The Nature and Causes of the U.S. Trade Imbalance


Speech before the Ilhae-Brookings Seminar III for Corporate Executives on Korea-U.S. Relations, Seoul, Korea, March 20, 1987.

Coming Back from the United States . . .

               Let me begin by saying that I have no prepared text on the subject given in your brochure. I just came back from the United States about a week ago after a two week's tour to six cities as a member of what we called the Korean Buying Mission. So I would like to depart from the announced topic and share with you some of the impressions I received during my stay in the United States. I am encouraged to do so by the realization that much has been said about Korea but very little about the United States, particularly by my fellow Koreans, in your five-day seminar.

The purpose of our mission to the United States was to increase Korea's imports from the United States by means of personal contact between businesspersons from the two countries. This was, of course, an expression of Korea's concern over the growing trade surplus with the United States, which hit a record high of more than $7 billion last year.

I thought our mission was well received and appreciated by both the business community and government officials in all places we visited-including a number of political leaders on Capitol Hill. They expressed particular appreciation when we told them that the Korean business community had been making conscious efforts to divert our import sources from Japan to the United States and that about $400 million of the total purchases of nearly $2 billion worth of goods made during the tour represented new purchases apparently diverted from Japan in favor of the United States. When we wound up our trip in Washington, attending a series of receptions and dinners given in honor of our mission by congressional figures from the states and districts we visited, I had this sort of feeling: "Mission accomplished."

However, my complacency was short lived, and I was brought back to reality when I was talking to a group of people at the Georgetown Trade Forum toward the end of my stay in Washington. My short remarks were followed by a lively dialogue between the audience and myself, which I thought brought into clear focus the real issues confronting the United States and its major trading partners. One of the members of the audience asked me to what extent I believed Korea's "Buy American" campaign would help reduce the overall U.S. trade deficit as well as the U.S. trade deficit with Korea. I was not embarrassed by this question at all because I was fully aware that our buying mission was nothing more than a modest effort aimed at cooperating with the United States. Indeed, even if the entire Korean trade surplus disappeared overnight, it would reduce the overall trade deficit of the United States by less than 5 percent.

Incidentally, the Data Resource Institute reported that complete removal of Japanese import barriers would create only 250,000 new jobs in the United States. This number may look impressive. In fact, it is only 0.24 percent of the 102 million people currently employed in nonagricultural sectors in the United States. Naturally, the subsequent discussions in the Georgetown Seminar were centered around the major causes of the U.S. trade imbalance. I was reluctant at first to comment on U.S. economic policies for fear that I might seem presumptuous. But in the course of discussion, I gradually assumed my earlier role of an academic economist, putting to one side my official position. Let me summarize what I had to say, mostly concurring with my fellow economists at home and abroad, from the standpoint of an economist rather than a public servant or trade association official.

The Causes of the U.S. Trade Deficit

In my view, four factors appear to be most relevant to the current U.S. trade imbalance. In the first place, I think it is a simple truth that overspending relative to the domestic resources available within an economy inevitably brings about either a trade deficit or inflation-or both. If you want to avoid a trade deficit under the condition of overspending, then you have to restrict your imports and let domestic prices rise. On the other hand, if you want to avoid inflation, then you have to keep your import channels wide open and accept trade deficits as a result. In reality the choice between the two alternatives can never be perfect, and usually inflation and trade deficits come together in varying proportions, depending on which policy alternative receives greater emphasis.

One of the most vivid examples of this situation is found in the experience of Korea's economic growth during the 1970s. Korea then rather deliberately pursued a policy of overspending in the interest of high growth, accepting high inflation and chronic trade deficits as necessary costs. In the case of Korea, however, the overspending resulted mainly from overinvestment, not from overconsumption. Overinvestment brings about inflation and trade deficits, but at the same time it results in production facilities and advanced technology that can be used in time of need, while overconsumption leaves nothing but the two economic malaises, apart from its function of sustaining economic growth.

In the case of the United States, the overspending mainly led to growing trade deficits because of a wide-open domestic market for foreign goods. This was not the result of a policy choice, but largely due to the American tradition of liberal trade. However, the tradeoff between inflation and trade deficits has not been as complete as it would appear. For one thing, the United States had to accept higher domestic prices of certain items by restricting imports. For example, the Institute of International Economics in Washington, D.C. estimates that in 1985, protection cost American consumers about $65 billion. Another study by the Brookings Institution estimated that protection for the auto industry boosted average car prices by $2,500. Moreover, devaluation of the dollar necessitated by trade deficits generates upward pressure on domestic prices sooner or later, as feared by many American economists-including Chairman Volker of the Federal Reserve Board.

The striking feature of overspending in the United States is found in overconsumption as distinct from the overinvestment that Korea experienced during the 1970s, and, needless to say, the fiscal deficit is mainly responsible for the overconsumption. I was told that the U.S. fiscal deficit absorbs almost all personal savings in the United States, leaving little to contribute to private investment. Other countries like Japan also have the problem of fiscal deficits, but domestic savings in Japan are so large that fiscal deficits do not lead to the overspending in aggregate terms.

