BACKGROUND PAPER 

u.s. Trade Policy and 

the Tokyo Round of 

Multilateral Trade Negotiations 

March 1979 

O Congress of the United States 

Congressional Budget Office 

u.s. TRADE POLICY AND THE TOKYO ROUND 

OF MULTILATERAL TRADE NEGOTIATIONS 

The Congress of the United States 

Congressional Budget Office 

For sale by the Superintendent of Documents, U.S. Govemment Printing Office 

Washington, D.C. 20402 

PREFACE 

Since early 1975, the United States has been participating 

in the Tokyo Round of multilateral trade negotiations in Geneva. 

These negotiations appear to be nearing their conclusion. If 

and when an agreement is reached in Geneva, the text of the 

proposed agreement and a program of implementing legislation will 

be submitted to the Congress for approval. 

In preparation for its responsibilities regarding a proposed 

international trade agreement, the Subcommittee on International 

Trade of the Senate Finance Committee has requested that a number 

of organizations prepare studies on various aspects of U.S. 

international trade policy. This paper represents the Congressional Budget Office's contribution to this effort. 

This paper does not provide a detailed analysis of the 

specific terms of possible trade agreements. Rather, it presents 

a discussion of the likely general effec ts of trade liberalization on the U.S. economy and of some of the longer-term problems--

not all of which are being considered in Geneva--for U.S trade 

policy. Reports by other organizations will discuss the specifics 

of the proposed agreements. In keeping with CBO's mandate to 

provide nonpartisan and objective analysis, this paper offers no 

recommendations. 

This paper was prepared by C.R. Neu and Emery Simon of the 

National Security and International Affairs Division of the 

Congressional Budget Office, under the general supervision of 

David S.C. Chu. The authors wish to acknowledge the particular 

assistance of Jean Ellen Kane, who gathered most of the materials' 

necessary for this paper. Also assisting the authors were Peggy 

Weeks and James Verdier. The draft of this paper benefited 

greatly from the comments of Professor Robert E. Baldwin, although 

responsibility for any errors remains the authors'. The manuscript was edited by Robert L. Faherty. It was typed for publication by Janet Stafford. 

March 1979 

Alice M. Rivlin 

Director 

iii 

CONTENTS 

SUMMARY 

CHAPTER I. 

CHAPTER II. 

CHAPTER III. 

CHAPTER IV. 

CHAPTER V. 

. . . . . . . . . . . . . . . . . . . . . . ix 

INTRODUCTION . . . . . . . . . . . . . 1 

The Importance of International 

Trade to the U.S. Economy. • • • • • •• 2 

The Multilateral Trade Negotiations • • •• 3 

The Recent Rise in Protectionist 

Sentiment • • • • • 

Congressional Action 

• • . . . . . . . . . . 

THE PRESENT SITUATION • . . . . . . 

. . . . . . 

THE IMPLICATIONS OF FREER TRADE • . . . . . 

The Benefits of Freer Trade • • 

Gainers and Losers as a Result 

of Trade Liberalization • • • 

The Macroeconomic Effects of 

Trade Liberalization • • • • 

· . . . . . 

· . . . · . . The International Political Effects 

of Trade Liberalization.. • • • • • 

SOME SPECIAL PROBLEMS FOR U.S. 

TRADE POLICY • • • • • • • • • 

Government Involvement in 

· . . . . . 

5 

7 

9 

19 

19 

21 

26 

33 

35 

International Trade • • • • • • • • • •• 35 

"Bilateralism" •••••••••••••• 39 

Transfers of U.S. Technology Abroad • • •• 42 

The Effects of Federal Regulations 

on U.S. Industries ••••••••••• 43 

CONCLUSION . . . . . . . . . . . . . . . . 47 

v 

TABLES 

TABLE 1. 

TABLE 2. 

TABLE 3. 

TABLE 4. 

TABLE 5. 

TABLE 6. 

TABLE 7. 

FIGURES 

FIGURE 1. 

FIGURE 2. 

FIGURE 3. 

EXPORTS AND IMPORTS AS A PERCENT OF GROSS 

NATIONAL PRODUCT IN SELECTED INDUSTRIALIZED 

COUNTRIES, 1977 •••••••••••••• 

ACTIONS TO RESTRICT IMPORTS BY THE UNITED 

STATES, CANADA, AND THE EUROPEAN COMMUNITY, 

1971-1977 ••••••••••••••••• 

U.S. EXPORTS AND IMPORTS BY MAJOR COMMODITY 

. . 1 

6 

GROUP • • • • • • • • • • • • • • • • • • • 11 

BALANCE OF IMPORTS AND EXPORTS OF SELECTED 

MANUFACTURING CATEGORIES FOR 1970 AND 1971 

U.S. TRADE WITH SELECTED REGIONS FOR 1970 

AND 1977 • • • • • • • • • • • • • • • • • 

AVERAGE TARIFF RATES FOR ELEVEN INDUSTRIAL 

COUNTRIES, 1973 ••••••••••••• 

. . . 

. . . EMPLOYMENT EFFECTS OF SELECTED TRADE 

LIBERALIZATION POLICIES •••••• . . . . . . 

U.S GOODS AND SERVICES AND MERCHANDISE 

IMPORTS AND EXPORTS AS A PERCENT OF GNP, 

1965-1978 • • • • • • • • • • • • • 

U.S. MERCHANDISE IMPORTS AND EXPORTS BY 

QUARTERS, 1974-1978 ••••••••• 

U.S. IMPORTS OF MAJOR COMMODITIES FROM 

LEADING LDC SUPPLIERS IN 1977 • • • • . . . . . 

vii 

12 

14 

28 

31 

2 

10 

13 

SUMMARY 

The multilateral trade negotiations (MTN) now underway in 

Geneva have become the focus of growing interest in U.S. policy 

toward international trade and, more generally, in the entire set 

of rules and practices that govern the conduct of international 

trade. These negotiations, in which 98 nations are participating, 

have as their goal the conclusion of multilateral agreements that 

will result in major tariff reductions, in substantial progress 

toward the reduction of a variety of nontariff barriers, and 

in general reform of the rules and procedures laid down for 

international trade in the General Agreement on Tariffs and Trade 

(GATT) • 

This round of negotiations has been underway since early 1975 

and is now nearing its conclusion. On January 4, 1979, the 

President, in accordance with the terms of the Trade Act of 1974, 

notified the Congress of his intention to enter into a multilateral trade agreement. Ninety days after this notification, the 

President may conclude a trade agreement. He will then submit the 

text of the agreement, along with the required implementing 

legislation, to the Congress for approval, and the agreement will 

enter into force for the United States upon enactment of the 

implementing legislation. 

The Trade Act of 1974 prohibits the Congress from amending 

the trade agreement after it has been formally submitted by the 

President. The terms of this agreement, however, are expected to 

be quite broad, allowing considerable leeway for interpretation. 

The exact content of the implementing legislation will be a matter 

for negotiation between the President and the Congress, and thus 

the Congress will exercise considerable influence over the ultimate effect that any new trade agreement will have on the U.S. 

economy. 

Events of the last few years--oil price increases, worldwide 

recession, international monetary instability, widely varying 

rates of inflation, and the emergence of some developing countries 

as exporters of manufactured products--have placed strains on the 

trading system, shifting patterns of trade and producing large 

imbalances in the flow of trade. Some of these same factors have 

had the effect of disrupting domestic economies and causing 

ix 

41 .. 56BO~ .2 

j" 
significant dislocation of workers. In these circumstances, it is 

not surprising that pressure for more restrictive trade policies 

is growing in many countries. Indeed, in the developed countries 

from which data are available, the last three years have seen 

a noticeable increase in official actions that have the effect of 

limiting imports. Although the primary goal of the Geneva talks 

is a significant liberalization of world trade arrangements, many 

see agreement in Geneva as necessary if the current liberality of 

trading arrangements is to be maintained. Without an agreement, 

these observers argue, it will be impossible for many governments 

to resist growing pressure for protectionist policies. 

For the most part, the "new protectionism" that is emerging 

has taken the form of nontariff barriers to trade. Thus, most 

attention at Geneva has focused on agreements governing such 

practices rather than on the tariff reductions that will also be 

part of any agreement reached in Geneva. Unfortunately, the 

effects of reductions in many nontariff barriers are very difficult to quantify and must sometimes be excluded from formal 

analyses of the effects of liberalized trade. 

THE PRESENT SITUATION 

The most striking development in the international trade 

of the United States has been the emergence in 1977 and the continuation in 1978 of a large deficit for merchandise trade. 

The causes of this deficit are well established: relatively slow 

economic growth and thus weak demand for U.S. goods abroad, 

increased U.S. oil imports, and the delayed effects of some loss 

in U.S. competitiveness in world markets caused by relatively 

rapid inflation in the United States. Nothing that is decided in 

Geneva will weaken these influences, and thus a successful conclusion of these negotiations cannot be expected to eliminate or 

markedly reduce (or increase, for that matter) the U.S. trade 

deficit. 

Of more relevance to the Geneva negotiations are some changes 

in the structure of U.S. trade, particularly trade in manufactures, that have been occurring in recent years. Traditionally, 

the United States has been an exporter of agricultural products 

and of manufactured products that embody highly sophisticated 

technology. The United States has been an importer of fuels and 

raw materials and of relatively simple, light manufactured goods. 

This characterization remains accurate today. If anything, the 

relative strengths and weaknesses of the U.S. economy have become 

x 
more marked over the last few years, with the U.S. surplus in 

heavy manufactured goods doubling between 1970 and 1977 and the 

U.S. deficit in light manufactured goods increasing two and 

one-half times during the same period. 

In the cases of both heavy and light manufactures, most 

of the changes in the U.S. trade position can be accounted for by 

trade with the developing countries. U.S. exports of heavy 

manufactured goods to developing countries increased three and 

one-half times between 1970 and 1977, while imports of light 

manufactured goods from these same countries increased four and 

one-half times during the same period. The U.S. balance of trade 

in manufactures has held relatively constant with· respect to the 

other developed countries, with the dramatic exception of Japan, 

which has increased its exports of heavy manufactures to the 

United States more than fourfold since 1970. 

The significance of all of this for the MTN is that the 

changes that are occurring in the U.S. trade position are caused 

mostly by Japan and the developing countries, nations often cited 

as maintaining high barriers to foreign imports while aggressively 

encouraging their own exports. It would sel~m that an important 

aspect of any trade agreement would be how it affects U.S. trade 

with these countries. 

THE IMPLICATIONS OF FREER TRADE 

The arguments for free in ternat ional trade are well known: 

if each nation specializes in the production of the goods that it 

can produce relatively efficiently and trades these for other 

goods produced relatively efficiently abroad, all nations benefit 

through a more efficient production of all goods. Freer trade can 

also serve to slow inflation by making foreign goods more readily 

available when these are less expensive than domestic products. 

Further, the potential for foreign competition can place pressure 

on domestic producers to moderate price increases. The world is 

much more complex, of course, than this simple model suggests, and 

numerous exceptions to the general proposition that free trade 

benefi ts all parties have long been recognized. Nonetheless, 

recent studies seem to indicate clearly that a general liberalization of trade arrangements could bestow measurable economic 

benefits on the United States. 

What is beneficial to the economy as 11 whole is not, however, beneficial to all individuals within that economy. For 

xi 
trade liberalization to be effective, it must result in some 

structural changes in the U.S. economy. For some U.S. industries, 

a general reduction of trade barriers will mean increased access 

to foreign marke ts, increased sales, and increased demand for 

workers in these industries. Inevitably, however, other industries in the United States are likely to suffer; increased foreign 

competition will reduce their sales and some of their workers will 

be displaced. The costs of relocating these workers must be 

included in any calculation of the net benefits of freer trade. 

Recent studies have indicated that in the United States 

the most likely beneficiaries of freer trade will be those industries that exploit highly sophisticated or recently developed 

technologies or those that produce or process agricultural commodities. Highly skilled and agricultural workers will probably 

benefit from freer trade, as will the southern, western, and 

midwestern areas of the United States. Among the potential losers 

as a result of trade liberalization are relatively labor-intensive 

industries and industries that employ simple, well-known 'technologies. Semiskilled workers are likely to suffer the most from 

freer trade, and most of the jobs lost will be in the traditional, 

urban manufacturing areas of the North and East. 

While the employment effects of trade liberalization may be 

large in particular industries, they are likely to be quite small 

for the economy as a whole. Estimates of net changes in employment that will result from trade liberalization of the sort being 

discussed in Geneva are generally less than one-tenth of one 

percent of the total labor force. A reduction in trade barriers 

would have only a small impact on the general rate of inflation--

much smaller than the effects of federal fiscal and monetary 

policy. (Freer trade could prove a significant moderating influence on prices in a few particular sectors, however, and as 

such could constitute a useful element of a general anti-inflation 

program.) Nor would trade liberalization bring about major 

changes in the overall U.S. trade position. Finally, changes in 

the prices of internationally traded goods resulting from tariff 

reductions will be minuscule compared with the changes brought 

about by recent exchange rate movements. In sum, the short-term 

macroeconomic effects of trade liberalization are likely to be 

negligible. 

