THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, May 22, 1995 TAG: 9505200223
SECTION: BUSINESS WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Forum
SOURCE: BY J.R. BULLINGTON
LENGTH: Medium: 75 lines
It's easy for American politicians to blame the Japanese and other foreigners for our persistent trade deficits. They don't vote in our elections.
Moreover, there is a solid case to be made that Japan is indeed more protectionist than the United States and most other countries.
As any American who visits Japan will quickly recognize, their strong yen and enormous trade surpluses have not given the Japanese people a standard of living nearly as good as ours. They may make high salaries, in dollar terms, but those salaries won't buy nearly as much of the food, housing and other good things of life as will comparable salaries here.
This gap in living standards - a gap that is much more important than the trade gap to the average American or Japanese - is in large measure a function of Japan's reluctance to open its markets to foreign products. Restrictions on rice imports, for example, make the price of this Japanese diet staple eight to 10 times the world price.
We are surely right to press the Japanese to lower protectionist barriers and buy more American goods and services. The resulting increase in trade would benefit both them and us. That is why trade is important. With increased trade, both parties win.
And the Clinton administration is right to bring our complaints about Japanese protectionism to the World Trade Organization, the body created last year, with U.S. leadership, to replace the General Agreement on Tariffs and Trade. A principal reason for establishing the WTO was to facilitate the fair and effective resolution of these sorts of trade disputes.
An apt analogy might be a boating partner who drills a hole in his end of the boat. Is the best response to drill another one in our end?
Just as increased trade would benefit both countries, a trade war would harm both, in about equal measure.
Moreover, we need to recognize that Japanese and other foreign restrictions on exports from the United States are not the fundamental cause of our persistent trade deficits. That cause lies within, not without: It is a national savings rate which is too low to meet our investment needs.
When a country invests more than it saves, the gap is necessarily filled by foreign savers who invest in that country. This is just what has been happening with the United States in the past several years, as we have gone from the world's largest creditor nation to its largest debtor.
Where do foreigners get these surplus dollars to invest in the U.S.? This is where the trade gap comes in. They get them by selling more to us than they buy from us.
Thus, to fix the trade deficit, we need to fix the savings deficit. We could do this by reducing investment, but that would harm our competitiveness and slow our growth. Or we could increase savings, which would boost both competitiveness and growth while at the same time balancing trade.
How do we increase savings? On the national level, the way to increase savings is to eliminate the huge annual deficits in the federal budget. These deficits represent an enormous dissavings.
And on the personal level, the most obvious policy prescription is tax reform which favors savings over consumption. Examples would include a lower capital gains tax, replacement of income taxes with sales or value-added taxes, and restoration of deductability for Individual Retirement Accounts.
Even if we are successful in forcing Japan to more fully open its economy, this would only shift the trade gap elsewhere unless we also increase our domestic savings rate.
Pressing other countries to reduce trade barriers is a good policy. However, the pressure should be applied in ways which do not harm our own economy. And it should not be seen as a substitute for ignoring our domestic economic shortcomings. MEMO: J.R. Bullington is the director of the Center for Global Business and
Executive Education at Old Dominion University.
by CNB