the line has come for small firms in semiconductors and computers, but in fact the last four years have seen more spinoffs and startups than any previous period in the history of electronics.

For example, a young American entrepreneur, Raymond Kurzweil, has started three companies to pursue his amazing inventions in artificial intelligence, including the leading-edge music synthesizer used by Stevie Wonder, a reading machine for the blind, and a revolutionary new voice-actuated word processor. This last device can take dictation at a 150 words per minute and recognize a 15,000-word vocabulary. In developing the word processor, which will be sold by Wang and Xerox for around $5,000 late this year, Kurzweil beat out IBM, AT&T, and the entire Japanese electronics industry. Because typewriters cannot accommodate the hundreds of Kanji characters, this technology has long been a supreme goal of leading Japanese conglomerates and government planners at MITI.

As time passes, such inventions and entrpreneurial efforts will revitalize trade between the United States and Japan. First, however, all this U.S. creativity may well increase imports rather than reduce them. By generating a stream of new inventions, the new firms will stimulate the import of complementary components and capital goods. This process of American innovation, which leads to increasing trade deficits, was vividly manifest during the recent electronics boom.

The exemplary product in this surge of American growth was probably the IBM personal computer. Introduced in 1981, in a mere three years it grew from nothing to some $7 billion in sales. It enhanced productivity and management resources in businesses, large and small, across the country. As it fed on the creativity of the suppliers of software—chiefly new firms such as Microsoft and Lotus—the PC simultaneously expanded the market for software. It fueled the success of the huge new industry of computer retailing. It provided standards that offered targets and specifications for all other efforts in personal computing. It fostered boom years for many semiconductor firms, starting with Intel and Advanced Micro Devices, the producers of its central microprocessor and peripherals. All in all, it was a dramatic boon to the U.S. economy.

Yet by the standards of Senator Danforth and others fixated on the trade balance, the personal computer was a catastrophe. It represented a drastic decline in U.S. competitiveness. Not only did it gorge on Japanese DRAMs; it also used Asian keyboards, disk drives, monitors, power supplies, and other components. In fact, while only a small proportion of total sales went overseas, between 60 and 70 percent of the machine was manufactured outside the United States. The Japanese version of the IBM PC was made by Matsushita. Moreover, by creating a settled hardware standard, it allowed the Japanese to penetrate the U.S. computer market with hundreds of thousands of PC clones.

The IBM personal computer symbolizes a computer revolution in the United States that contributed heavily to U.S. growth, productivity, incentives, and real personal income. It also contributed billions of dollars to the much-feared deficit in the balance of payments vis-à-vis Japan and other countries. Yet the gains to. the U.S. economy dwarfed the debts incurred overseas. Similarly, the import of VCRs manufactured abroad is generating a far greater industry of video software and retailing in the United States. And as the debts to foreigners are repaid, every dollar will ultimately be spent on U.S. goods and services or investments. But the single-entry bookkeepers of Congress focus only on the liabilities of foreign trade.

The conventional economics of trade and aggregate demand are simply bankrupt. Nothing they predict is true. A trade deficit does not necessarily destroy employment; it may well increase it. A trade surplus does not necessarily increase national wealth and power; it may deplete it. OPEC nations have had the largest trade surpluses over recent decades, and the United States has recently had some of the largest deficits. What matters in economics is the release of creative energies in productive work and entrepreneurship.

Crucial by this supply-side measure is not aggregate demand but creative supply, not trade surpluses but trade incentives, not capital formation but entrepreneurial quality, not balanced budgets but low marginal tax rates, not national or institutional savings but the disposable personal savings that fuel more than 90 percent of all new businesses. What matters most of all is a nation's success in attracting, educating, and emancipating the most valuable capital in any economy: its human beings.

The United States remains in the world lead in chips and other high-tech products chiefly because it continues to enjoy a massive favorable balance of trade in the single most important area—a category that dwarfs in importance all the numbers that agitate American politicians. That domain is the international movement of human resources, chiefly immigrants.

Immigrants are the lifeblood of U.S. high-tech companies, from the top echelons of management and engineering (for example, Andrew Grove and Masatoshi Shima of Intel) through the design centers and dust-free "clean rooms" of Silicon Valley, and on to its remaining assembly lines. A Japanese immigrant teaching linguistics at Harvard University made critical contributions to Kurzweil's word processor. A Cuban refugee, Juan Benitez, recently became president of Micron Technology, the inventive company that created the world's smallest 64K and 256K DRAMs and is the only domestic producer to survive in that business, selling heavily in the open market. Luckily, the United States still accepts immigrants in large numbers (although Senator Danforth's colleagues are trying to pass protectionist legislation in this area, as well, and the welfare state is reaching out to destroy the work incentives of the refugees who do make it in).

Foreigners express greater confidence in America and its prospects by importing American bonds (claims on future American goods) than they would by importing more American bulldozers or baseball bats. By immigrating, they pay the United States the ultimate tribute.

The ideal of trade balance springs from a world when national power stemmed from the control of territory or the command of land masses and sea lanes, natural resources and bullion reserves; a time when the balance of power in Europe depended on who ruled the iron and coal mines of the Ruhr basin. In an age of 50-trillion-dollar capital markets that operate far more smoothly and efficiently than the markets for goods and services, however, there is no more reason for imports and exports to be balanced from one country to another than for the flow of immigrants to be in balance, or for a balance of trade between any two American states.

There is no particular relationship between the competitiveness of an entire economy and the pattern of imports and exports it displays. Such a balance is completely arbitrary, its pursuit entirely irrational, and its achievement possible only by ripping and tearing at the fabric of international commerce and interdependency.

The world has passed far beyond the economic theories that inspire the world's policymakers today. Failing to comprehend the new technologies that dominate capital markets and that shape the prospects of nations, they retreat to the accounting codes of mercantilism and the zero-sum games of static econometrics. They plunge back into primitive superstitions and numerological symmetries, into nationalist categories that are all but meaningless in a global economy or even to two systems as intimately intermeshed as the United States' and Japan's.

Contrary to the predictions of most modern writers, from George Orwell to Norman Mailer, this is preeminently the era not of nations but of individuals. Against the decisions of entrepreneurs to move themselves and their money, the bureaucracies of the state are increasingly impotent and at bay. The state may confiscate the means of production, manipulate the markets for money, issue orders and guns. It can steal technology but it cannot produce it; it can capture land but can scarcely till it. It can retain power by police controls but it cannot productively use it.

If a nation wishes to increase its wealth and power, it must create an environment that is hospitable to the men and women who populate the intellectual frontiers of enterprise. In this pursuit, what matters is maintaining a surplus in the accounts of liberty.

George Gilder is the author of Wealth and Poverty and The Spirit of Enterprise.