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THE UNITED STATES AND THE ___ NEW INTERNATIONAL ECONOMY: FACING THE WORLD AS IT IS John Heinz „merican trade policymakers can resolve the country's trade crisis only by adapting its free-trade philosophy to fit the modern world. The first challenge is to understand the limitations of U.S. economic power in a world very different from that of thirty, or even twenty, years ago— where financial flows now dwarf trade flows. The second task is to recognize the limitations of traditional analysis about the implementation of free-trade philosophy as it was understood in the postwar era. The world economy actually operates quite differently from the way economics textbooks tell us it should, and nations do not always act in the rational way economists would lead us to expect. If the United States is to meet these two challenges, it must act more aggressively in support ofboth the liberal international trading system and the nation's own economic interests. While the present system should not be abandoned, the United States cannot afford to base its trade policy solely on preservation of the status quo. "Free trade is not a principle. It is an expedient." In an era that venerates free trade, it is useful to remember Benjamin Disraeli's dictum of 1843. Trade was both a principle and an expedient for the British, whose industrial development, dominance of the sea lanes, and far-flung John Heinz is a Republican senator from Pennsylvania. He chairs the subcommittee on International Finance and Monetary Policy of the Senate Committee on Banking, Housing, and Urban Affairs, and serves on the international trade subcommittee of the Finance Committee. The author would like to acknowledge the assistance of his legislative assistant William Reinsch in the preparation of this article. 8 SAIS REVIEW empire allowed them to benefit from the act of trading as well as from the results of such activity. This happy circumstance fostered a marriage of convenience between enlightened self-interest and an economic theory that, in the age of mercantilism, was not yet so highly regarded. Although Europe and especially Asia have not forgotten Disraeli's insight, since the Franklin D. Roosevelt administration the United States has espoused a laissez-faire, free-trade philosophy regardless of whether or not this furthered the national interest. As the country recovered from the Depression and World War II, this philosophy worked well. During the two decades following the war, U.S. economic dominance resembled that of Britain in the late nineteenth century. The United States accounted for some 60 percent of the free world's gross domestic product (GDP). Moreover, historians commonly agree that during the 1950s and early 1960s America's great strength allowed the nation to absorb economic burdens—which for it were modest—in the interest of maintaining the trading system and sustaining economic recovery in warravaged Europe. As long as the total pie was expanding, sacrifices were easy. The cost was small and the political and economic gains were immediate and real. In short, the United States benefited from the principle of free trade, satisfying both theological purists and American economic interests. In the present period, however, the United States' continued pursuit of what is now an outdated interpretation of free trade defies reality rather than accommodates it. As economic growth has slowed in so many parts of the world, the consequences of the nation's failure to adjust its vision have become obvious. The report of the President's Commission on Industrial Competitiveness, which appeared in January 1985, summarized: Most dramatic, perhaps, is our declining position in the world trading arena. . . . The deterioration of our trade balance began more than a decade ago, when the dollar was widely thought to be weak. In industry after industry, U.S. firms are losing market share. Even in high technology—often referred to as the "sunrise" industries—the United States lost world market share in 7 out of 10 sectors.1 Looking more closely at the trade deficit, the National Association of Manufacturers (nam) has concluded that virtually all of the deficit increase from $69 billion in 1983 to $123 billion in 1984 was attributable to a $50 billion increase (to $89...

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