Protecting the global economy's growth
THE global trading system that has supported the postwar prosperity and growth is in jeopardy. That concern dominated the meeting here of the Trilateral Commission, with members from Western Europe, Japan, and North America. And it preoccupies Japanese leaders jolted by United States congressional threats of protection. A fair analysis of the crisis requires separating factors often lumped together:
The worldwide US trade deficit of $123 billion for 1984 is basically our own fault, not that of the Japanese. Its main cause is the current and prospective budget deficits of $200 billion or so. The resulting high interest rates have driven up the dollar more than 70 percent since 1980 and sucked in massive capital imports from abroad.
It is the overvalued dollar that cripples US exporters and exposes US producers to cheap imports, distorting the industrial structure and inevitably provoking demands for protection.
The only remedy is a rigorous program to cut the budget deficit within three years. That should bring the dollar down, facilitate exports, and restrain imports, thereby correcting the trade imbalance.
Conversely, the large Japanese trade surplus with the US and globally is due primarily to very high savings rates in Japan. Since its savings exceed domestic investment, Japan is a net exporter of capital. In a world normally short of capital, this is not necessarily bad, but it does result in a trade surplus. Removing barriers to the Japanese market, though desirable, would not get rid of this surplus. Only higher domestic consumption or investment would do so.
While gradually opening its market, Japan still has constraints on access to it. Some are explicit, such as those protecting citrus and rice. Others are indirect, like product standards, bureaucratic procedures, and complicated distribution channels.
For Europe, the inflated dollar has stimulated exports, but high interest rates and capital outflow have impeded investment and growth at home.
This situation is much more dangerous than many appear to realize. To avoid potential disaster, steps need to be taken promptly to correct the existing imbalances.
By far the most critical step both for US welfare and for the global economy is to deal with the US budget deficit and the overvalued dollar. The recent agreement between the US President and Senate GOP leaders on a package of speeding cuts including defense and social security suggests that both now recognize the need for action. But it will be extremely difficult to get Congress to approve the specific package, and even if passed, it will be much too small unless supplemented by a substantial revenue increase, which thus far President Reagan adamantly rejects. Some are optimistic about his ultimately accepting this as long as income tax rates are not raised: Perhaps it could be done as a part of tax reform, or as an energy tax, or by postponing tax indexing in parallel with the cuts in indexing entitlements. If the President and Congress cannot adopt an adequate budget program, it will mean that our political system is incapable of dealing responsibly with a serious threat.
By comparison, opening Japan's markets further, while necessary, is of far less economic importance. The added imports are not likely to be very large, though their composition might change. But politically, this step is much more significant, by eliminating a major source of friction. Foreign exporters are angered and frustrated by ``unfair'' exclusion from the Japanese market, and they tend to blame Japan for hardships more traceable to the overvalued dollar.
Removing this grievance is important to avoid protectionist measures that could damage US-Japanese relations more broadly, as well as in the interest of freer trade. The question is whether practical measures will be taken in such export sectors as telecommunications, pharmaceuticals, and plywood in the next few months.
To curb its trade surplus materially, Japan will have to stimulate higher consumption or domestic investment by tax incentives or by freeing up its capital markets. As the world economy recovers, however, Japanese capital export can well meet a real need.
Finally, for robust recovery and growth, Western Europe will have to loosen some of the rigidities that impede innovation and expansion.
The United States, Western Europe, and Japan need to coordinate measures for dealing with these issues. Yet that will be extremely difficult, given the large element of domestic politics involved. The Bonn summit in May offers an opportunity to make a start on remedies. Perhaps in anticipation, Secretary of State George Shultz's speech at Princeton this month analyzed the key imbalances and means for their correction (unfortunately, ruling out any tax-rate increase for cutting the budget deficit). Certainly delay only further mortgages the future.
Robert R. Bowie has been concerned with foreign affairs for nearly 40 years on the Harvard faculty, in government posts, and as a consultant.