Some longer-term benefits--not easily captured by traditional 

economic analysis--might also result from a general reduction in 

trade barriers. It is impossible to estimate the magnitude of 

these benefits--deriving from larger-scale production, from more 

xii 
rapid innovation spurred on by increased competition, or from the 

ability of governments to adopt expansionary economic policies 

with less fear of inflation--but few would argue that such benefits are unlikely. Perhaps the most important effect of reaching 

a multilateral trade agreement, however, is not economic, but 

political. The Geneva negotiations represent a major effort 

on the part of most of the market-oriented economies of the world 

to cooperate in achieving common goals. The success or failure of 

these talks could have an important effect on the prospects for 

such cooperation in the future. 

SOME SPECIAL PROBLEMS FOR U.S. TRADE POLICY 

While the Geneva negotiations may contribute to the maintenance of a liberal world trading system, they will not provide a 

solution to some of the most difficult problems that will confront 

U. S. policymakers during the next few years. With the partial 

exception of government involvement in international trade, these 

problems are not even being addressed in Geneva. 

The last few years have been marked by the widespread 

acceptance of, and in many cases demand for, government involvement in economic matters. Such involvement complicates the 

problems of setting rules for "fair" trade by introducing a host 

of mechanisms for government support or subsidization of exports 

and restriction of imports. To the extent that actions of other 

governments distort international trade flows, the traditional 

arguments for free trade are weakened, and free-trade policies 

that do not take account of these distortions may not be in the 

interest of the United States. 

Often, government involvement is not intended primarily to 

foster exports or to restrict imports; rather, the intervention is 

undertaken for domestic reasons. It can, nonetheless, influence 

trade, and a major task facing the negotiators in Geneva has been 

to devise a set of guidelines for determining what types of 

government practices are acceptable. Some progress in this area 

is expected, but it is likely that only the most blatant cases of 

government intervention in international trade can be restricted 

by international agreement. The more subtle and complex forms of 

intervention will continue to cause difficulties, and perhaps the 

major contribution of the Geneva talks in this regard will be the 

establishment of a set of procedures by which future disputes over 

specific practices can be resolved. Growing trade with centrally 

planned economies (which are not represented at Geneva) will also 

xiii 
pose special problems in determining what constitutes "fair" 

international trade. This is so both because governments in these 

countries are involved in nearly every phase of economic activity 

and because these governments are not parties to the major international agreements on trade policies. 

Problems are also created for the United States by a recent 

trend toward "bilateralism," the practice of concluding bilateral 

arrangements that bind two participating countries to accept 

specified levels of imports from each other--in some cases, over a 

period of several years. Such agreements have been most common 

between developed nations and oil-producing nations. Inasmuch as 

such bilateral arrangements can insulate large amounts of international trade from normal market forces, they can constitute 

important barriers to trade. Thus far, the United States has no 

clear policy on such agreements and has been less aggressive than 

other nations in concluding such agreements. Some observers have 

expressed the fear that in the future the United States will have 

no choice but to enter into bilateral agreements if it is to 

maintain its present share of world trade. 

It is sometimes alleged that the transfer of U.S. technology 

abroad by private firms has increased foreign competition to 

U.S. producers. That the transfer of this technology has aided 

other nations in establishing new industries cannot be doubted. 

It seems, however, that there is little that the United States can 

do to halt this flow. With very few exceptions, U.S. technology 

is available in other developed countries, and if U.S. firms 

cannot transfer it, firms in other nations will. Even if it were 

possible to restrict effectively the flow of technology, it would 

probably not be in the interest of the United States to do so. 

Capital goods, the principal embodiment of U.S. technology, 

account for one-third of U.S. merchandise exports. To restr.ict 

their sale abroad would hinder U.S. exports--most probably more so 

than does increased foreign competition. 

Finally, a number of U. S. producers have claimed that the 

costs of meeting federal environmental and occupational safety 

standards have reduced the competitiveness of U.S. goods in world 

markets and that some protection should be offered to industries 

so affected. Direct protection, however, is prohibited by the 

provisions of the GATT and would be likely to bring forth retaliation by other countries. Subsidies for affected industries 

create a similar risk if they are seen as being intended primarily 

to keep domestic producers competitive with foreign producers. 

More fundamentally, many groups have suffered as a result of 

xiv 
recently imposed federal regulations; it would be hard to justify 

a program aimed at compensating only those engaged in foreign 

trade. 

CONCLUSION 

A successful conclusion of the Geneva trade negotiations 

could provide some measurable, but small, net economic benefits 

for the United States. Of potentially much greater significance, 

however, is the possibility that, without an agreement in Geneva, 

it will be impossible to maintain the present level of liberality 

in the international trading system. 

Agreement in Geneva will not solve all problems related 

to U.S. trade policy. Indeed, there is some question about 

whether these problems can be handled at all under the present 

framework for international trade agreements. A general liberalization of international trade may have the effect of intensifying 

some of these problems by leaving the U.S. economy more open to 

"unfair" foreign trade practices. 

The most difficult problems arising from trade liberalization, however, may be domestic rather than international. 

Effective trade liberalization will cause structural changes in 

the U. S. economy, and inevitably some workers will be displaced. 

Present programs for compensating these victims of a liberalized 

trade stance are generally seen as inadequate, and it is widely 

thought that it will be politically impossible to implement new 

trade policies until these programs are expanded or substantially 

reorganized. 

xv 

CHAPTER I. INTRODUCTION 

For much of its recent history, the United States has been 

the most self-sufficient of the major industrialized nations, 

relying relatively little on foreign trade to satisfy its demands 

for goods and services and to provide markets for its products. 

While this traditional characterization of the United States 

remains valid today (see Table 1), there has been a marked trend 

in the last decade toward a greater U.S. economic dependence on 

foreign countries. Since the late 1960s, U.S. imports and exports 

of goods and services have grown much more rapidly than has the 

U.S. economy, and today they represent economic transactions equal 

to 10 and 9 percent of U.S. gross national product (GNP), respectively. Figure 1 details the growth of U.S. foreign trade as a 

share of GNP in recent years. 

TABLE 1. EXPORTS AND IMPORTS AS A PERCENT OF GROSS NATIONAL 

PRODUCT IN SELECTED INDUSTRIALIZED COUNTRIES, 1977 

Goods and Services Merchandise Onl~ 

Country Exports Imports Exports Imports 

United States 9 10 6 8 

Canada 25 27 22 20 

Japan 14 12 11 9 

West Germany 27 25 22 18 

France 22 23 16 17 

Italy 30 29 23 23 

United Kingdom 34 33 23 24 

SOURCE: International Monetary Fund, International Financial 

Statistics (January 1979). 

1 
Figure 1. 

U.S. Goods and Services and Merchandise Imports and Exports 

as a Percent of GNP, 1965-1978. 

Percent 

11 ~--------------------------------------------------------~ Goods and Services Imports 

10 ~ . ...-, 

9 Goods and Services Exports l'. .,.' 

'i '. ./ . './ I / .. ,* ." .., ./ 

8 

7 

.~.' ........... ".,.."",-

6 1--------~::-:O::::r'I"-.-.-.-. .,.". . ..". ..... 5 .",.._ ...... .,.".. 

.".' 

.'" I~:--...,.c::. 

• ..// "'R~di" 1m"", 

..,..".,.'/ .' / 

4 ......... ------........ --~.. --~~---'\.. 

3 

•• ___ .. _ .. ...-...-•• _.. Merchandise Exports 

O~--~--~--~ __ ~ ____ L-__ ~ __ ~ __ ~ __ ~ ____ L-__ ~ __ -L __ ~ 

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1976 1976 1977 1978 

Calendar Years 

SOURCE: U.S. Department of Commerce. Bureau of Economic Analysis. 

THE IMPORTANCE OF INTERNATIONAL TRADE TO THE U.S. ECONOMY 

In large part, the recent rise in U.S. imports and exports 

as a share of GNP has been a reflection of a general expansion of 

worldwide international trade. The late 1960s and .early 19708--

at least until the oil crisis and the recession of 1974-1975--

were years of rapid economic growth throughout most of the world. 

With this growth came increased demand for foreign products 

in nearly all countries, and an expansion in total international 

trade was the result. Facilitating the expansion of trade were 

a marked increase in international credit to finance trade and 

important reductions in the costs of international transportation 

and communications. The sharp increase in oil prices in 1974 also 

contributed to the expansion of world trade, because oil-importing 

nations were forced to export more to cover the increased costs of 

imported oil and because increased oil revenues--whether in the 

hands of oil-exporting countries or "recycled" through international financial markets--placed increased amounts of foreign 

exchange at the disposal of potential importers. Finally, the 

worldwide expansion of international trade was aided by the 

adoption of export-oriented development strategies by a number of 

2 
developing countries, the increasing economic integration of 

Europe, and a general liberalization of trade policies in the late 

1960s. 1/ 

Despite the relatively small size of U.S. trade relative to 

GNP, the absolute value of U.S. imports and exports is very 

large, far surpassing that of any other country. In 1977, U.S. 

imports of goods and services were valued at $187 billion and 

its exports at $176 billion. The comparable figures for West 

Germany, the next most active trading nation, were $130 billion 

and $142 billion. Japan was a distant third, with imports and 

exports valued at $84 billion and $96 billion, respectively. 

Accompanying the growth in importance of U. S. foreign trade 

have been increasing concern and debate over appropriate U.S. 

poliCies toward international trade. In part, this increased 

concern has been a result of the simple increase in the volume of 

U.S. international transactions. Adding to this concern, however, 

have been a number of events in recent years that have focused 

special attention on U.S. international transactions. Most 

notable among these have been sharp increases in the price of 

imported oil, the emergence of unprecedented deficits in the U.S. 

trade and current accounts, the decline of the dollar relative to 

most other major currencies, and the emergence of new sources of 

foreign competition in traditional U.S. industries. 

THE MULTILATERAL TRADE NEGOTIATIONS 

A major focus for this increased interest in U. S. international economic policy has been the Tokyo Round of multilateral 

trade negotiations now underway in Geneva. 11 These negotiations, 

11 For a succinct history of the growth of international trade 

in recent years, see Bela Balassa, World Trade and the International Economy: Trends, Prospects and Policies, World 

Bank, Staff Working Paper No. 282 (May 1978). 

11 This round of negotiations, the seventh held under the auspices of the General Agreement on Tariffs and Trade (GATT), is 

known as the Tokyo Round because the call to and general 

outline for these discussions were contained in the communique 

issued at the conclusion of a ministerial-level conference 

held in Tokyo in September 1973. 

3 
in which 98 nations are participating, have as their goal the 

conclusion of multilateral agreements that will result in significant tariff reductions, in substantial progress toward the reduction or harmonization of a variety of nontariff barriers to 

trade, and in general reform of the rules and procedures laid down 

for international trade in the General Agreement on Tariffs and 

Trade (GATT). 

Although this round of negotiations has been underway since 

early 1975, it is only now nearing conclusion. In accordance 

with the terms of the Trade Act of 1974, which gave the U.S. 

President the authority to negotiate changes in tariffs and trade 

policies, President Carter informed the Congress on January 4, 

1979, of his intention to conclude an agreement in Geneva. After 

a period of 90 days (also stipulated by the Trade Act), the President may conclude such an agreement and submit it formally to the 

Congress for approval. An agreement could, then, be concluded as 

early as the first week in April 1979. Along with the text of any 

agreement, the President will submit to the Congress legislation 

to implement the proposed agreement. The new agreement will enter 

into force for the United States when and if the Congress enacts 

the implementing legislation. Thus, a new trade agreement will 

require a majority vote in each house of Congress to enter into 

force. 

A number of issues in the negotiations are still unresolved, 

and thus there remains some doubt about when all parties will 

be able to reach final agreement. If the negotiations are to 

succeed, however, agreement must be reached by January 3, 1980. 

On that date, the statutory authority of the U.S. President 

to participate in the discussions expires. Without U.S. participation, the Geneva talks would likely collapse, and there is 

every expectation that some agreement will be reached by that 

date. 

The Geneva trade negotiations cannot, of course, be expected 

to result in agreements that will ease all major international 

economic problems. Agreement on the relatively narrow set of 

trade-rela ted issues being discussed in Geneva could, however, 

provide important benefits to the world economy by preserving 

a liberal system of world trade. Pressures are growing in 

many nations for the adoption of restrictive trade policies, 

and the widespread institution of such measures would certainly 

hinder the further growth of world trade. Many observers see a 

successful conclusion of the Geneva talks as essential if a marked 

increase in protectionist policies is to be avoided. 

