From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Trade War?
Date: Tue, 10 Nov 1992 14:28:46 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <4ezp48a00Vp09h61BQ@andrew.cmu.edu> ts2a+@andrew.cmu.edu (Thomas Omar Smith) writes:
>Excerpts from netnews.sci.econ: 6-Nov-92 Trade War? Peter
>Nelson@apollo.hp.c (1845)

>>   1.  The entire world economy is very shaky just now; the last
>>       thing it needs is a trade war.   We should all be trying 
>>       to INCREASE the volume of world trade.
>
>However, we can't increase trade if our opponents are allowed to erect
>barriers and we are not.

  This is a nonsequitor.  Just because we don't have trade in a particular 
  product (oilseeds, rice, etc) doesn't mean we can't trade freely
  in cars, computers, wine, etc.   A trade war tends to spill over into
  unrelated areas.

>  Otherwise, they lock our products out, sell to
>us, and force us into a trade deficit.

  This depends on how you define a trade deficit.  There's no such
  thing as one-way trade.   If we supply currency in exchange for
  manufactured goods (typically the case in a trade deficit) then
  the manufacturing nation ends up with a lot of currency.  If the
  effects of a trade deficit are really deleterious to our economy
  then relative to the manufacturing nation's own currency, ours
  becomes worth less.  This makes the manufacturing nation's products
  more expensive and reduces their ability to sell to us, while at
  the same time reducing the value of the currency-based assets of
  ours that they hold.   In these senses trade deficits tend to be
  self-correcting.


>>  2.  France, et al, are democracies.  Their voters have made it
>>       clear that they WANT some of their tax money to be used for
>>       agricultural subsidies.   What the US is, in effect, saying
>>       to the EC officials is that they should ignore the wishes of
>>       their own voters and instead follow OUR dictates.  This
>>       sounds "imperialistic" to me.  I don't see how we can 
>>       morally justify this while at the same time allegedly trying
>>       to promote democracy around the world.
>
>No, this is the U.S. defending its voters from being controlled by a
>French vote.  Just because a majority of French people want to keep up a
>trade barrier doesn't mean that the U.S. has to quietly tolerate their
>wishes.  We have the right to respond to their barriers with barriers of
>our own if necessary, to protect the interests of our voters.

  How is it in my interest that I have to pay twice as much for French
  wines?    In any case, US interests are not served by a trade war
  which this could precipitate.



>There is a difference between providing an incentive and pursuing a
>combative policy.  The French are subsidizing their industry to the
>point that U.S. producers, no matter how efficient, cannot compete. 
>Therefore, the French take all the business from the U.S. to France,
>causing a net outflow of goods to France.  We lose jobs, and they gain
>jobs.  Then, they can raise the prices on Canola oil and we won't have
> the domestic industry to counter it.   

  This illustrates the flaws in simplistic ivory-tower kinds of thinking.  
  In the Real World (tm) what would happen is that people would switch 
  to some alternative if the French raised their prices in that
  manner.  In the Real World, predatory pricing simply doesn't work 
   --  the Japanese, for instance *totally dominate* the camera market,
  and virtually dominate the home electronics (VCR, CD player, TV, etc)
  market.  But, relative to the dollar/yen ratio their prices have
  actually come *down* in the last 10 years.


>> 3b.  While the US may be protecting some jobs in their oilseed 
>>         industry, they are threatening jobs in other industries.
>>         Specialty food and wine importers, restaurants, etc in
>>         the immediate term, and just about any industry you can
>>         name if this spins out of control.  
>
>True there are risks, but there are also risks in not taking a stand. 
>If the U.S. doesn't prove that it can effectively respond to unfair
>barriers oversees, then other countries will believe they can get away
>with it too, and the situation will deteriorate.  The whole point of the
>barriers is not to destroy the French economy, its to push them back to
>the bargaining table on agricultural issues, where they've been
>stonewalling.


  But the French have no obligation to sit at the bargaining table.
  If they want to subsidize their agriculture, it's their taxes.
   
  Subsidies are only *one part* of a whole host of factors that
  determine competitiveness.   Worker productivity, labor
  discipline, creativity/innovation, average wages, energy
  costs, transportation costs/distances, regulatory environ-
  ment, average working hours, company investment in R&D,
  interest rates, quality, etc ETC, ET CETERA, all affect
  our ability to compete.  We've lost millions of jobs, FAR
  more jobs than in the oilseed business, to nations that
  beat us out in some of these other areas in various
  industries.   If we start demanding parity in subsidies are 
  we going to start demanding parity in those other areas as
  well?   US car workers make $16/hr, German ones make 
  $26/hr.  Should we match their rates in the interest of
  fairness?   US interest rates are among the lowest in the
  world, making cost of capital far less here than in Europe.
  Should we raise our rates to "level the playing field"?

  This is what people here don't grasp:  There are so many factors
  determining competitiveness that YOU CAN NEVER HAVE A LEVEL
  PLAYING FIELD.   A "level playing field" is a fantasy promo-
  ted by political demogogues seeking scapegoats.   There is no
  such thing as a sustainable trade deficit, as I indicated
  above.   But a trade war, i.e., something that reduces the 
  VOLUME of world trade is very damaging.


---peter



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