By Paul Pirrotta
The names may change but unfortunately our international trade policy leaders seem intent on repeating the same mistakes.
Industry Week recently reported that “A bipartisan group of U.S. senators introduced a bill Sept. 22 aimed at creating jobs by cracking down on China’s alleged currency manipulation … The lawmakers say China’s currency manipulation has cost the United States more than 2.8 million jobs since 2001.”
In the 1980’s, it was Japan which was at the root of all that was wrong with our economy. Fast forward to 2011 and China is the new villain. As Ronald Reagan would say: “Here we go again … ”
To correct the trade imbalance of the 1980’s, finance ministers from the major nations signed the widely publicized 1985 Plaza Accord, an agreement which stipulated that the U.S. dollar was overvalued. The purpose of the agreement was to overcome the trade deficit our country was running vs. Japan, a situation which was blamed on the artificially low yen exchange rate dictated by the Central Bank of Japan.
At the time of this agreement, the yen to dollar exchange rate was averaging 239 to 1. Over the next three years, the rate dropped to 128 to 1, thus making Japanese exports a lot more expensive. Since then the exchange rate has further dropped to a current 80 to 1.
And what was the impact on our trade deficit? In 1985, the U.S. incurred a trade deficit of $46 billion vs. Japan. In 1986, that same trade deficit was $55 billion, in 1987 $56 billion and in 1988 it was $52 billion. In 2010, we had a trade deficit of $60 billion.
Lessons from this experience: Despite the yen almost doubling its value from 1985 to 1988, our trade deficit remained largely unaffected and has remained so to this day.
The increasing value of the yen, coupled with a liberalization of the Japanese market, did produce some benefits: Our exports to Japan saw a significant rise, jumping some 50 percent over the 1985-1988 time period and in 2010 had almost doubled from the 1985 totals.
We must take this past experience into account as we try to deal with the China trade issue. Currency changes alone will not produce the desired results of a reduction in the trade deficit nor create new jobs at home. And a significant rise in the value of the Yuan could also have implications on our inflation picture. If the Yuan rises say 25 percent, theoretically we will see a comparable rise in the cost of the goods we import from China which means that our consumers pocket will suffer a great deal in loss of purchasing power.
We also need to agree on an approach to these negotiations. Is public pressure more effective than private negotiations in reaching an agreement? I have found no evidence that public pressure when applied against an independent nation not our ally produces any results. Continued one-on-one confidential negotiations focused on the exchange rate issue, on internal market liberalization and on elimination of export barriers are preferred to these public displays of legislative efforts which I find ineffective and counter productive.
America’s trade deficit is not driven by supply, i.e.China, but by demand, i.e. our insatiable appetite for consumer products. And as long as that demand is there, any nation, whether China, Japan , etc., will satisfy the need.
We will not resolve our trade deficit issues until we address consumption.
Paul Pirrotta is president of Paul Pirrotta International in Glastonbury and writes on global trade issues. Reach him through the company’s website at: http://italy-usatraderep.com/aboutus.html