4 
THE RECENT RISE IN PROTECTIONIST SENTIMENT 

The pressures for increased protectionism arise from a 

variety of sources. Recovery from the recession of 1974 and 1975 

has generally been disappointing among the industrialized nations, 

in part because some governments have found it difficult to adopt 

strongly stimulative economic policies--either for fear of inflation or because of weak balance-of-payments positions. Faced with 

continuing unemployment and excess industrial capacity, a number 

of governments have found policies designed to encourage exports 

or to restrict imports increasingly attractive. 

To the problems caused by recession and slow recovery have 

been added those created by structural changes in the world 

economy. During the last few years, the more advanced developing 

countries have increased dramatically their production of manufactured goods. These goods are intended primarily for export 

markets, and nearly all of the developed countries have experienced an influx of manufactured goods produced in the developing 

countries. The growth of this trade has been rapid enough to 

begin displacing some workers in the developed countries, and 

import-competing industries have increasingly sought protection 

against what is sometimes seen as unfair competition from low-wage 

developing countries. 

Pressure for protectionist measures has also grown out 

of increasing government involvement in economic and commercial 

activity. For a wide variety of reasons--social, political, 

economic, environmental--many governments have increasingly taken 

a direct hand in the financial and operational aspects of important sec tors of their economies. Inevi tably, such government 

involvement blurs traditional distinctions between government and 

business, and claims that foreign governments are offering unfair 

subsidies to their own exporters--and that, consequently, firms 

which must compete with these exports are entitled to some form of 

protection--are becoming more common. The other side of government involvement is reflected in claims--heard with increasing 

frequency in the United States--that environmental, health, and 

safety regulations place domestic producers at a disadvantage 

in relation to foreign producers and that domestic producers are 

therefore jus tified in seeking protec tion agains t imports. 

Finally, a number of recent events--especially the large 

increases in the price of oil and the widely differing rates of 

inflation and economic growth among the industrialized countries--

have led to large imbalances in international payments. In some 

5 
countries with large payments deficits, restrictive trade policies 

may be seen as alternatives to politically more difficult fiscal 

and monetary policies designed to reduce these deficits. 

There is no single comprehensive measure of the level of 

protectionism prevailing at any given time, primarily because of 

the variety and complexity of trade-limiting arrangements and 

because many trade-limiting policies cannot readily be identified 

as such. Nevertheless, some evidence of increasing protectionism 

can be found; Table 2, for example, shows the number of specific 

trade-restricting actions taken by the United States, Canada, and 

the European Community (EC) since 1971. 3/ The figures in this 

table for different countries are not strictly comparable, and 

TABLE 2. ACTIONS TO RESTRICT IMPORTS BY THE UNITED STATES, 

CANADA, AND THE EUROPEAN COMMUNITY, 1971-1977 

Year 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

United States 

6 

18 

12 

9 

5 

26 

16 

Canada 

6 

7 

7 

8 

19 

26 

37 

European 

Community 

5 

9 

6 

4 

23 

13 

41 

SOURCE: International Monetary Fund, The Rise in Protectionism, 

Pamphlet No. 24 (July 1978), pp. 26-34. 

3/ Included in these figures are anti -dumping duties, special 

duties imposed on imports that injure domestic industries 

(so-called "escape-clause" or "safeguard" actions), countervailing duties imposed on subsidized exports of other countries, quantitative restrictions, special import surtaxes, 

and, in the case of Canada, voluntary export restraints 

negotiated with other countries. 

6 
no attempt is made to measure the total value of the products 

affected by each action. Nonetheless, the figures do reflect a 

growing number of cases in which governments have chosen to erect 

barriers to particular imports. 

In addition to being limited by formal import barriers, 

world trade is being further restricted through less formal 

arrangements between governments. Often these arrangements 

take the form of "voluntary" restraints agreed to by exporting 

nations, in many cases with the understanding that voluntary 

restraint will reduce the likelihood of formal actions by importing countries. Further, the extension of such voluntary arrangements to a large number of sectors was suggested at the May 

1977 economic summit meeting in London by French President Giscard 

d'Estaing when he called for a system of "organized free trade" 

through which each country's share of important world markets 

would be established by international agreements and be maintained 

by voluntary export controls. 

Thus, the trade negotiations in Geneva are proceeding in an 

environment that is decreasingly favorable to liberalized trade. 

Few of the governments participating in these negotiations desire 

increased protectionism; many would prefer fewer trade restrictions. Yet, without important concessions from other governments, 

few are likely to be able to resist domestic pressures for more 

protection. The importance of the trade talks, then, is that they 

provide a forum in which these concessions can be arranged and, it 

is hoped, increased protectionism forestalled. 

CONGRESSIONAL ACTION 

Whatever the outcome of the negotiations in Geneva, different 

sectors of the U.S. economy will be affected differently. Some 

industries may expect to gain important new markets abroad if 

barriers to international trade are significantly reduced, and 

consumers of some products may find lower-priced foreign goods 

more readily available. Other industries, however, must be 

expected to lose sales to increased foreign competition if U.S. 

barriers to imports are lowered, and some workers will inevitably 

be displaced. A failure of the Geneva talks and the possible 

continued rise of restrictive trade policies would also result in 

an uneven distribution of costs and benefits throughout the U.S. 

economy. A Congressional decision to accept or to reject an 

agreement that is reached in Geneva will necessarily require a 

balancing of these competing interests. 

7 
The Congress will have little opportunity to alter the formal 

terms of any agreement reached in Geneva. Technically, before an 

agreement is concluded, the Congress may suggest changes in the 

text of the agreement. While it is possible that changes suggested in this manner could be adopted, the complexity and 

difficulty of international negotiations involving so many participants is such that the likelihood of making last minute 

changes must be seen as quite small. No amendments to the 

proposed agreement will be permitted during the formal Congressional debate over its approval. The Congress will have to vote 

for or against the agreement as it stands. 

This is not to say that the Congress will be without influence in forming U.S. trade policy in the near future. The 

agreements that emerge from the Geneva talks will likely be 

of a very broad nature, allowing a great deal of latitude for 

interpretation. The Congress will be called upon to enact a broad 

program of implementing legislation to bring U.S. law and policy 

into conformance with any new agreement. In doing so, the Congress will exercise a powerful influence on just how a multilateral trade agreement will affect the U.S. economy. 

This paper provides an outline of the major implications for 

the U.S. economy of a significant multilateral liberalization of 

trade policies. Since, at this writing, a number of issues have 

yet to be resolved in Geneva, no attempt is made here to analyze 

in detail the implications of specific provisions of possible 

agreements. Enough is known about the broad outline of possible 

agreements, however, to allow a discussion of the general and 

long-term effects of trade liberalization. 

Chapter II of this paper provides a brief discussion of the 

present state of U.S. international trade and identifies major 

changes in this trade in recent years. Chapter III discusses some 

of the more important implications of freer trade, identifying in 

particular which groups wi thin the United States stand to gain 

from freer trade and which stand to lose. Chapter IV discusses 

some special problems for U.S. trade policy that are likely to be 

intensified by a general liberalization of world trade. Chapter V 

provides a summary of the arguments of the preceding chapters and 

draws some conclusions about the effects of trade liberalization. 

8 
CHAPTER II. THE PRESENT SITUATION 

The U.S. balance of merchandise trade has shifted over the 

past three years, falling from a surplus of $9 billion in 1975 to 

a deficit of $31.1 billion in 1977. This deterioration continued 

in 1978, with the deficit increasing to $34.2 billion. l! 

A major contributing factor to the deterioration in U.S. 

trade balances was the quadrupling of oil prices in 1974, which 

served to increase significantly U.S. expenditures for imported 

fuels. Furthermore, as Figure 2 shows, U.S. exports remained 

nearly constant between the second quarter of 1975 and the fourth 

quarter of 1977, while imports increased rapidly over that period. 

This increased U. S. demand for foreign products was caused by a 

more rapid economic recovery in the United States than abroad from 

the 1975 recession, compounded by the effects of an overvalued 

dollar and relatively rapid inflation in the United States during 

1974, which served to keep the relative prices of foreign products 

low. 

In addition to the recent downswing in the U.S. trade balance, some long-term changes in the pattern of U.S. trade are also 

taking place, particularly in the manufacturing sector. Trade 

of manufactured goods accounted for the largest portion of U.S. 

exports and imports in the post-World War II period. Despite the 

recent increases in the price levels of raw materials, foodstuffs, 

and fuels, manufactures continue to playa critical role, accounting for 50 percent of imports and 70 percent of exports in 1977 

(see Table 3). Trade in manufactures is also important, because 

this has historically been the category in which the United States 

has accumulated most of its trade surplus. Recently, there has 

been a considerable amount of rearrangement both in the markets to 

which the United States sells its manufactures and in the areas 

from which manufactures are purchased. 

1/ U.S. Department of Commerce, Bureau of Economic Analysis, 

"U.S. Department of Commerce News" (February 11, 1979). These 

numbers are calculated on a "ba1ance-of-payments" basis; 

calculated on a "census" basis, the 1978 merchandise trade 

deficit was $28.4 billion. 

9 
Figure 2. 

U.S. Merchandise Imports and Exports, by Quarters, 1974-1978. 

Billions of Dollars 

48r---------------------------------------------------------~ 

46 

44 

42 

40 

38 

36 

34 

32 

30 

28 

26 

24 

22 

o ~~--~~--~~~--~~ __ ~~ __ ~~ __ ~~~~_L ____ ~~~ 

II III IV 

1974 

II III IV 

1975 

II III IV 

1976 

Calendar Years 

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis. 

II III IV 

1977 

II III IV 

1978 

While some types of manufacturing industries have maintained 

their competitiveness and therefore have fared well in the face of 

the rapidly changing trade patterns of the 1970s, others have 

become very sensitive to pressure from foreign competitors. 

Table 4 presents data for ten manufacturing categories: the 

five with the largest surpluses in 1970 and 1977 and the five with 

the largest deficits. These data show that the United States had 

surpluses in categories that make use of advanced technologies, 

such as computers; categories that employ complex manufacturing 

techniques, such as chemicals and aircraft; and categories that 

are highly capital intensive, such as industrial and electrical 

machinery. Conversely, those industries that employ standardized 

technologies, such as automobile maufacturers, and those that tend 

to be more labor intensive, such as footwear and clothing manufacturers, have experienced the largest deficits. 

10 
TABLE 3. u.s. EXPORTS AND IMPORTS BY MAJOR COMMODITY GROUP: 

PERCENT OF TOTAL BY VALUE 

1970 1973 1977 

U.S. Exports 

Foodstuffs 16 24 19 

Raw materials 10 9 8 

Fuels 4 2 3 

Manufac tures 70 65 70 

Total 100 100 100 

U.S. Imports 

Foodstuffs 16 14 10 

Raw materials 12 11 8 

Fuels 8 11 30 

Manufactures 64 64 52 

Total 100 100 100 

SOURCE: U.S. Central Intelligence Agency, National Foreign 

Assessment Center, The Role of LDCs in the U.S. Balance 

of Payments (1978). 

This pattern of surpluses and deficits is very much in 

line with the relative strengths and weaknesses of the U.S. 

economy. The U.S. economy is strong on technological innovation, 

rich in capital, and tends to pay relatively high wages. This 

high wage structure forces production techniques to be labor 

saving rather than labor intensive. Consequently, the most 

competitive industries are those that require relatively small 

inputs of labor for production •. Chemicals, industrial machines, 

and computers are good examples of such industries. The United 

States in fact continues to be highly competitive in world markets 

with these products. Between 1973 and 1977, the U.S. share of 

world exports of chemicals increased from 19.1 percent to 21.1 

percent; the U.S. share of trade in electrical machines also 

increased from 21.6 percent to 23.2 percent; while the U.S. 

share of trade in nonelectrical machines remained constant at 25 

11 
TABLE 4. BALANCE OF IMPORTS AND EXPORTS OF SELECTED MANUFACTURING 

CATEGORIES FOR 1970 AND 1977: IN MILLIONS OF DOLLARS 

Largest Surplus Sectors 

Industrial machines 

Chemicals 

Aircraft 

Electrical machines 

Office machines, computers 

Largest Deficit Sectors 

Motor vehicles 

Clothing 

TV, radio, phonographs 

Miscellaneous consumer goods 

Footwear 

1970 

3,492 

2,391 

2,281 

1,403 

1,052 

-1,460 

-1,062 

-983 

-756 

-619 

1977 

8,999 

5,478 

4,868 

3,512 

2,093 

-4,860 

-3,502 

-2,561 

-2,085 

-1,834 

SOURCE: U. S. Central Intelligence Agency, Na t iona1 Foreign 

Assessment Center, The Role of LDCs in the U.S. Balance 

of Payments (1978). 

percent. 2/ Conversely, those U.S. industries that do not utilize 

advanced -technologies, thereby necessitating higher inputs of 

labor, are at a competitive disadvantage in world export markets. 

