Dollar realignment: an inadequate trade policy?
THE House of Representatives' lopsided vote late last month for a trade program -- a program President Ronald Reagan condemns as raw protectionism -- implicitly but unmistakably rebukes United States international economic policy. This is deeply significant. One can argue that Washington's pursuit of a chimera -- trying to solve the trade deficit through currency devaluation -- has allowed the real historical and political dimensions of the trade crisis to go largely untended, in the process speeding up the transfer of US wealth and global economic leverage to Japan.
The linchpin, of course, was last year's Reagan administration decision to deal with the trade crisis principally through currency realignment. Devalue the overpriced dollar by 20 to 25 percent, key officials said, and the trade problem will be brought under control. Congress won't have to -- and should not -- pass legislation restricting imports or hobbling the President's authority in trade matters.
Nine months later, that narrowly based strategy looks increasingly inadequate.
Multinational corporations have received some benefit, but Congress generally dismisses the administration as a failure on the trade front. Thus this spring's resurgent demand for legislation.
Recent official data have fanned the fires of political frustration. After all, the dollar has been tumbling for 15 months now, falling much further than originally predicted against currencies like the Japanese yen; yet we have seen little gain in the trade statistics. The improvements forecast for early to mid-1986 have not materialized.
Let me stipulate: The 1985-86 decline in the dollar is certain to bring greater trade benefits in 1987. But it probably won't be enough to push next year's trade deficit below $120 billion or so, and that's a painful prospect. Moreover, two particular shortfalls stand out in the administration's reliance on currency devaluation:
Foreign companies, Japanese in particular, are absorbing currency losses to maintain increased shares of United States markets.
Many commercially important currencies have stayed roughly the same against the dollar -- those of major US trading partners like Canada, Mexico, Taiwan, and Korea -- so that the US trade deficit with these nations has stayed the same or worsened.
If Congress is proposing heavy-handed remedies, one reason is that the administration's own blinders have arguably promoted a near-absence of serious analysis of world power realignment.
Respected congressional specialists like Sen. John Danforth of Missouri and Rep. Sam Gibbons of Florida -- chairmen, respectively, of the Senate and House international trade subcommittees -- have been driven toward ``protectionism'' by White House inaction and naivet'e as much as by anything else.
If currency devaluation has no history of reversing long-term trade declines -- Britain's 20th-century record offers proof aplenty that it does not -- several other major caveats are also in order: To begin with, the administration's lack of a sophisticated working domestic and international blueprint causes it to respond to surges of congressional anger-cum-legislative insistence by pushing the panic button. To indulge another metaphor, trade-policy sabers are rattled to convince Congress that the administration is indeed macho enough to carry the day without new legislation. The sad irony is that moves of this kind -- the sudden imposition in late May of 35 percent duties on some Canadian forest products, for example -- can simultaneously fail to impress a disillusioned Congress even as they infuriate an unsuspecting industry.
And these flare-ups, unfortunately, come amid world circumstances in which a ``trade war'' -- a painful realignment of global economic power -- seems all too plausible.
As of 1986, we are seeing the increasing obsolescence of a whole string of world organizations -- from the United Nations to UNESCO, the World Court to the General Agreement on Trade and Tariffs (GATT) -- largely shaped by the United States during the period of US international hegemony after World War II. Given the world's new circumstances, it may be that these organizations no longer serve enough purposes and realities and that new organizations, relationships, and rulemaking bodies will have to be shaped. But few observers raise the possibility.
Yet the change in the balance of world economic power has been enormous, with East Asia the prime beneficiary.
Thanks to the huge and mishandled trade deficits of the last few years, the United States has become the world's largest debtor nation, while Japan has become the world's largest creditor. Recycling the profits from pumping cheap electronics and automobiles into US markets, Japan has become an increasingly critical underwriter of America's borrowing spree: Will the Japanese buy bonds? Will they keep financing our budget deficit? Will they insist on better US interest rates as a condition?
Respected US economists have begun to talk about the United States being in hock to Japan and about American interest rates being determined in Tokyo, not New York or Washington.
And Harvard professor Ezra Vogel's article ``Pax Nipponica?'' in the current issue of Foreign Affairs plausibly argues that Japan's growing economic preeminence must inevitably be a force for neo-mercantilism.
In the meantime, Treasury Secretary James Baker's optimistic focus on coordinating the world's currencies and economies is winning plaudits, not least from observers who remember malcoordination and economic nationalism as a factor in the Great Depression of the 1930s.
But we have to wonder: Are today's internationalist assumptions realistic? Moreover, if avoiding the mistakes of the last war were an adequate policy for the next confrontation, then France's Maginot Line would have stopped Germany's panzers in 1940.
Let us hope late-1980s United States international economic policy is not another Maginot Line, already close to a Pacific breach.
Kevin Phillips is an author, commentator, and publisher of The American Political Report.