This observation leads me to the second factor that contributes to the U.S. trade deficit. It is well known that the United States has lagged behind Japan and West Germany during the 1970s and beyond in adjusting its industrial structure in response to shifting comparative advantage, investing in renovation of old facilities, and spending on technological research and development. On the other hand, U.S. business is said to have long suffered from various overhead costs-including lawyers' fees, which are now approximately 1 percent of the U.S. GNP. The implication is that business activities in the United States are hampered by highly complex and restrictive laws and regulations. This situation may be the reason why some sectors of U.S. industry now suffer from low productivity relative to their competitors in the international market.

Thirdly, the trade deficit gives rise to the need for more exports to narrow the trade gap. However, American businesses in general are not foreign-trade oriented, except for the multinationals and some other large companies, for the obvious reason that the United States has been so rich in natural resources with so large a domestic market that foreign trade has traditionally played a limited role in the U.S. economy, even though the United States still remains the world's largest trading nation in terms of export and import volume. When I was in the United States, I heard the chairman of the Boston Bank tell American business leaders and our group in a luncheon speech that American businessmen generally do not fully commit themselves to foreign trade and regard foreign trade merely as a means of disposing of excess inventories occasioned by changing market conditions at home.

I turn now to the fourth factor-import barriers and unfair trade practices on the part of U.S. trading partners-which is now the primary trade concern for the United States. In all fairness, we must admit that the U.S. market is much more open than other countries, including Korea. Certainly the United States has valid reasons for pressing other countries to remedy the situation. In this regard, I am sure you have heard many times from previous Korean speakers about Korea's ongoing efforts to address the trade issues raised by the United States.

Yet, it occurs to me that the preoccupation of the American people with this issue tends to obscure not only the importance of other factors, such as those I discussed earlier, but also causes them to overlook some important aspects of market access in foreign countries. For instance, the United States enjoyed a quarter century of more or less balanced trade from 1960 to 1976. We may then ask: Were the markets of Japan, Korea, and those of other countries more open during that period of time than they are now? I believe the answer is no. By and large, U.S. trading partners have become more accessible to American products than was formerly the case as a result of various liberalization measures taken in recent years, often at the request of the U.S. government. This may imply that trade barriers and unfair trade practices by themselves cannot go very far in explaining the U.S. trade deficits we observe today. I think it is more accurate to say that the U.S. need for easier access to foreign markets has become much more acute than ever before because of the growing deficit than to say that the limited access to foreign markets is mainly responsible for the U.S. trade deficit.

Related to this observation, I would also note that one tends to overlook the fact that generally if import barriers exist in a country, they keep out not only American products but also the exports of all other countries. By the same token, if a country opens up its market to foreign products, it is not only for the benefit of the United States but also for that of all other countries-in keeping with the basic principle of nondiscrimination of the GATT system. Given this circumstance, market opening does not automatically guarantee increased American exports to any newly opened foreign market. The result largely depends on the extent to which U.S. companies are successful in competing with other nations' companies in the market under consideration. This was well illustrated in Korea's experience of market opening in recent years. When Korea opened its market for certain products at the request of the United States, more often than not Japan turned out to be the major beneficiary rather than the United States. This experience clearly demonstrates that productivity of domestic industries and competitiveness in international markets are the major factors determining the trade position of a given country. Competitiveness is, of course, a broad concept that relates to not only price and quality factors but also delivery time, after-service, market information, and even language. In a recent survey conducted by my own organization, KTA, we found that Korean companies generally believe that Japanese companies fare better than American companies in most of these competitive areas.

Need for International Cooperation

Whatever the causes of the U.S. trade imbalance may be, one thing is very clear: Every country involved must do its best to reduce its trade imbalance with the United States for the obvious reason that when the United States suffers, the other countries also are bound to suffer. In other words, the economic strength of a great many countries, including Korea, is heavily dependent on the economic health of the United States and its leadership role in the world economy.

In the final analysis, I came back from the United States with mixed feelings. On the one hand, I felt strongly that the intimate friendship and the spirit of cooperation between our two countries remains so strong that we can successfully face any challenge by working together for our mutual advantage. On the other hand, looking at the global scene, I could not help feeling that the world trade environment is deteriorating rapidly. One of the most ominous trends is that international commerce is increasingly being held hostage to international power politics. For example, when it was recently announced that an American company had won an international tender for construction of a nuclear power plant in Korea, at least two normally friendly nations were very angry, threatening to retaliate against us for the alleged unfairness. I hope that Korea's purchase of American aircraft in the course of our buying missions visit will not bring about the same sort of reaction from other friendly nations. Even in the United States, we had some complaints from the cities and states that we had not been able to include on our itinerary. This caused me to reflect that when commercial business decisions are transferred from the marketplace to government offices, it is inevitable that a favor given to one country will alienate other countries, making trade relations among nations much more difficult.

How long can we continue to move in the direction of protectionism before we see the complete breakdown of the international trading system? What we need desperately now is to restore order in international trade and finance. Success in the Uruguay round is critical to this objective, but I am not sure at this moment whether it is going to succeed. I know that it cannot succeed without wide-ranging international commitment and cooperation and dedicated leadership from the major countries; but I do not know how the political will needed to achieve this can be mobilized, given the present situation.