Footwear, clothing, and light consumer goods are examples of 

products that require large inputs of labor; the increasing volume 

of imports in these categories, coupled with a growing deficit, 

reflects their decreased competitiveness. 

U.S. imports of light manufactures are increasingly supplied by the developing countries (LDCs), particularly those 

developing countries that have managed to build a significant 

capital and infrastructural base. Among the fastest growing 

suppliers to the U.S. market are the group of newly industrialized 

~/ U.S. Department of Commerce, Commerce America (June 19, 1978), 

p. 9. 

12 
countries (NICs)--that is, Singapore, Taiwan, Hong Kong, South 

Korea, Brazil, Mexico, and Malaysia. These seven countries 

accounted for 55 percent of U.S. imports from non-OPEC developing countries in 1977. Moreover, in certain light manufactures, 

just three of these countries (Taiwan, Hong Kong, South Korea) 

accounted for at least 50 percent of U.S. imports from developing 

countries (see Figure 3). 

Intense competition from abroad for American light manufactures industries is not a new phenomenon. In the 1950s and 

1960s, as the EC countries and Japan increased their industrial 

base, their light manufac tures domina ted U. S. imports. As 

the levels of technology and capital expanded, these countries 

increasingly shifted their emphasis to heavy manufactures, with 

the NICs taking up the slack in the supply of light manufactures. 

As Table 5 shows, as recently as 1970 the developed countries 

Figure 3. 

U.S. Imports of Major Commodities from Leading LDC 

Suppliers in 1977: in Billions of Dollars 

$3.3 

I.~ South Korea 

I'I., T.;"" 

{1!:; Hong Kong 

CLOTHING 

$2.7 

:::.x:,.;.::: Other 

H:f~:: Hong Kong 

mf"ffiti:il Malaysia 

. South Korea '1: II Singapore I 'J Taiwan 

'1:11 I:l:l : 

Mexico 

ELECTRICAL 

MACHINERY 

$1.0 

~r\~: 

i 

y~ : 

FOOTWEAR 

$1.0 

Other ::::: Other Brazil 

South Korea South Korea 

~: Hong Kong 

Taiwan .. 

:::.~l~, Taiwan : 

TELEVISIONS, RADIOS, 

AND PHONOGRAPHS 

SOURCE: U.S. Central Intelligence Agency, National Foreign Assessment Center, The Role of LDCs in the 

U.S. Balance of Payments (1978), p. 63. 

13 
TABLE 5. U.S. TRADE WITH SELECTED REGIONS FOR 1970 AND 1977: IN MILLIONS OF 

DOLLARS 

U.S. Exports 

U.S. Imports 

Balance 

Exports of 

Heavy Manufactures ~I 

Imports of 

Heavy Manufactures ~I 

Balance 

Exports of 

Light Manufactures 1/ 

Imports of 

Light Manufactures fl 

Balance 

1970 

43,226 

39,963 

World 

1977 

120,163 

147,848 

Developed 

Countries al 

1970 

30,498 

29,420 

1977 

75,375 

79,935 

European 

Community 

1970 1977 

11,300 26,476 

9,226 22,382 

Canada 

1970 1977 

9,084 25,749 

11,091 29,759 

3,263 -27,685 1,015 -4,560 2,074 4,094 -2,007 -4,010 

28,052 77,384 19,511 46,815 6,941 14,994 6,858 19,798 

19,397 61,039 17,961 53,003 6,163 15,686 6,781 17,771 

8,655 16,345 1,550 -6,188 778 -692 78 2,027 

2,186 6,524 1,512 4,388 525 1,603 537 1,722 

6,128 16,316 4,282 7,864 1,576 2,806 309 673 

-3,942 -9,792 -2,770 -3,476 -1,051 -1,203 228 1,049 

(Continued) 

SOURCE: U.S. Central Intelligence Agency, National Foreign Assessment Center, 

The Role of LDCs in the U.S. Balance of Payments (1978). 

J!I The member countries of the Organization for Economic Cooperation and 

Development. 

21 Organization of Petroleum Exporting Countries (OPEC). 

14 
TABLE 5. ( Con ti nued ) 

Japan OPEC b/ 

1970 1977 1970 1977 

U.S. Exports 4,652 10,522 2,053 14,019 

U.S. Imports 5 2875 18 1902 1,678 33 2019 

Balance -1,223 -8,380 375 -19,000 

Exports of 

Heavy Manufactures ~/ 1,786 3,456 1,504 11,336 

Imports of 

Heavy Manufactures !y 3 2 634 15 1 236 34 147 

Balance -1,850 -11,780 1,470 11,189 

Exports of 

Light Manufactures }) 158 305 85 536 

Imports of 

Light Manufactures 11 1 1961 3 1211 11 37 

Balance -1,803 -2,906 74 499 

~/ Non-OPEC less developed countries (LDCs). 

Non-OPEC 

LDCs c/ 

1970 1977 

9,950 27,724 

8,613 33 1759 

1,337 -6,035 

6,738 18,404 

1,313 7.607 

5,425 10,797 

555 1,529 

1.802 8.128 

-1,247 -6,599 

Newly 

Industralized 

Countries d/ 

1970 1977 

4,422 14,481 

4 2106 18.664 

316 -4,183 

3,015 9,708 

899 6,179 

2,116 3,529 

225 678 

1.473 6.973 

-1,248 -6,295 

~/ Mexico, Brazil. Hong Kong. Taiwan, South Korea, Singapore, and Malaysia. 

~/ SITC categories 5, 6, and 7, excluding category 65 (textile yarn and 

fabric) • 

11 Textile yarn and fabric; clothing; footwear; televisions, radios, and 

phonographs; and miscellaneous consumer goods. 

15 
supplied 70 percent of all U.S. imports of five major light 

manufactures groupings, 3/ while the NICs supplied only 24 percent. By 1977, the share of the developed countries had dropped 

to just 43 percent, while the share of the seven NICs had increased to equal the developed countries' share at 43 percent. 

Japan, in particular, has been shifting from light to heavy 

manufactures at a very rapid pace. In 1970, 22 percent of all 

Japanese exports were of the light industrial type, centering on 

textiles; 72 percent fell into the chemicals and heavy industry 

categories. By 1977, light manufactures had dropped significantly 

to just 12 percent of total exports, while heavy industrial 

products had risen to 84 percent. ~/ 

These trends in U.S. and developed countries' trade are 

hardly startling. U.S. products that rely heavily on those 

factors that are abundant in the American economy (that is, 

capital, skilled labor, and innovative technology) continue to 

perform well in world markets. Whereas the increasing U.S. trade 

deficit in light manufactures is noteworthy, concern with this 

aspect should not be disproportionate to the implications raised. 

The historical pattern of world trade reveals that products follow 

a relatively predictable cycle. Innovation takes place in those 

economies that have sufficient resources to make the necessary 

expendi tures on research and development. As a product gains 

acceptance in world markets and the methods of production become 

standardized, the relative competitiveness of the various producers becomes a function of the cost of the labor component 

of the final product. While the United States has an edge at the 

front end of this cycle, its advantage is diminished at the latter 

stages. 

The United States has been following a trade pattern that 

reflects this type of cycle (see Table 5). As would be expected, 

the United States performed well in trade of heavy manufactures, 

almost doubling its surplus between 1970 and 1977. The bulk of 

the trade was with the developed countries, and a fairly sizable 

deficit developed with respect to them because of the rapid 

increase in U.S. imports of heavy manufactures from Japan. (In 

3/ Textile yarn and fabric; clothing; radios, televisions, and 

phonographs; footwear; and miscellaneous consumer goods. 

~/ United States - Japan Trade Council, Japan's Trade in 1977, 

Council Report No. 29 (June 23, 1977). 

16 
1970, the United States had a deficit of $2 billion in heavy 

manufactures trade with Japan; by 1977, the deficit had mushroomed 

to $12 billion.) This deficit in trade of heavy manufactures with 

the developed countries was more than offset by a huge surplus 

with OPEC and the developing countries, leading to an overall 

surplus of $16 billion in 1977 in trade of heavy manufactures. 

In trade of light manufactures, the U.S. deficit increased 

from $4 billion to $10 billion between 1970 and 1977. The NICs 

accounted for about two-thirds of this deficit, increasing the 

level of their exports to the United States dramatically over 

the period, by both volume and value measures. It is noteworthy, 

however, that in 1977 the United States had a surplus in trade 

of manufactures as a whole with non-OPEC developing countries 

of about $4 billion. The existence of this surplus would seem 

to indicate that manufactures trade with developing countries has 

a beneficial net effect on the overall U.S. economy insofar as it 

creates jobs, although specific industries may suffer severe 

displacements as a consequence of this trade. 

In short, U.S. trade balances in those goods that employ 

resources that are abundant in the U. S. economy have improved 

between 1970 and 1977, while balances for goods that require 

larger inputs of labor have deteriorated. This pattern of surpluses and deficits is not surprising; it is in fact a logical 

consequence of the relative scarcities and abundances of labor, 

land, and capital that prevail in the U.S. economy. 

17 

CHAPTER II 1. THE IMPLICATIONS OF FREER TRADE 

THE BENEFITS OF FREER TRADE 

The arguments in favor of free inte~national trade are 

well known. Free trade allows each nation to specialize in 

the production of those goods and services that it can produce 

relatively efficiently. The export of such goods allows each 

country to pay for imports of other products that can be produced more cheaply abroad. With each nation concentrating its 

productive efforts in those areas in which it is relatively 

efficient, total world output is maximized and all nations stand 

to gain. Consumers in each country benefi t through the availability of foreign products at prices lower than those charged for 

similar domestic products. Even when domestically produced goods 

are cheaper than imports, free trade can benefit consumers by 

forcing domestic producers to moderate their price increases lest 

they lose sales to foreign competitors. Efficient producers 

are able to expand their operations to serve the larger markets 

opened by free trade; relatively inefficient producers, unable to 

compete with foreign products, are forced to reduce their scale of 

operation, thus freeing workers and capital for other--presumably 

more efficient--employment. 

This case for free trade has always recognized certain 

exceptions--cases in which free trade was not necessarily desirable. Domestic production in certain industries should, for 

example, be maintained even if foreign production were cheaper 

in order to reduce the threat that international political developments could interrupt the supply of essential goods. 

Protection from foreign competition might be offered to new 

domestic industries during the years required for them to achieve 

full international competitiveness. Domestic industries facing 

predatory foreign competition might in some cases require protection since, if such competition succeeded in destroying a 

domestic industry, thereby leaving a foreign supplier as the sole 

source of supply, the foreign producer would be left free to 

raise prices in the future. Temporary protection from foreign 

competition might also ease the adjustment to changed economic 

condi tions of workers in industries that are no longer competitive in international markets. Finally, import restrictions 

19 
might in some cases be employed strategically in retaliation for 

similar barriers imposed by other countries. 1/ 

Despite this variety of rationales for trade restrictions, 

cases in which trade barriers are appropriate have generally been 

considered to be the exception rather than the rule. They have 

been regarded as a set of interesting, but quantitatively minor, 

exceptions to the general proposition that policies of free 

international trade would benefit all nations. 

The world is, of course, considerably more complex than is 

suggested by the foregoing simple arguments for free trade. 

Further, it is precisely those aspects of international trade 

that are not well accounted for in the traditional theory of 

trade that pose the greatest obstacles to the formation of practical trade policies. Nonetheless, the general conclusion that 

free trade is a desirable goal remains extremely robust. 

Two recent studies--the most comprehensive examinations of 

the effects of trade liberalization currently available--provide 

empirical support for this proposition. Both of these studies 

were completed before the Geneva negotiations entered their 

final phase, and as a result both calculate the effects of tariff 

reductions somewhat larger than are likely to be agreed on in 

Geneva (which are expected to be between 30 and 40 percent spread 

over eight or ten years). The conclusions of these studies do, 

nonetheless, indicate the general direction of the effects of 

trade liberalization. 

A study of the effects of a 60 percent multilateral reduc tion in all tariffs, for example, shows gains to the United 

States as a whole equivalent to an increase in national income of about $1 billion a year in 1974 prices at 1974 trade 

Y The imposition of a tariff will reduce demand for imported 

products and, all other things being equal, reduce the price 

of the affected commodity in world markets. In some cases, 

this price reduction and the revenues of the tariff collected 

by the government can be sufficient to offset the losses to 

consumers who must pay the tariff. In such cases, the imposition of a tariff can result in a net gain in welfare to the 

nation imposing the tariff. The problem with such "optimal 

tariff" schemes is that the gains can be eliminated if some 

other nation chooses to retaliate. 

20 
volumes. 2/ A similar study, based on 1971 prices and trade flows 

and assuming a 50 percent multilateral tariff reduction, also 

shows significant gains for the United States as a whole. 3/ Not 

included in these estimates are additional benefits of liberalized 

trade arising from a variety of sources such as increased efficiency due to a larger scale of production, increased investment, 

increased stimulus to technical change, and more stimulative 

macroeconomic policies made possible by reductions in inflationary 

pressures. Further, these figures exclude the gains that could be 

realized through the reduction of nontariff barriers and most of 

the gains that would result from liberalized agricultural trade. 

