Share this story
Close X
Switch to Desktop Site

Trade and unemployment; Global bread-and-butter issues

No one knows with certainty how to get the world out of its present economic muddle, centering on high unemployment, economic stagnation, and mounting debts for many of the world's poorer lands.

But on one thing almost everyone agrees: A clear link exists between the plight of the world's many millions of jobless people and the inability of their nations to buy and sell goods as freely as before.

About these ads

''The present state of world trade,'' says Sir Roy Denman, Common Market envoy to Washington, ''is at its gloomiest since World War II.''

''World trade,'' notes the Washington-based Institute for International Economics, ''is declining substantially for the first time in the postwar period.''

This decline - after decades of steady growth - coincides with a global rise in unemployment that, if unchecked, could threaten the social and political fabric of many lands.

The threat is magnified in developing countries with feeble democratic roots. But even nations like Switzerland, Denmark, the Netherlands, and West Germany have experienced urban riots stemming from lack of jobs and opportunity for young people pouring onto labor marts.

''If our problem is unemployment, how do you solve it?'' United States Special Trade Representative William E. Brock asks. ''By putting more people back to work,'' he says. ''How do you do that? By selling more goods. Trade internationally is so big now that it really can make a difference.''

But the problem Mr. Brock cites - unemployment - is worldwide.

Among the 24 industrial members of the Organization for Economic Cooperation and Development (OECD), 32 million people are jobless. Next year the total may rise to 35 million - 12 percent of the OECD's collective work force.

About these ads

OECD members are the rich nations of the world - the US, Canada, Japan, and Western Europe. If they suffer a ''grim, steady rise in unemployment'' - in the words of Sylvia Ostry, the OECD's chief economist - what about the poor?

There the situation is worse. In some developing countries half the labor force is without sustained, meaningful work.

Switch now to the role of foreign trade in the economies of nations, rich and poor. Does trade ''really make a difference?''

In Western Europe the role of foreign trade is central. Twenty-five percent of the gross national product (GNP) of Common Market nations derives from foreign trade, ranging from 18 percent in France to 52 percent in Ireland.

Even the United States, despite its continent of riches, cannot escape a growing dependence on the flow of goods and services between Americans and peoples overseas.

''Between 1978 and 1980,'' says C. Fred Bergsten of the Institute for International Economics in Washington, D.C., ''three-quarters of the total growth in the US economy came from the improvement in our trade balance. And over the last 18 months three-quarters of the decline in the US economy has come from the deterioration of our trade balance.''

''In fact, Dr. Bergsten adds, ''the deepening deficit in our trade has been by far the biggest factor pushing our economy into recession - much bigger than the housing or automobile slump.''

''Weakness in international trade is a new element interfering with the recovery this time around,'' writes Allen Sinai of Data Resources, Inc., ''providing a drag on the economy not usually in place at this time in the business cycle. Continuing recession throughout most of the Western industrialized world is depressing the demand for US exports.

''The enforced austerity on LDCs (less developed countries) because of huge debt problems - for example, Mexico, Argentina, and Brazil - also will trim US exports.''

Between the first quarter of 1981 and the third quarter of 1982, Mr. Sinai says, ''net US exports, in real terms, declined $20.7 billion - some 77.5 percent of the total reduction in real GNP over that period.''

Despite the United States' vast resources, it lacks certain key minerals and raw materials. In some cases, like petroleum, the lack is partial. In 1979 almost 48 percent of all the oil burned by Americans came from foreign wells. Today, by dint of conservation, switching to coal and natural gas, and low industrial demand, oil imports have been cut in half.

This success story cannot be repeated in the case of cobalt and manganese, essential to the making of steel. One hundred percent of these minerals comes from overseas. At least 90 percent of chromium, bauxite, and platinum - all vital to certain manufacturing processes - are foreign-supplied.Japan's compelling need to export - the source of much friction with Washington - stems from that country's almost total dependence on the outside world for raw materials, including food. ''Unless we export,'' says Akio Morita, chairman of the Sony Corporation, ''we cannot survive.''

LDCs are in the worst situation of all because they lack the ability to churn out enough exports to pay for needed imports. Whipsawed by fluctuating world prices for commodities - the primary exports of most LDCs - backward countries strove during the 1970s to import from the West the infrastructure needed to build a manufacturing capability.

Some, like Mexico, Brazil, South Korea, Taiwan, and Singapore, succeeded - so much so that they find protectionist barriers mounting against their consumer goods exports.

Borrowing to pay for imports, borrowing to buy oil that leaped from $3 to $34 a barrel in seven years, LDCs - even the most successful - fell deeper into debt. This was manageable as long as their own economic growth gave promise of debt repayment in the future.

Now, however, the LDCs, with a cumulative debt burden of close to $600 billion, find their overseas markets shrinking, due mainly to deep recession among their major customers.

The threat of default - or at the least the need to reschedule hundreds of billions of dollars worth of debt - hangs over the international banking system and becomes an integral part of the trade-unemployment link.

What happens to the LDCs is of enormous concern to Americans. ''Developing countries,'' Dr. Bergsten says, ''excluding OPEC, now take about one-third of US exports and have been our most rapidly growing export market for the past 10 to 12 years.''

''Eleven of the top 20 trading partners of the United States are developing countries,'' says John W. Sewell, president of the Overseas Development Council in Washington. ''Of these 11, eight also rank among the major borrowers from US banks, and seven also rank among the largest developing-country debtors.''

Cool heads would dictate, given this interdependence among nations, that everyone should cooperate to expand trade. There is ample evidence, experts say, that more jobs are gained through exports than are lost from imports.

