Thinking the Unthinkable
America�s trade imbalances have gotten so bad that it is time to think the unthinkable. By Eamonn Fingleton.
If the United States is ever to revive its manufacturing base and bring its trade back into reasonable balance, what should it do? The choices boil down to just two highly controversial policy options: (a) Devalue the dollar or (b) impose tariffs on imports.
Faced with such a choice, virtually the entire American establishment will opt for devaluation. Certainly devaluation was the solution the Reagan administration chose in similar circumstances in the mid 1980s. In the two years after the Plaza Accord of 1985, the Reagan administration acquiesced in an effective 50 percent cut in the dollar�s value against the Japanese yen and other strong currencies.
But devaluation is the wrong choice. For a start, as experience with the mid-1980s devaluation demonstrated, devaluation is largely ineffective � and often positively counterproductive � in addressing the root problem of chronically imbalanced trade. In fact, in the years immediately following the Plaza Accord, America�s trade deficits actually rose and they never subsequently fell below 1 percent of gross domestic product � a level exceeded for the first time just two years before the Plaza Accord.
Even if devaluation were effective, however, it would still be inappropriate for present circumstances. The reason: a lower dollar would constitute a major effective diminution of American power. Why should the United States acquiesce in such a fate when the fundamental problem has been caused not by its own actions but by the policies � and bad faith � of its trade partners? In justice, the burden of adjustment should fall on other nations � particularly those in East Asia which have been most determined in pursuing mercantilist trade policies over the years.
In the circumstances, we have no alternative but to consider the second option: tariffs. Tariffs have long been considered unthinkable. Unfortunately the American manufacturing base is now so deeply hollowed out that it is time to think the unthinkable.
How tariffs can work: a lesson from the Eisenhower years
Let�s be clear: the poor image that tariffs suffer in the current American economic debate is largely undeserved. Their image problem stems almost entirely from the allegedly major part they played in causing the Great Depression. In reality, however, they played a minor role in that disaster�much less significant certainly than the general mismanagement of domestic demand in the United States and elsewhere in those years. In any case, to judge tariffs by reference to their Depression-era manifestation is hardly more appropriate than to judge luxury liners by reference to the Titanic.
For any sane consideration of tariffs the appropriate reference point is not the Hoover years but rather those of Dwight Eisenhower. Eisenhower�s time after all was one of unprecedented prosperity not only for the United States but for most of the rest of the world. And, accompanied by supporting policies such as careful demand management and fair regulation of financial markets, tariffs clearly played a major role in providing the economic stability needed for manufacturing industries to thrive.
The great advantage of tariffs is, of course, that they powerfully counter the effect of other nations� industrial policies in undermining the profitability of American manufacturing industries. Competing with one another behind a modest but adequate wall of tariffs, American companies would be provided with a generally appropriate level of profitability. And assuming that the tariff regimen was likely to continue, they could reinvest those profits in the confident knowledge that, provided only that they manage their businesses wisely, they would earn a fair return in the future. Essentially therefore tariffs could go a long way towards end-running the savings shortages and poor returns on investment that have discouraged so many American manufacturers from creating the world beating production technologies that the American worker needs to stay at the leading edge in the world productivity league tables.
Of course, tariffs, like most economic tools, generate minuses as well as pluses. Certainly compared to a world of perfect free trade, they result in a less than optimum distribution of global industrial capacity. But for an economy as large as the United States (or for a large trading block such as the European Union), the diseconomies involved in maintaining some firewalls against the vagaries of globalization are quite minor. In any case absolute economic efficiency is by no means the only consideration here. It hardly ever is in real life.
The need for firewalls against the worst excesses of globalization may not enter into economists� equations but it is a real enough consideration. Globalization might work if all the world�s people shared substantially the same cultural values. But, unbeknownst to most advocates of globalization (or at least ignored by them), the fact is that world culture at the end of the twentieth century remains startlingly diverse. Absent carefully thought through safeguards, therefore, any attempt to mesh diverse cultures together is likely to end in tears.
Eamonn Fingleton is the author most recently of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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