One would expect, therefore, that these figures underestimate the 

total benefits of trade liberalization. 

Offsetting these benefits to a degree are the one-time 

costs of moving workers and capital from one industry to another 

in response to changed patterns of economic activity. Both 

studies estimate these one-time costs to be small in comparison 

with total benefits--in one case, the costs are estimated to be 

fully recovered in the first year's benefits of reduced tariffs, 

and in the other case, in less than two years. 4/ These estimates 

leave little doubt that, on balance, the United States would reap 

significant rewards from tariff reductions of the sort being 

considered in Geneva. 

GAINERS AND LOSERS AS A RESULT OF TRADE LIBERALIZATION 

The problem with such figures for the net gains of liberalized trade policies is that they can hide the fact that these 

gains are not evenly distributed. While consumers and producers 

2/ William R. Cline, Naboro Kawanabe, T.O.M. Kronsjo, and Thomas 

Williams, Trade Negotiations in the Tokyo Round: A Quantitative Assessment (Washington, D.C.: The Brookings Institution, 

1978), p. 86. 

3/ Robert E. Baldwin, John H. Mutti, and J. David Richardson, 

Welfare Effects on the United States of a Significant Multilateral Tariff Reduction (University of Wisconsin-Madison: 

April 1978; processed), p. 21. 

!i/ See Cline and others, Trade Negotiations in the Tokyo Round, 

p. 130; and Ibid., pp. 21-22. 

21 
of some products may benefit greatly from freer trade, some 

businesses will be forced to close and some workers will lose 

their jobs because of increased foreign competition. It will, 

of course, be of small comfort to these businesses and workers 

to learn that the gains accruing to others are much greater 

than the losses they themselves are suffering. 

There is no way to predict with any accuracy exactly how 

much particular sectors of the U.S. economy will gain or lose as 

a result of agreements reached in Geneva to liberalize trade policies. The distribution of such gains and losses will be highly 

dependent on the details of the tariff reduction formulas and 

on the nontariff barrier reduction~ that finally emerge from 

the negotiations, and as yet all of these details have not 

been worked out. The average tariff reductions of 30 percent 

to 40 percent that are expected will result from a wide range 

of reductions for specific products. A number of particular 

products will be accorded special treatment or excluded entirely from tariff reductions. Needless to say, each nation 

has its own set of products for which it seeks special treatment, and in the closing phases of the negotiations there could 

be important changes in the treatment of particular products. 

Even if it is impossible to estimate accurately the impact 

of trade liberalization on particular industries, it is possible 

from such studies as the two cited above to get some indication 

of which types of industries will gain and which will lose as 

a result of trade liberalization. In general, the industries 

that will suffer as a result of trade liberalization are those 

that are relatively labor intensive or that make use of simple, 

well-known technologies. Among the industries that could potentially suffer the most as a result of tariff reductions are those 

producing footwear, leather products other than shoes, pottery 

food utensils, steel products, radios and television sets, and 

jewelry. 2/ 

'i.! Robert E. Baldwin and Wayne S. Lewis, "U.S. Tariff Effects 

on Trade and Employment in Detailed SIC Industries," U.S. 

Department of Labor (1978), p. 255. This list includes 

industries that would suffer if tariffs were reduced. As a 

practical matter, producers of nonrubber footwear and television sets face no such potential injury, since these products have been excluded from any tariff reductions agreed to 

in Geneva. 

22 
In addition to those industries, the textile industry is 

often cited as the U.S. industry likely to suffer most severely as 

a result of trade liberalization. 61 According to one estimate, 

job losses in the textile industry could account for nearly 43 

percent of all jobs lost in the United States as a result of 

tariff reductions if tariffs on textiles were reduced by the same 

proportion as tariffs on other commodities. II Estimates of the 

effect of tariff reductions on the textile industry are particularly unreliable, however. Most observers expect tariff reductions on textiles to be significantly smaller than reductions in 

other tariffs. Further f imports of textiles are limited by a 

series of bilateral agreements negotiated within the general 

framework of the international Multi-Fiber Agreement, and nothing 

that is being negotiated in Geneva will alter the terms of these 

agreements. To estimate how large an increase in U.S. textile 

imports might result from textile tariff reductions, it would be 

necessary to do a careful analysis of the many categories of 

textiles covered by each bilateral textile trade agreement, 

an undertaking that is beyond the scope of this paper. 

Trade liberalization will have the reverse effect on a number 

of industries whose exports have been restricted by high tariffs 

abroad. Lower duties on the products of these industries will 

bring about increased demand and eventually will result in higher 

employment. By and large, the beneficiaries of freer trade will 

be those industries that exploit highly sophisticated or recently 

developed technology or that process u.s. agricultural commodities. Among those likely to benefit most are industries producing 

tobacco products, semiconductors, computing machines, office 

machines, mechanized measuring devices, electronic· components, 

a1rcraft, and aircraft equipment.!1 Also making important gains 

!!.! The textile industry includes producers both of woven cloth 

and of apparel. The United States is a net exporter of woven 

cloth and would presumably remain so after tariff reductions. 

The portion of the U.S. textile industry that is threatened 

by trade liberalization is, more accurately, the apparel 

industry. 

II See Cline and others, Trade Negotiations in the Tokyo Round, 

p. 136. 

!I Baldwin and others, Welfare Effects on the United States of a 

Significant Multilateral Tariff Reduction, p. 24. 

23 
will be the U.S. agricultural sector, particularly if liberalization includes not only tariff reductions but also a lowering of 

agricultural nontariff barriers by the European Community and 

by Japan. 

The brunt of job layoffs in the United States resulting 

from trade liberalization will be borne disproportionately 

by semiskilled workers--primarily machine operators, assembly 

line workers, and nonfarm laborers. Highly skilled workers 

will be more in demand as a result of general trade liberalization, with the need for research and d~velopment workers 

and production-related technical workers growing most rapidly. Demand will also increase for all types of agricultural 

workers. 2/ 

Geographically, most of the net job losses resulting from 

trade liberalization will take place in the urban areas of the 

North and East, particularly in Illinois, Massachusetts, Michigan, 

New York, Ohio, and Pennsylvania. Relative to their populations, 

the four New England states of Maine, New Hampshire, Vermont, and 

Massachusetts will suffer the largest displacement of workers. 

Newly created jobs would be concentrated in the southern. midwestern, and western areas of the United States, with especially 

large increases in the agricultural regions of Kansas, Minnesota, 

and the Dakotas. 10/ 

The distribution of jobs lost and gained throughout the 

United States could have some important social consequences. 

Because those losing jobs will be predominantly semiskilled 

production workers, the burden of adjusting to a regime of freer 

trade will fall more heavily on lower-income and minority workers 

than on the higher-income, mostly white male workers in highly 

technical jobs. Often it will be those workers hardest to 

place in new occupations who will be thrown out of work by trade 

liberalization. This is particularly the case in the textile 

industry, in which 23 percent of the workers are minorities and 65 

2/ Baldwin and Lewis, "U.S. Trade and Tariff Effects on Trade 

and Employment in Detailed SIC Industries," p. 253. 

10/ Ibid •• p. 254. These estimates of the geographical distribution of job losses and gains do not include the jobs lost by 

textile workers, located primarily in the southern United 

States. 

24 
percent are women. Q/ Many jobs in the textile industry are 

located in rural and economically stagnant areas where opportunities for alternate employment are few, and many textile 

workers possess few work skills of use in other occupations. 

Among the beneficiaries of lowered trade barriers would be 

consumers in the United States. In many cases, trade barriers 

have been erected specifically to protect particular domestic 

industries from lower-priced foreign competition. One would 

expect, therefore, that the removal or reduction of such trade 

barriers would result in increased availability of lower-priced 

goods in the U.S. market. Estimates of the effects of tariff 

reductions consistently show such price decreases. In general, 

the sectors in which these price reductions are estimated to be 

most significant are the same sectors in which job losses resulting from liberalization would be the largest. This is not surprising, since it is exactly those domestic industries in which 

prices are much higher than those of foreign producers that 

are most dependent on trade restrictions for their continued 

survival. ~/ Further, it is widely believed--although difficult 

to prove--tha t increased foreign access to U. S. marke ts will aid 

U.S. consumers by bringing additional competitive pressure to bear 

on U.S. producers, thus restraining domestic price increases. 

The nature and distribution of gains and losses due to liberalized trade are such that one might expect opposition to less 

11/ Joint Statement of Fifteen Fiber, Textile, and Apparel 

Industry Associations and Labor Unions to the Subcommittee on 

International Trade, Senate Committee on Finance (August 15, 

1978; processed), p. 4. 

12/ The areas in which the potential consumer gains from freer 

trade are estimated to be greatest-~veneer and plywood, nonrubber footwear, leather products other than shoes, pottery 

food utensils, cutlery, radios and television sets, motorcycles and bicycles, and sports and athletic goods--are among 

those areas in which employment losses are likely to be 

greatest. Net welfare gains (the benefit to consumers minus 

the costs of adjustment for idled workers and capital) are 

summarized succinctly in Cline and others, Trade Negotiations 

in the Tokyo Round, p. 130, Table 3-15. Specific changes by 

industry are found in Baldwin and others, Welfare Effects on 

the United States of a Significant Multilateral Tariff 

Reduction, p. 26. 

25 
restrictive policies to be better organized and more vocal than 

support will be. The negative effects of trade liberalization 

will fall heavily on a relatively small group of industries and 

workers. But because the losses suffered by this group would be 

severe--plant closings and the loss of jobs--and because the 

adversely affected groups would be concentrated in a few locations 

and would in general be relatively well organized, strong opposition to trade liberalization is likely to develop. The beneficiaries of trade liberalization, on the other hand, will be many and 

generally unorganized. The benefits accruing to each consumer 

will be only marginal--perhaps not even easily discernible--and 

the workers finding new jobs are likely to be widely scattered and 

often without organized unions. Support for liberalized trade 

policies by these groups will, therefore, be relatively muted. 

The relative organization of opposition to trade liberalization 

should not obscure the fact that trade liberalization could lead 

to significant net gains for the United States. Neither should it 

be forgotten, though, that some groups will pay heavily for these 

overall gains. 

Some mechanisms exist in the United States to redistribute 

the gains of freer trade and to mitigate the injury suffered by 

displaced workers. These mechanisms--unemployment compensation 

and trade adjustment assistance are the most obvious examples--are 

far from adequate, however, to compensate fully those who suffer 

as a result of action that will bring a larger gain to the rest of 

the economy. Inevi tably, a decision to approve any agreement 

calling for liberalized trade must hurt some workers and help 

others. The Congress cannot avoid this dilemma, and the best it 

can do is consider carefully which groups will be aided and which 

injured. If it chooses to approve a trade liberalization agreement, it may wish to consider expanded or restructured programs 

providing relief to the losers. 

THE MACROECONOMIC EFFECTS OF TRADE LIBERALIZATION 

Trade liberalization could bring important benefits to 

particular industries and groups of workers. It could also 

result in marginal gains for consumers and, as the figures 

noted earlier suggest, in net gains for the whole United States 

economy. It is important, however, to keep these gains in 

perspective. Many other influences both in the United States 

and abroad also affect employment, income, and economic growth 

in the United States. In many cases, these other influences 

26 
overshadow the effects that might be expected to arise from 

trade liberalization. For the U.S. economy as a whole, the 

effects of trade liberalization, while positive, will be quite 

small in comparison with the effects of other recent economic 

developments. 

Consider, for example, the effects of the tariff reductions 

being negotiated in Geneva. It appears that agreement will be 

reached on a scheme that will reduce tariffs by 30 to 40 percent 

gradually over the course of eight to ten years. The average 

tariff rate for all dutiable products imported by the developed 

countries is less than 11 percent, and the average tariff rate on 

all imports is only about 6 percent (see Table 6). The use of 

average tariff levels obscures the effect of some particularly 

high tariffs imposed on specific products in one country or 

another. Nonetheless, these figures do suggest that tariff 

reduction agreements that may be reached in Geneva will lower the 

prices of imports only some 2 or 3 percent on average over the 

course of the next eight or ten years. 

During the year ending in September 1978, however, the 

trade-weighted value of the U.S. dollar declined by 8.2 percent, 

bringing with it a roughly equal increase in the price of most 

U.S. imports. (Crude oil, the price of which is set in U.S. 

dollars, is an important exception.) Other countries have experienced rapid appreciations of their currencies. In the same year 

ending in September 1978, the West German mark appreciated by an 

average of 5.6 percent and by 34 percent, on a trade-weighted 

basis. These currency rate movements have had the same effects as 

would have resulted if all other countries had placed large 

tariffs on German and Japanese products and at the same time 

sharply cut their tariff rates on U.S. goods: U.S. goods have 

become relatively cheaper in world markets, and Japanese and 

German goods have become more expensive. What is most striking, 

though, is that the import price changes that will be brought 

about by tariff reductions negotiated in Geneva will be quite 

small compared with those that have been caused by recent exchange 

rate movements. 

