The conventional view holds that as the worldwide economic recovery progresses and as the dollar weakens, the U.S. trade deficit will be significantly reduced. This, presumably, would quiet protectionist voices.
However, that view is fatally flawed, as it ignores the important relationship between the U.S. deficit and the debt crisis of the Third World. Third World debt, estimated at $810 billion at the end of 1983, was largely acquired during the inflationary period of the 1970s when future inflation was expected to erode the real value of the debt. The price stability of the 1980s together with poor trade performance have compromised the Third World's repayment prospects and raised the specter of widespread default.
The crisis has been addressed by the International Monetary Fund together with the creditor and debtor nations. A major feature of the IMF-engineered solution has been the imposition of "austerity measures" designed primarily to promote debtor-nation exports while inhibiting their imports. The net foreign-exchange earnings anticipated from the austerity-induced trade surplus then can be used for debt service. This policy, which is showing some signs of success, has already had a significant impact on the trade flows. For example, Latin American exports from high-debt countries in the first eleven months of 1984, were 15 percent, or 6.1 billion, above the first eleven months of 1983.
The existence of the large debt and the necessity of Third World countries running trade surpluses to adequately service this debt is severely constraining the industrial world's trade policy. The world trade balance is a zero-sum game. For the Third World to have persistent trade surpluses requires that other countries accommodate this effort with comparable deficits. As Japan and Western Europe are both running trade surpluses, the burden of running a trade deficit to absorb Third World net exports has fallen almost entirely upon the United States and has significantly contributed to the higher U.S. deficit. For the first eleven months of 1984, the U.S. trade deficit with the Third World debtor nations constituted 15 percent of the total U.S. deficit of $115.1 billion. By contrast, for the first eleven months of 1980, the U.S. ran a small surplus ($293 million) with these same debtor nations.
Furthermore, since debt-repayment considerations necessitate an extended period of debtor-nation surpluses, this part of the deficit can be expected to increase through the 1980s. Even should the Europeans and Japanese share in the repayments burden by running their own trade deficits, it is inconceivable that the United States would not be expected to carry a lion's share of the burden. In short, to stave off major defaults among Third World countries, the United States is faced with the overriding necessity of maintaining continuing trade deficits into the indefinite future, albeit of a smaller magnitude than the current deficit. Hence, protectionist measures are of limited value in redressing the overall trade deficit and will only further distort the trade pattern. In this environment, our political system will be severely tested to resist the implementation of more ill-conceived ad hoc import restrictions of the type to which we are becoming accustomed.
Author Roger A. Sedjo is a senior fellow in RFF's Renewable Resources Division and director of the Forest Economics and Policy Program. This article is reprinted with permission of The Wall Street Journal, in which it first appeared.
A version of this article appeared in print in the May 1985 issue of Resources magazine.
