Trade: We're Not Import Gorgers

There is a widely held perception today that U.S. businesses are no longer competing effectively in the world's marketplaces. The United States' large trade deficit is presented as evidence of our inability to sell our products to foreigners compared with our desire to buy theirs.

If this were true, then U.S. uncompetitiveness would indeed be a serious problem. But it's not true. In fact, the opposite is the truth.

Many Americans believe that the trade deficit reflects a one-way flood of Japanese goods into the United States, while Japan prevents U.S. products from entering its markets. This makes Japan's businesses appear to be more effective than they really are.

In fact, for the last few years the United States has proven to be better than Japan (and most other countries) at competing for the world's business. From November 1982 to November 1986, the output of U.S. manufacturers increased by 30 percent. This dramatic growth far outpaced that of any other major country, including Japan. Also, since manufacturing employment rose by 6 percent while output rose by 30 percent, there was obviously a huge increase in productivity—more than 4 percent a year in the United States compared with just 2.5 percent in Japan for the same period.

The U.S. economy has grown at an average rate of more than 4 percent for five years—one of the longest and strongest U.S. expansions in a century. Over the same five-year period, stock prices have doubled, interest rates have been halved, inflation has been reduced from 13 percent to 3 percent, private saving has increased by more than $200 billion a year, real hourly compensation is up 5 percent, and after-tax per capita income is up 10 percent. Eleven million new jobs have been created, giving the United States the highest total rate of employment in its history and a rate higher than Japan's. No other country in the world has an economy that has been as successful as ours over the last five years.

So why do we still have huge trade deficits? The reason is mostly our trading partners' inability to duplicate our economic success. The increase in the U.S. deficit has been entirely due to falling exports, not "gorging ourselves on imports." In fact, imports account for a smaller share of our economy today than in 1980 and a much smaller share than in any other major country. We aren't buying more—other countries are buying less.

Why? Put simply, they can't afford to buy more. Most countries never escaped from the worldwide recession of 1981–82. European countries, for example, have experienced a dismal growth rate—below 1 percent per year on average since 1980. Also, lack of employment growth in other nations has kept their buying ability depressed. From 1980 to 1985, employment in Europe fell by 0.3 percent per year. Japan's 1 percent annual increase was better, but still not as impressive as our increase of 1.5 percent per year.

Also, according to the U.S. Labor Department, the United States has been creating more high-paying managerial and professional jobs than low-paying service, labor, and farm jobs. This trend has been in effect for over four years now and contradicts the myth that the U.S. economy has been producing mostly low-paying, unskilled jobs during this period.

A better picture of U.S. competitiveness can be seen by comparing the share of his income that the average American spends on foreign goods with the share of his income that the average foreigner spends' on U.S. goods. Canada is the United States' largest trading partner, and its average citizen spends over 14 percent of his income on U.S. goods while the average American spends only 1.7 percent of his on Canadian goods. Taiwan is another major trading partner. The average Taiwanese spends about 8 percent of his income on U.S. goods; the average American, less than 0.5 percent of his on Taiwanese goods.

Despite these great trade discrepancies in favor of the United States on a per capita basis, we still had a $22-billion trade deficit with Canada and a $13-billion deficit with Taiwan in 1985. In fact, while no country sells more to the United States per capita than the United States sells abroad, we still have trade deficits because our citizens earn so much more per capita than the rest of the world.

This helps clarify what is needed to reduce our trade deficits. Actions that discourage Americans from purchasing foreign products, such as tariffs, are not at all helpful. Instead, actions that encourage other countries' economic growth are needed. Foreigners must be able to afford to buy more U.S. goods.

A sizable group of very confused politicians has used the trade deficit to call for steps that would shut off or severely limit imports into the United States. This would inevitably lead to similar restrictions on U.S. goods abroad. Because foreigners on a per capita basis spend far more on U.S. products than we spend on foreign products, the United States has the most to lose from such protectionism.

So what can be done to stimulate growth in foreign economies? Very simply, other nations need to follow the examples set by the United States for economic prosperity—moderate tax rates, deregulation, privatization, and moderate monetary growth. Indeed, countries that have adopted similar policies have performed better than those that chose not to.

The United Kingdom reduced its top tax rates from 83 percent to 60 percent, deregulated many industries, and privatized many businesses. Its economic growth has been one of the best in Europe as a result, and a great improvement for that country in particular. Turkey has experienced the fastest growth in Europe—7 percent in 1986 alone. Most of this growth can be attributed to its top tax rate falling from 68 percent to 50 percent. India also reduced its top rate and saw a considerable increase in growth.

Throughout the rest of Europe, countries that chose high tax rates and excessive government interference in the marketplace (such as France) have performed dismally. Europeans should be able to afford to buy many more U.S. goods, but they can't until they reduce unemployment rates (the average is 11 percent) and increase economic growth. The same goes for developing nations, which have had to live with stagnated earnings and high unemployment rates.

There is considerable evidence to suggest that what caused the world stock markets to crash in October was renewed investor fears that the policies of economic growth would be replaced with the destructive policies of the past. "Things began to go sour," economist Alan Reynolds wrote in National Review last November, "as the White House showed signs of being increasingly unwilling or unable to resist Congress's return to its old ways of doling out favors"—namely, through antitrade and antiwealth measures.

"By October 19," observed Reynolds, "the odds of bad U.S. trade and tax legislation appeared greatly increased, while the odds of Japanese and German tax reform or monetary cooperation seemed greatly reduced. Opportunities for profitable trade were thus in jeopardy all around the world."

Although it is hard to believe, some politicians have said they believe the crash was the market's way of calling for higher taxes on corporations, stockholders, and consumers, along with "stiff" tariffs to "protect" American businesses. The evidence is overwhelming that such actions could only lead to economic stagnation and more depressed economies. For example, these exact policies were the main reason why the Great Depression in this country was so long and severe.

One result of a recession caused by bad economic policies would be a decline in U.S. consumer buying, which would finally reduce our trade deficit. But causing a recession is not a very good way to get rid of a statistic whose meaning in unclear anyway.

What the United States needs to do now is continue to implement the same policies of reducing taxes and government interference that have been so effective over the last five years. Also, we should expound more loudly on the benefits of lower tax rates and open trade policies to those countries that have not already begun to enact them. By doing so, we will continue our own prosperity and encourage similar growth abroad.

James C. Mooney is a financial consultant with Thomson McKinnon Securities in Cincinnati.