The effects of trade liberalization on the U.S. balanceof-payments position are al so very small compared wi th the 

effects of other recent developments. Cline, for example, 

estimates that a 60 percent reduction in tariffs and agricultural nontariff barriers would result in an increase in net U.S. 

exports of about $1 billion a year at 1974 prices and trade 

27 
TABLE 6. AVERAGE TARIFF RATES FOR ELEVEN INDUSTRIAL COUNTRIES, 

1973 

All ImEorts 

Product United 

Category Total ~/ States Canada Japan EC 

All 

Products 6.2 7.1 6.7 6.3 4.2 

Raw 

Materials 1.5 2.3 0.4 3.8 0.3 

Semifinished 

Manufactures 6.6 6.0 10.6 6.2 5.9 

Finished 

Manufactures 9.4 9.0 6.7 12.0 8.9 

- - - - - - - - - - - - - - - - - - - - - - - - - - - -(Contin~ed) 

SOURCE: GATT, Basic Documentation for the Tariff Study: Summary 

by Industrial Product Categories (Geneva, March 1974), as 

quoted in William R. Cline, Naboro Kawanabe, T.O.M. 

Kronsjo, and Thomas Williams, Trade Negotiations in the 

volumes. 13/ Baldwin and Lewis estimate that a 50 percent reduction in tariffs and nontariff barriers (including U.S. quotas on 

textile and apparel imports, which were not included in Cline's 

study) would result in a net trade loss of $0.7 billion a year in 

1971 prices and at 1971 trade volumes. 14/ 

13/ See Cline and others, Trade Negotiations in the Tokyo Round, 

p. 185. 

14/ Baldwin and Lewis, "U.S. Trade and Tariff Effects on Trade 

and Employment in Detailed SIC Industries," p. 259. Not surprisingly, increases in U.S. imports of textiles and apparel 

28 
TABLE 6. (Continued) 

Dutiable Items Onl! 

Product United 

Category Total a/ States Canada Japan EC 

All 

Products 10.7 8.9 14.2 11.2 9.0 

Raw 

Materials 5.7 4.4 6.3 10.6 3.5 

Semifinished 

Manufactures 10.5 9.5 14.5 8.9 9.9 

Finished 

Manufactures 11.3 9.5 14.2 12.5 9.2 

Tok!o Round: A Quantitative Assessment (Washington, D.C.: 

The Brookings Institution, 1978), p. 10. 

!!./ Includes United States, Canada, Japan, EC, Austria, Finland, 

Norway, Sweden, Switzerland, Australia, and New Zealand. 

There is no simple way to update these figures to provide 

estimates of what effect the actions now being discussed at Geneva 

might have on the U.S. trade position. Of course, prices have 

increased and the volume of U.S. trade has grown substantially 

since the years that provide the basis for these estimates, and 

one might expect the effects of these reductions in trade barriers 

to be somewhat larger today. On the other hand, it is extremely 

unlikely that tariff cuts or reductions in nontariff barriers 

will be as great as those on which these estimates are based. 

are responsible for this deterioration in the trade balance. 

If these textile imports are excluded, the U.S. trade position would improve by about $0.2 billion. 

29 
The fact remains, however, that changes in the net U.S. 

trade position of $1 billion or $2 billion one way or the other--

particularly when spread out over a period of years--are quite 

small compared with total U.S. merchandise imports and exports, 

which were $176 billion and $141.7 billion, respectively, in 

1978. These changes are also small relative to the changes that 

could arise as a result of changes in the international economic 

environment. If, for example, Japan, Canada, and the developed 

countries of Western Europe had grown as rapidly as the United 

States did following the 1974/1975 recession, the U.S. current 

account balance would have improved by more than $7 billion a year 

by the end of 1977. 15/ 

The overall employment effects of trade liberalization are 

likely to be very small when compared with the employment effects 

produced by shifts in U.S. domestic economic policies. Because 

wages in the United States are high relative to those in most 

of the rest of the world, freer trade might be expected to result 

in at least temporarily reduced employment in the United States. 

This expectation is borne out by estimates of net changes in 

employment that are the immediate results of trade liberalization. 

Table 7 lists these estimates for selected programs of trade 

liberalization. These estimates are derived from data from 

different years and, to provide some common measure of comparison, 

changes in employment are given both in absolute terms and as a 

fraction of the total labor force in the base year. In only one 

case is the net change in employment greater than one-tenth of one 

percent of the total labor force. 

In putting the employment effects of changes in U.S. net 

exports in perspective, it is helpful to remember that the impact 

of increased or decreased net exports on employment is roughly 

equal to the impact of a similar increase or decrease in spending by the federal government for goods and services. 1:.2../ The 

15/ This estimate is derived from a CBO simulation of the effects 

of more rapid economic growth abroad, using the Data Resources, Inc. quarterly econometric model of the United States. 

1:.2../ For more on the size of these effects and the speed with 

which they are felt, see Congressional Budget Office, The CBO 

Multipliers Project: A Methodology for Analyzing the Effects 

of Alternative Economic Policies, Technical Analysis Paper 

(August 1977). 

30 
TABLE 7. EMPLOYMENT EFFECTS OF SELECTED TRADE LIBERALIZATION 

POLICIES 

Net Change 

Net Change in Employment 

in Base as Percentage 

Policy Employment Year of Labor Force Source 

50% Linear 900 0.001 Baldwin 

Tariff to to and Lewis, 

Reduction -37,300 1971 -0.04 p. 257 2./ 

60% Linear Cline 

Tariff and others, 

Reduction -28,900 1974 -0.03 p. 125 J2i 

50% Reduction 

in Tariff 

Equivalent -70,400 -D.08 Baldwin 

of Nontariff to to and Lewis, 

Barriers -108,500 1971 -0.13 p. 259 a/ 

a/ Robert E. Baldwin and Wayne S. Lewis, "U.S. Tariff Effects on 

Trade and Employment in Detailed SIC Industries," U.S. Department of Labor (1978). 

~/ William R. Cline, Naboro Kawanabe, T.O.M. Kronsjo, and Thomas 

Williams, Trade Negotiations in the Tokyo Round: A Quantitative Assessment (Washington, D.C.: The Brookings Institution, 

1978). 

distribution of jobs gained and lost as a result of trade liberalization and the speed with which these changes in employment occur 

will differ markedly, however, from what would happen if the 

federal government reduced, say, defense spending. The fact 

remains, though, that the total number of jobs gained or lost is 

relatively independent of the source of changes in the demand for 

U.S. products. 

31 
The removal of trade barriers may increase or decrease U.S. 

net exports by $1 billion or $2 billion over the course of 

several years. In fiscal year 1978, however, the U.S. federal 

government spent $8.4 billion less than had been anticipated 

in the Second Concurrent Resolution on the Budget for that year. 

Thus, the overall employment effects of trade liberalization can 

be swamped not only by major shifts in domestic fiscal policies, 

but also by the errors that the federal government makes in 

estimating its outlays in any given year. 

Finally, the price effects of trade liberalization are 

also likely to be quite small. If trade liberalization leads 

to a reduction in U. S. import prices of 2 or 3 percent over the 

course of the next ten years, this will lower the consumer price 

index by only about one-half of one percentage point over that 

same period. 17/ This is not a large change when one considers 

that, even ifinflation is held to 6 percent a year, consumer 

prices will rise by 79 percent over ten years. Although the 

overall price effects of freer trade may be quite small, the 

effects in a few important sectors could be significant. In these 

cases, liberalized trade policies could constitute a useful 

element of a general anti-inflation program. 

Trade liberalization may have important economic consequences 

for particular sectors of the U.S. economy, and both the U.S. and 

world economies could gain significantly through the increased 

specialization of production allowed by freer trade, the increased 

availability of imported products ,and the long-term improvements 

in production efficiency fostered by increased competition and 

larger-scale production. Nonetheless, the near-term macroeconomic 

gains to the United States that will arise from freer trade are 

probably quite small. It seems that macroeconomic considerations 

will not serve to argue strongly either in favor of or in opposition to liberalized trade. 

17/ This estimate was derived by reestimating an equation originally reported by Rudiger Dornbusch and Paul Krugman in their 

article, "Flexible Exchange Rates in the Short Run," Brookings Papers on Economic Activity, 3:1976 (Washington, D.C.: 

The Brookings Institution, 1976), pp. 537-75. The equation 

was originally estimated using data for the years 1955-1975. 

The reestimate used data for 1955-1977. 

32 
THE INTERNATIONAL POLITICAL EFFECTS OF TRADE LIBERALIZATION 

The most important effects of trade liberalization.may not be 

economic at all. Rather, the importance of the current round of 

trade negotiations may lie in the effect that its successful 

conclusion will have on the political climate that produces 

national trade policies. 

For all of the reasons outlined in the introduction to this 

paper--disappointing recovery from recession, structural changes 

in the world economy, and increased government involvement in 

heretofore private commercial activities--sentiment for protectionism is rising, and there seems little reason to expect that 

the motivations for this sentiment will be reduced significantly 

in the near future. There are some indications that various 

national governments have been using the prospect of the new trade 

agreements to hold off this growing protectionist sentiment; they 

have argued that new restrictions should not be imposed at a time 

when they might be threatening to agreements that would benefit 

all countries. If the talks fail, the abili ty--and indeed the 

desire--of individual governments to continue to resist protectionist pressures will be weakened. Although it is impossible to 

predict with any certainty what the consequences of such a situation might be, it is clear that one possible outcome--and to many 

observers a likely one--is the rapid proliferation of new trade 

barriers and a subsequent reduction in world trade. In a sense, 

then, the current round of trade negotiations is important not for 

what it may accomplish, but rather for what its successful conclusion may prevent. 

Beyond questions of trade restric tions and the growth 

of international trade, the final outcome of the Geneva negotiations may have implications for the future prospects of 

international cooperation on a number of economic and political 

issues. The Tokyo Round of trade negotiations is only one 

of a number of settings in which the United States is seeking 

economic and political cooperation from the other developed 

countries. Stabilization of international monetary arrangements, reduction of the large recent imbalances in international 

payments, and coordinated policies for the development and 

equitable distribution of energy and natural resources are 

all important goals of U.S. economic and foreign policy, and 

none of these can be achieved without the active cooperation of 

all of the developed market economies. Further, these same 

coun tries--Japan and Wes tern Europe in particular--are the 

strongest and most important political allies of the United 

33 
States. Continued cooperation with these countries is necessary 

for the furtherance of a wide variety of U.S. national objectives. The Geneva trade negotiations represent a highly visible cooperative enterprise among these developed countries. 

The success or failure of these negotiations may well affect 

the willingness of the major participants to pursue other cooperative goals in the future. 

Similarly, the trade negotiations constitute an important 

link between the indus trialized na tions and the developing 

nations--and particularly between the industrialized nations and 

the most advanced of the developing nations, which stand to gain 

much from increased access to markets in the developed world. For 

these newly industrialized countries, the new role of an important 

international trader brings with it new opportunities for economic 

growth, new domestic political and economic problems, and new 

responsiblities for the maintenance of the international economic 

order. The United States and its industrialized allies have 

strong interests in how the rapidly developing countries meet 

the se opportunities, responsibilities, and problems. They 

also have, therefore, a strong interest in maintaining close 

contact with the developing countries through such channels as the 

trade negotiations. A satisfactory conclusion of those portions 

of the talks that deal with relations between developed and 

developing countries could serve as a step to further helpful 

consultations on a variety of other issues. 

34 
CHAPTER IV. SOME SPECIAL PROBLEMS FOR U.S. TRADE POLICY 

The most difficult questions facing makers of trade policy 

today are not really questions about the desirability of a liberal 

trading environment: few would argue that a general increase in 

trade restrictions would be beneficial. Rather, the pressing 

questions--particularly for U.S. policymakers--have to do with how 

a liberal trading system can be made to work effectively and 

equitably despite a variety of influences with the potential 

to disrupt international trade patterns. 

In one form or another, these influences--the most important 

are government involvement in international trade, the international transfer of technology, bilateral rather than multilateral 

trading arrangements, and the effects of government environmental 

and safety regulations--have always posed problems for trade policy. They have been ignored in the past because more pressing--

and more easily resolved--problems have captured the attention 

of policymakers. Today, however, they are increasingly difficult 

to ignore, partly because easier solutions such as simple tariff 

reductions have already achieved nearly as much as can be expected 

from them, but also because present-day economic and political. 

events have made these influences much more important in recent 

years. 

