Trade: Why The Experts Are Wrong

Discussions about trade have a way of degenerating into economic mumbo jumbo. Well aware that most people don't know the first thing about how to translate dollars into yen, much less figure out why the trade deficit is so large, some economists and trade mavens frequently turn to elaborate economic explanations that confuse rather than clarify.

The current dispute between Japan and the U.S. is no exception. Having been lambasted for contemplating the imposition of stiff tariffs on Japanese luxury cars and thereby threatening the end of the world's free-trade system, the U.S. is being skewered, yet again, for mismanaging its own economic house. In the national income accounts, the experts opine, savings equals investment, and without enough savings there's not enough investment, and without enough investment there isn't enough growth. U.S. savings are too low, the budget deficit too high, consumption exceeds income, and imports of goods and capital outweigh exports. Hence the trade deficit and the capital-account deficit. The Japanese, by contrast, are champion savers, which explains their mammoth trade surplus.

True, the U.S. savings rate trails that of Japan. But there are two problems with this cascade of explanations. First, economics-textbook truisms are about as useful as observing that a rose is a rose is a rose. They don't say anything about cause. For instance, if America exported more to Japan, incomes would be higher, and Americans might save more. And the Japanese might well save less if they could spend more income on cheap imports.

Second, the analysis is tired. Look at what has happened in America over the past decade. The dollar has plunged 64% against the yen since 1985. The budget deficit will amount to about 2.6% of gross domestic product this year, down from 5.4% in 1985. There has been an investment boom, productivity is up, and Corporate America is piling on the profits. Yet the U.S. still has a yawning trade deficit with Japan, and still would even if it did everything the experts recommend to shore up savings and cut the budget deficit.

That's because economics is not the issue here. It's a case of market access, pure and simple. The mercantilist Japanese export to the world while shielding their home market. America keeps trying to break that market open. The Japanese, meanwhile, retain virtually unfettered access to the U.S. market. Lawrence Chimerine, managing director at the Economic Strategy Institute, estimates that if Japan's markets were to be totally open, the annual U.S. trade deficit with Japan would amount to only $15 billion, instead of the $64 billion it is today.

To be sure, autos may not be the cleanest unfair-trade case the U.S. has against Japan. American carmakers could push harder to offer right-hand-drive models and could make more of an effort to open dealerships in Japan. And it's true the unilateral action seems to undercut the new World Trade Organization--although the U.S. has just made clear it will abide by the WTO's ruling.

No less a free trader than the Scottish economist Adam Smith wrote that when a foreign nation imposes "high duties or prohibitions" on imports, then "revenge naturally dictates retaliation." That is, "we should impose the like duties and prohibitions upon the importation of some or all of their manufactures." The object? "Repeal" of those prohibitions. Fairness and reciprocity, not macroeconomics, are the issues at hand.

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