One out of five US factory jobs produces for markets overseas. American farmers sell one-third of their crops abroad. In 11 of the 50 US states, says trade ambassador Brock, ''more than 15 percent of all manufacturing jobs are related to exports.'' The export share of the US GNP has jumped from 4.4 percent in 1970 to 8.5 percent now.

Yet the opposite of trade expansion is going on. Protectionism is on the rise throughout the world, as troubled industries - employers and workers alike - besiege their governments for protection against imports.

The US curbs imports of European steel. Domestic content legislation, not yet passed by Congress, aims at Japanese cars. The US and China are in a mini trade war over textiles.

Europeans limit sales of Japanese cars and videotape recorders. And Tokyo makes it hard for foreign high-technology products to penetrate the Japanese market.

The list of protectionist tactics is varied, long, and growing. Tariff barriers are falling, thanks to successive rounds of negotiations within the General Agreement on Tariffs and Trade. But more subtle nontariff barriers climb.

Despite the adherence of most governments to the principle of free trade, administrations at home and abroad find it politically difficult to withstand protectionist appeals from jobless workers and industries sliding toward bankruptcy.

Much pressure comes from the old ''smokestack'' industries, like autos and steel, which - having lost their competitive edge - may never employ as many workers as before.

But the American textile industry, reputedly the most modern and productive in the world, complains about low-cost textile labor in China, Korea, Singapore, and elsewhere. US makers of semiconductors say they can compete head-to-head with the Japanese - if they are given a fair crack at the Japanese market, second largest in the world.

The demand for protection or reciprocity, in short, springs from old industries and new, as governments count their jobless and weigh the economic and social costs.

To the extent that trade channels continue to shrink - because of protectionism or recession or both - it will be harder for the US and other economies to recover.

''It should be recognized,'' says Dr. Bergsten, ''that the US trade deficit in 1983 is going to rise to at least $75 or $80 billion and could reach an annual rate approaching $100 billion by the end of the year. Those numbers suggest a significant drag on the domestic economy, taking perhaps 1 or 1.5 percentage points off our GNP and creating additional unemployment to the tune of 1 or 2 million jobs.''

Will recovery in the United States be hard to achieve, unless there is a real improvement in the trade balance?

Yes, replies Bergsten. ''Because of the further deterioration of the trade balance over the coming year, we will need a substantial rise in the domestic components of the economy just to break even or get very modest growth.''

How can the world community begin to halt this downward spiral? Expansionary measures, especially among the industrial powers most successful in combating inflation, are called for by a growing number of experts.

''We ought to have as our objective for 1983 economic expansion,'' says Secretary of State George P. Shultz. ''We want an expansion in 1983, and setting that objective clearly in our sights is important.''

This advice, if taken, would reverse the policy course of recent years, when the United States and other industrial powers focused on inflation. Striking gains have been made, though the full battle has not been won.

US inflation, broadly measured on a GNP-deflator basis, rose 6 percent in 1982, the lowest rate since 1977. The rate for the last quarter of 1982 was only 4.3 percent. Consumer prices rose even less.

Among the 24 member nations of OECD, inflation is running at an annual pace of less than 7 percent for the first time since 1973.

Much of today's economic stagnation and high unemployment traces back to international efforts to squeeze out inflation. Anti-inflationary gains, in other words, have been achieved at fearful cost.

Now, according to Shultz and others, it is time for the major powers to run the risk of a little inflation, because the risk of world depression is greater. Over the near term the inflationary danger is seen as low. The US and other economies have a great deal of unused capacity and idle manpower to employ, before inflationary bottlenecks appear.

In any case, the thinking goes, there is no way the world can recover, unless the United States, West Germany, and Japan in particular prime the economic pumps.

A first step for the US is to bring the overvalued dollar into better alignment with other world currencies. High US interest rates, plus the tendency of overseas investors to run to the dollar in troubled times, have shot its value skyward.

''The overvalued dollar,'' says Bergsten, ''is the overwhelming cause of the deterioration of our trade balance. Virtually the whole deterioration, I think, can be attributed to the loss of price competitiveness that our exports have suffered through the severe overvaluation of the dollar.''

For some months the Federal Reserve Board has tried to nudge interest rates down, by lowering the discount rate and injecting more money into the banking system. Nominal rates have dropped, but real rates of interest charged by lenders remain extremely high.

When the prime stood at 21 percent and the consumer price index (CPI) measured 13 percent, the real rate of interest was the difference between the two, or 8 percent. Today the prime is 11 percent and the CPI is roughly 4 percent. So the real rate of interest is 7 percent, representing the lender's expectation of what will happen over the life of his loan.

''Interest rates,'' Bergsten says, ''have come down in nominal terms, but they are still exceedingly high in real terms. Much further reduction in real interest rates is essential, so that the dollar's exchange rate will return to a more appropriate level.''

How can that be done? Paul A. Volcker, chairman of the Federal Reserve Board, points to huge and growing budget deficits as a key cause of the financial community's distrust of the future. Mr. Volcker calls on Congress and the White House to bring down those deficits - or at least to present budgets that are credible.

That in turn will require President Reagan and lawmakers to make painful choices - including real slashes in the growth rate of defense spending and a cap on the growth of entitlement programs, including social security and medicare. If these things are not done, deficits will grow and interest rates are unlikely to drop.

Much of this remedy goes against President Reagan's grain. The leaders of West Germany, Japan, Britain, and other industrial powers confront their own blends of political and social pressures, as complex as those that face Mr. Reagan and Congress.

No one can chart the exact path that governments will follow to expand trade and, in consequence, put people back to work. But until the most powerful economies in the world are put to rights, progress will be slow.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.