With the exception of growing involvement of governments in 

international trade, these issues are not being discussed in 

Geneva. Their relevance to the Geneva talks lies in the fact that 

in a less restrictive trading environment these influences will be 

more strongly felt. Without some multilateral agreement on how to 

approach these problems, they have the potential for preventing 

the continued liberalization of the international trading system. 

GOVERNMENT INVOLVEMENT IN INTERNATIONAL TRADE 

Since the conclusion of the Kennedy Round of trade negotiations in 1967, there has been a marked increase in the involvement of national governments in international trade and in economic activity in general. This involvement has taken a wide 

variety of forms, including export subsidization, the formation of 

35 
special ministries to encourage exports, nationalization of major 

industries, government support for research and development, price 

support arrangements, environmental regulations, and special 

programs to mitigate the effects of economic dislocation. 

The problem that government involvement creates for trade 

policy is that a set of new actors--national governments--now 

figure prominently in international transactions. Because 

these new actors do not have the same simple profit-maximizing 

objectives that are postulated for individual firms in traditional 

trade theory and because these actors have powers not possessed 

by individual firms, their activities can--and indeed usually 

are designed to--subvert the usual forces of economic adjustment. 

The results are often the creation of distortions in world trade 

patterns, the delay of necessary adjustment to changed economic 

conditions, and conflict among inconsistent policies adopted by 

several countries. 

An often-cited example of the problems that can be caused by 

government involvement in international trade matters is the case 

of the British steel industry. Many critics have argued that the 

United Kingdom, with relatively high labor costs and an obsolete 

capital stock and without large deposits of iron ore, should not 

be in the business of producing steel. Steel, it is argued, could 

be produced more cheaply in other countries and exported to the 

United Kingdom in return for other goods and services that England 

could produce more efficiently. Such an arrangement would benefit 

all concerned (after provision had been made for relocating 

displaced British steelworkers), with other nations being able to 

export more steel and British consumers of steel being able to 

purchase steel more cheaply. 

Without government intervention, the British steel industry 

would, it is argued, gradually disappear. Continual losses would 

force private companies out of business until eventually no 

steel producers would remain. But the British steel industry 

is not in private hands. Rather, it is state owned and its 

operating losses ($857 million in 1977) are absorbed by the 

government. It can, therefore, continue to produce steel at a 

loss almost indefinitely. Other nations, whose steel industries 

might be competitive in world markets, face a difficult choice as 

a result of the subsidization of the British steel industry: they 

can either allow their own steel industries to suffer through 

competition with subsidized British steel, or they can take 

steps to protect their industries by imposing countervailing 

duties on imports of British steel or by subsidizing their own 

36 
steel industries. Neither choice is attractive, and neither 

serves to promote the most efficient production of steel. If a 

number of countries simultaneously attempt to protect their steel 

industries--and this is in fact the case today--the result will be 

global overcapacity in the steel industry. Rather than shutting 

down, inefficient or obsolete steel plants remain in operation, 

tying up resources that could be better utilized elsewhere, and 

international economic tensions are heightened as various countries vie for shares of a world steel market too small to support 

all of them. 

Government intervention in international trade poses particularly serious difficulties for the United States. The size 

of the U.S. market and the high level of U.S. income make the 

United States an attractive market for many foreign exporters, and 

governments intent on expanding exports have often made the U.S. 

market a target for their efforts. Even if trade expansion is not 

the primary motivation for government intervention, the relative 

openness of the U. S. economy has allowed the effects of exportsupporting policies to be felt in the United States. 

The United States is not exempt from charges of intervening 

in private markets to stimulate U.S. exports. Critics in foreign 

countries point to heavy government subsidization of the U.S. 

electronics and aircraft industries through defense-related 

research and development contracts. These contracts, it is 

alleged, have allowed U. S. firms to develop technologies easily 

adapted to civilian purposes, giving the United States a commanding lead over other producers of sophisticated electronic gear and 

aircraft. Some criticism of the United States has also arisen 

with respect to U.S. farm price support policies, which from time 

to time have resulted in massive overproduction of agricultural 

commodities and in a necessity for U.S. producers to export their 

crops. Indeed, it is generally recognized that the major U.S. 

food aid program (the Food for Peace program authorized by Public 

Law 480) was designed not only to aid poor nations, but also to 

maintain domestic agricultural prices by increasing U.S. food 

exports. 

In neither of those cases was the primary motivation for 

government action an attempt to increase U.S. exports. The 

government supported research and development in the electronics 

and aircraft industries in order to produce a sophisticated 

defense hardware. Farm programs and food aid programs were 

insti tuted to preserve certain kinds of agricultural production 

deemed valuable, to dispense with large stockpiles of excess 

37 
products, and to aid the worldfs hungry. Nonetheless, these 

actions may have had important effects on patterns of international trade. The same is true of many actions undertaken by 

foreign governments, and herein lies the real problem with government involvement in trade matters. 

There seems to be general agreement that governments should 

refrain from ac tions designed specifically to subsidize exports 

at the expense of similar industries in other countries. Few 

would dispute, however, the right of governments to pursue important domestic goals through economic intervention even if this 

intervention alters trade patterns. Perhaps more to the point, 

few governments would subscribe to international agreements that 

limited their freedom to engage in such intervention. The difficulty lies in separating these two kinds of actions in some 

practical way. 

The so-called subsidies code being negotiated in Geneva 

is an attempt to identify at least some types of government 

practices that will be considered improper. The variety of 

rationales for government intervention in economic matters and 

the subtlety of tactics by which this intervention may be accomplished are sufficiently great, however. that any code will be 

able to proscribe only the most flagrant attempts to encourage 

exports at the expense of other nations. Indeed, most observers 

expect that the subsidies code negotiated in Geneva will contain 

little that is new in this regard; most of the practices that will 

be prohibited by the new code are already considered unacceptable 

under the terms of existing trade agreements. The most important 

product of the Geneva negotiations regarding government involvement in international trade is not likely to be clear agreement on 

which kinds of government practices are acceptable and which are 

not. Rather, it will be agreement on a mechanism for resolving 

the inevitable disputes that will arise over specific government 

policies. 

A particularly troublesome instance of government involvement 

in international trade is posed by the growing trade between 

centrally planned economies and the market-oriented economies of 

the rest of the world. Because government involvement in economic 

activity is so pervasive in the centrally planned economies, the 

internal prices of many commodities can deviate sharply from the 

prices of comparable commodities in market-oriented economies. 

When the prices of important factors of production--labor, electricity, steel, or fuel oil, for example--are so affected, the 

result can be a bewildering assortment of implicit taxes and 

38 
subsidies that strongly affect the prices at which finished goods 

can be offered for sale in international markets. Because of the 

complexity of arrangements in these nonmarket economies, it is 

difficul t to determine whether or not the net effect of state 

intervention is to subsidize exports. Thus, in some cases there 

is little basis for judging whether exports from a centrally 

planned economy are competing fairly with those of market-oriented 

economies. 

Unfortunately, the problems of trade with centrally planned 

economies are not being discussed in Geneva. This is because .. none 

of the major centrally planned economies is a party to the GATT, 

and consequently none is represented at the trade negotiations in 

Geneva. As trade with these countries becomes increasingly 

important for all of the market-oriented economies, some means 

will have to be found for including the centrally planned economies in future negotiations over the conduct of international 

trade. 

"BILATERALISM" 

There has been a growing tendency in the past few years 

for pairs of countries to conclude special bilateral trade 

agreements whereby each party to the agreement undertakes to 

purchase a specified amount of the other's products. These 

agreements can take a variety of forms. At one end of the 

spectrum are agreements involving relatively small volumes of 

trade through which a private firm will agree to build a plant in 

a developing or a centrally planned economy, accepting subsequent 

output from the plant as payment. Such arrangements have been 

common for a number of years--particularly between Western European multinational corporations and the governments of Eastern 

European countries. During the past few months, a number of 

highly publicized contracts of this sort between firms of various 

nationali ties and the People's Republic of China have been 

concluded. 

A newer phenomenon has been the conclusion of much largerscale agreements between two governments. These have been most 

common between the governments of industrialized nations and the 

governments of oil-exporting countries. Japan, for example, 

has entered into agreements with both Iran and Iraq committing 

it to buy specified amounts of oil from these countries over 

the course of several years and requiring the two oil-producing 

countries to purchase Japanese equipment and services in amounts 

39 
equivalent to the value of their oil exports to Japan. Similar 

arrangements have been concluded between Japan and Mexico and 

between France and Mexico. 

These arrangements (which have been referred to as examples 

of a new "bilateralism") have been criticized as placing some 

international economic transactions beyond the influence of market 

forces and, as such, constituting important obstacles to fair 

and open international trade. In essence, these arrangements 

reserve some fraction of a nation's total imports for particular 

countries. Products from other nations not party to bilateral 

arrangements can be displaced, even if these products are cheaper 

than those that the importer has agreed to buy. Because these 

arrangements typically extend over several years--in some cases, 

as many as ten--they can freeze the shape of at least a part of 

world trade flows no matter how economic conditions may turn out 

in the future. 

Further, because many of these bilateral arrangements--

especially those involving larger volumes of trade and extending over longer periods--are concluded through government-togovernment negotiations rather than through private commercial 

channels, there is widespread fear that such arrangements may mark 

excessive governmental intervention or that they may be concluded 

for political rather than for economic reasons. 

While all nations would presumably be better off if all 

international transactions were subject to market forces, there 

are strong incentives for individual countries to enter into such 

arrangements. Developed nations may find in such arrangements 

an opportunity to gain an advantage over other countries by tying 

up some part of lucrative, fast-growing export markets. For 

the developing countries and for the centrally planned economies, 

these arrangements provide an alternative means of financing industrial development outside the normal channels of international 

lending. Indeed, the original motivation for these arrangements 

lay in the difficulties encountered by some nations in finding 

conventional commercial financing for the installation of new 

plants and equipment. By entering into what were essentially 

barter arrangements with firms in developed countries, the industrializing nations sidestepped the need for international financing. With bilateral arrangements, the burden of obtaining financing is left with the firm in the developed country. In cases 

where capital formation is not an explicit part of the bilateral 

contract (as in cases where oil is traded for unspecified commodities), the developing country has the advantage of being able to 

40 
negotiate large purchases of foreign goods at one time--sometimes 

getting better terms by buying in volume and minimizing the need 

for extensive managerial staffs (often lacking in developing 

countries) to arrange and execute international transactions. 

Bilateralism poses a particular problem for the United 

States. Because the federal government has relatively little 

control over the private firms in the United States that carry 

out the bulk of U.S. international transactions, it cannot 

enter into bilateral arrangements as easily as can governments 

that exercise effective control over important industries. Not 

surprisingly, the United States has been much less aggressive in 

pursuing bilateral arrangements than have other countries, and 

there does not seem to be any clear U.S. policy toward such 

arrangements. If these arrangements continue to proliferate, 

the United States could find itself at a disadvantage in relation 

to some other developed countries that do seek to establish 

special bilateral ties. 

Without some international agreement to limit the spread of 

bilateral trade arrangements, it may be impossible for individual 

nations to resist the incentives to enter into such arrangements. 

If other nations are making bilateral deals, then a nation will 

only injure itself by refraining from making similar deals. At 

present, no multilateral agreement governs bilateral arrangements, 

and no such agreement is being discussed in Geneva. 

But formulating an agreement to limit bilateral trade 

arrangements will not be a simple matter. Many have argued 

that, by necessity, trade negotiations in the future will be 

of a bilateral nature. Some support is lent to this position by 

the difficulties that have been encountered in reaching agreement 

among the many participants in the present round of multilateral 

trade negotiations. Further, all indications are that, for the 

near future at least, the most pressing matters for negotiation 

will be specific practices by individual countries that may 

be alleged to harm the interests of other countries. Such disputes may be much better handled on an ad hoc bilateral basis 

than through multilateral negotiation, and few observers see any 

prospect for another round of multilateral trade negotiations in 

the near future. 

By their 

discriminatory 

partners, and 

framework that 

nature, bilateral trade arrangements constitute 

treatment by a nation of its potential trading 

as such they are contrary to the spirit of the 

underlies the present trading system. At the same 

41 
time, there is no reason to expect that the motivations to enter 

into such arrangements will weaken appreciably in coming years. 

Indeed, there are reasons to think that further progress in 

opening up world markets will come only as the cumulative result 

of many bilateral arrangements. Bilateralism, then, is likely to 

remain a problem for international trade policy--and for U.S. 

trade policy in particular--for some time to come. 

TRANSFERS OF U.S. TECHNOLOGY ABROAD 

Another issue that has caused concern, particularly among 

labor groups, is the negative effect that unrestrained exports 

of technology are having on the trade balance of the United 

States. Some observers have argued that, by making American 

know-how and technology available to foreign producers, the United 

States is creating competitors for its domestic industries. With 

the acquisition of U. S. technology, foreign producers will begin 

to replace U.S. products in their home markets. As these producers increase their output beyond the absorptive capacity of 

their domestic markets, the logical next step will be to begin 

exporting into foreign markets. Their exports will compete with 

U.S. export products--at first, in third-country markets and, 

eventually, in the U.S. market as well. 

Labor groups have suggested that, by imposing restric tions 

on the export of capital goods, many of the problems associated 

with technology transfers might be ameliorated. Attempts to 

stem the outflow of technology from the United States might, 

however, serve to shift the cause of the problem but would most 

probably not solve it. Export restrictions of this sort would 

eliminate a good deal of the foreign demand for the output of U.S. 

industries. Because exports of capital goods that are technology 

intensive play such an important role in U.S. exports, accounting 

for one-third of all goods sold abroad in 1977, this induced 

drop in foreign demand would also result in excess productive 

capaci ty at home, leading to plant closings and worker layoffs. 

With the imposition of export restrictions, job losses due to 

increased competition would be replaced by job losses due to 

export restriction. The net effect would be very similar under 

both circumstances. 

The recommendation to curtail exports of capital goods 

makes the erroneous assumption that technology is the critical 

factor in determining competitiveness. The most widely accepted 

explanations of international trade, however, postulate that 

42 
competitiveness--or comparative advantage--is a function not 

only of technology (capital), but also of the composition of the 

labor force, as well as of the natural resources with which the 

nation is endowed. So, even if all nations were to enjoy the 

benefits of having identical technologies, equal competitiveness 

would still not be guaranteed. 

It becomes clear from the above that a policy of restricting 

exports of capital goods is not the best means of ameliorating the 

effects of foreign competition. In this context, although the 

United States is the major supplier of capital goods to world 

markets, it is not the only supplier. Technologies similar to 

those available from the United States can also be obtained from 

other industrialized countries. Presumably, if the United States 

were to cut back on its sales of capital goods, these countries 

would be more than willing to take up the slack in supply. 

While recognizing that unlimited transfers of technology 

might have some negative implications for the U.S. economy, the 

proposed solution of imposing export restrictions is hardly a 

desirable alternative, nor does it seem likely to be effective. 

THE EFFECTS OF FEDERAL REGULATIONS ON U.S. INDUSTRIES 

Industry as well as labor representatives have expressed 

concern about the effect that government regulations have on 

domestic employment, the level of activity in the domestic economy, as well as the competitive position of U.S. industry. This 

concern has emerged as a reaction to the imposition of regulations 

in areas such as occupational safety, pollution control, and 

product safety. 

Industry representatives in particular have argued that the 

expense of compliance with these regulations has raised their 

production costs, particularly in such industries as steel, chemicals, and metal manufacturing. Federal regulations unquestionably 

have prompted industry to make large investments for po1lutionabatement equipment. In 1977, U.S. industry as a whole spent a 

total of $7 billion for pollution abatement, representing about 5 

percent of total expenditures for new plant and equipment. 1./ 

1/ U.S. Department of Commerce, Bureau of Economic Analysis, 

Survey of Current Business (June 1978), pp. 34-35. 

43 
The proportion spent by some industries was a good deal larger: 

10 percent for the chemicals industry, 15 percent for steel works 

and blast furnaces, and 17 percent for nonferrous metal manufactur ing. The industr ies claim that the high cost of compliance 

with federal regulations has forced them to increase the price of 

their finished goods to such a degree that they now find it 

difficult to compete in world markets. 

Some observers, while agreeing that there is validity 

to these allegations, contend' that the negative effects of 

the regulations have been rather limited. They point out that 

very few firms have suffered such a severe loss of competitiveness as a consequence of the regulations that they have 

been forced to close. The Environmental Protec tion Agency estimates that, between 1971 and 1977, a total of 119 plants were 

closed in the United States because of environmental regulations. These plant .closings have resulted in the direct loss of 

21,900 jobs. J:../ Nevertheless, not all of these plants produced 

goods that were traded internationally; thus, only a portion of 

these job losses can be attributed to changes in international 

competitiveness. 

These observers also contend that the regulations have 

not seriously affected the international competitive position of 

most U. S. industries. A recent, still uncompleted study by the 

U.S. Department of Commerce which seeks to analyze the effect of 

environmental regulations on competitiveness has drawn the preliminary conclusion that environmental control costs have had little, 

if any, effect on reducing exports or increasing imports. 3/ 

The study seeks to analyze the problem by comparing the outlays 

an industry made for pollution-abatement equipment with the volume 

of trade of the industry; it has found no significant correlation 

between them. 

Although these results are valid for many industries, it is 

undeniable that some producers have suffered a loss in competitiveness as a consequence of regulatory actions, and it might be 

proper for the government to provide some form of relief to the 

most seriously affected industries. 

2/ Council on Environmental Quality, Ninth Annual Report, 1978, 

p. 432. 

3/ Ibid., p. 436. 

44 
Some analysts have made the allegation that many of the most 

robust competitors of those U.S. industries that have sustained 

injury derive their advantage from being located in countries 

that have not enacted pollution control or occupational safety 

regulations. Copper producers are a good example of an industry 

that has suffered injury because of increased exports to the 

United States by producers who are not subject to environmental 

regulations. The Copper Environmental Equalization Act of 1977 

was an attempt to provide relief for the copper industry; the 

legislation, however, was not enacted into law. The bill proposed 

to increase the duty on imported copper by an amount that offset 

the cost incurred by U.S. producers in meeting domestic environmental regulations. Using the tariff structure in this way, 

however, presents a number of problems. One of these problems is 

that Article II of the GATT prohibits unilateral alteration of 

import duties on a good that has been subject to trade concessions. By raising the import duty on copper, the United States 

would become subject to claims for compensation from its trading 

partners or to retaliatory actions against U.S. exports. 

An alternative means that has been suggested to offset 

the effects of regulatory action would be to implement a subsidies 

scheme that is designed to make the affected U.S. industries 

competitive again in world markets. Using subsidies to promote 

exports, however, has been a major issue of contention in the GATT 

system; in fact, Article XVI of the GATT agreement prohibits the 

enactment of subsidies if their explicit intent is to promote 

exports. The current round of trade negotiations has in fact made 

an effort to resolve this issue, and it remains to be seen how 

much has been accomplished. 

Because only a fraction of those industries that are affected 

by regulatory actions trade their goods internationally, a complicating feature of both of these relief schemes is that they would 

aid only some of the affected industries, while they would do 

little for those industries that do not engage in international 

trade. And it would seem difficult for the government to offer a 

rationale for a policy that aids only international traders. 

While government regulations have had some negative economic 

effects, it should be kept in mind that the reason for imposing 

them was to improve the quality of life in the United States. It 

is generally held that the regulations have made a contribution to 

this effort. Other nations, however, may conclude that maintaining or even marginally increasing their share of international 

trade is worth having a somewhat more hazardous workplace and a 

45 
less clean environment. The somewhat cynical conclusion could be 

drawn from this that, whatever problems these regulations have 

caused for U.S. producers, American consumers have enjoyed the 

benefit of cheaper products, while foreigners have borne the 

environmental and occupational costs. 

Ultimately, the only way to resolve the trade problems 

associated with nations enacting different regulatory measures 

is to negotiate a set of uniform international standards. While 

most developed countries have imposed measures similar to those 

enacted in the United States, some differences still remain, and 

these differences may provide a competitive advantage to certain 

industries. Most of the developing countries, however, have not 

enacted regulations, primarily because of a fear that regulatory 

action would hamper their efforts to modernize and develop their 

economies. The prospects for negotiating a set of uniform interna tional regulations in the near future , given the complexity 

of the divergent political and economic priorities that are 

involved, would appear to be rather slim. 

46 
CHAPTER V. CONCLUSION 

Not even the most determined optimist would hope for the 

agreements that may be reached in .Geneva to provide solutions to 

all the prob~ems that the United States faces in its trading 

relations wi t~h other nations. Many of these problems are the 

results of international economic disturbances and imbalances that 

have little to do with trade policy, and the Geneva negotiations 

were never intended to correct these disturbances and imbalances. 

Neither will trade liberalization of the sort being contemplated in Geneva have important macroeconomic effects in the 

United States. Some jobs will be lost as a result of changing 

trade patterns; others will be gained. The net change in employment, however, will probably be very small. Freer trade may 

act in some small way to restrain price increases in the United 

States, but these effects will be swamped by the effects of domestic fiscal and monetary policies. Even the size of the tariff 

reductions likely to arise from the Geneva negotiations are small 

when compared with the changes in international prices that have 

come about as a result of recent currency market fluctuations. 

At a microeconomic level, however, the Geneva negotiations 

could have important consequences. In a few areas--texti1es and 

agriculture are the most immediately obvious examp1es--trade 

liberalization could lead to major changes in the distribution of 

production, with relatively efficient producers assuming a larger 

share of world markets. These shifts in production would impose 

some costs for adjustment to changed conditions, but they would 

also result in generally higher efficiency in production and 

lower costs. After accounting for the costs of adjustment, these 

and similar shifts in production could be expected to result in 

measurable economic gains for the United States. 

These gains would be very small when compared with total 

U.S. GNP, but then so are the economic effects of nearly all 

international economic developments. The U.S. economy is so 

large and international transactions constitute such a small 

portion of overall economic activity that very few international 

economic initiatives can be justified on the grounds that they 

will bring about large changes in the U.S. economy. Perhaps 

of more relevance is the fact that trade liberalization could 

47 
lead to gains which, although small in comparison to the total 

economy, are substantial in an absolute sense. 

The most important gains likely to result from trade liberalization, however, are not captured by simple calculations of 

short-term gains and losses. Difficult to quantify, these benefits arise only over the course of several years. Increased 

competition may spur faster technological progress; larger-scale 

operations may allow production efficiencies; reduced inflationary 

pressure may allow more expansionary monetary and fiscal policies. 

Most important of all, agreement on some rules for international 

trade arrangements may be necessary to avoid a general return to 

more restrictive trade policies. As noted above, sentiment for 

protectionism is rising in a number of countries, and some observers have noted that, if the Geneva negotiations accomplish 

nothing more than maintaining the present level of liberality in 

the trading system, they will have served an important function. 

Although the near-term, easily measurable effects of the 

Geneva talks on the United States are likely to be small, the 

United States--perhaps more than most other nations--has much to 

gain in the long run if some agreement can be reached on what 

constitutes acceptable behavior in the conduct of international 

trade. Because the U.S. economy is relatively open and decentralized, it is highly susceptible to the effects of trade-supporting 

policies in other nations. Without international agreement on 

which policies are to be permitted and which are not, there is 

every prospect that government involvement in international 

trade--and the adverse effects that this involvement can have on 

U.S. industry--wi11 continue to grow. In such a situation, the 

Uni ted States would be faced wi th the unsa tisfac tory choices of 

allowing government-encouraged foreign enterprises to usurp U.S. 

markets, taking actions to protect threatened U.S. industries, or 

involving the U.S. government more directly in private economic 

activities in an attempt to encourage U.S. exports. Clearly, some 

negotiated restraint in government support of international trade 

would be preferable. 

Even a highly successful conclusion to the Geneva talks will 

leave a number of difficult problems for U.S. trade policy. 

Policies will have to be devised for dealing with specific cases 

of involvement by foreign governments in international trade 

and for regulating the growing volume of U.S. trade with nonmarke t economies. The Uni ted States will have to formulate 

some sort of policy toward large bilateral trade arrangements. 

Some means will have to be found either to compensate or to 

48 
protect from foreign competition U.S. producers who incur increased costs as a result of environmental, safety, or health 

regulations. Finally, and perhaps most important, the United 

States must have the capability to implement any agreement that is 

reached in Geneva. Some current U.S. government practices may 

have to be altered; other nations' compliance with new trade 

accords will have to be monitored; decisions will have to be made 

in cases of industries that seek relief under the terms of the new 

agreement; and the U.S. government will have to aid domestic 

producers in understanding a new agreement and in taking advantage 

of the opportunities it may offer. All of these functions will 

require an active and effective concern with trade matters on the 

part of the federal government. 

The most difficult problems that will have to be faced as 

a consequence of liberalized trade, however, may well be domestic 

and not international. Effective liberalization of international 

trade will require some important structural realignments in the 

U.S. economy. Inevitably, these structural changes will lead to a 

loss of jobs in some industries. In many cases, the workers most 

likely to suffer from trade liberalization are those least able to 

move easily into other occupations, and the federal government is 

widely seen as bearing some social and economic responsibility 

for the relocation of affected workers. Perhaps more immediately 

relevant is the political reality that, unless some provision 

is made to compensate dislocated workers, it is unlikely that any 

significant trade liberalization will be approved by the Congress. 

Few would argue that present programs for trade adjustment assistance provide adequate relief for workers and firms injured by 

increased foreign competition or that these programs provide the 

aid and incentives necessary to encourage adjustment to changed 

conditions. Restructuring of these programs will most likely be 

an important element of any set of policies designed to promote or 

take advantage of a liberalized system of international trade. 

o 

49