Markets and Nonmarkets: A Structuralist View of Western Trade Conflicts

MARKETS AND NONMARKETS: A STRUCTURALIST VIEW OF WESTERN TRADE CONFLICTS Wolfgang Hager ^Conventional explanations of trade conflicts among the United States, Europe, and Japan stress the international spillover effects of domestic recessions, the mercantilist race provoked by oil deficits, and the effects of an exchange-rate system that prices currencies not according to the value ofthe goods they buy, but according to their rate ofreturn in shortterm capital markets. Beneath these contingent factors, however, lie more fundamental problems that would persist even in a more favorable economic environment. Free trade between the Western mixed economies and the quasistates of the South remains desirable: it speeds the transfer of technology , combats excessive market power, and allows economies of scale through specialization. But it is becoming increasingly clear that such unhindered free trade is not consistent with either domestic or international equilibrium. Some of the consequences of integrating artificial markets for capital and labor in diverse subunits of the present world economy by the simple device of a free market are: domestic and international overcapacity in tradeables; undersupply of nontradeables; growing income disparities; and unemployment of a scale and duration that renders sizable portions of the population marginal. While a comparison of Western economies with their East European counterparts would be extreme, member-nations of the Organization for Economic Cooperation and Development (oecd) are pressing for COMECON-type arrangements of contractual trade at the sector level. And they are doing so while professing to live in a gatt/oecd world. Like the centrally planned economies, Western Europe, Japan, and, increasingly, the United States set targets for the quantity and quality of production by sector, for technological developments, and even for relative-factor rewards such as the income of capital and labor or the mobility and Wolfgang Hager, an economist with European Research Associates in Brussels, is currently teaching at the European University Institute in Florence. 155 156 SAIS REVIEW location of the workforces. For the most part, these targets are implicit rather than explicit; they are revealed by the workings ofpluralist politics or national consensus only when they are violated. When the implicit targets are not achieved, the state may act: forcing mergers, implementing selective macroeconomic or procurement policies, providing R&D services or subsidies, imposing legal restraints on firms' abilities to fire workers, or regulating the environment. The most important tool, however, is capital subsidies. The market may be too timid (developmental state capitalism), or firms may fail (lame-duck rescues), or because the state itself, by regulation, price control, or enforced labor hording, may damage the firms' ability to function. Through capital subsidies the state not only can compensate for its own failures and those of management, but also for the exercise of trade union power (overmanning and wages). In domestic terms, such intervention is not incompatible with equilibrium. In Japan, for example, the selective allocation of cheap capital to industry has led to an economy that is distorted by European standards, with low productivity in the nonexportables sectors. Nevertheless , the economy remains in equilibrium. In international trade, however , the discretionary element introduced by codetermined production levels and production costs imposes "solutions" that are not only indeterminate in theoretical welfare terms, but which, by weakening the market as a coordinating device, make for disequilibia with a strong bias toward overcapacity. These disequilibria are tolerable if (a) the interventions are not very large, or (b) one or several large importing economies are willing to be residual adjusters. But such adjustment must not violate implicit economic targets. For example, under conditions of full employment and growth, cheap supplies by competitors, however doubtful their origin, are welcomed as a boon to consumers and as a contribution to price stability. To this extent, the recession enters our analysis as it has greatly increased the extent of subsidization in many exporting countries while lowering the tolerance levels of importing countries. The United States, in particular, increasingly resists the role of residual adjuster to European and Japanese industrial policies. Trade conflicts between the three key oecd countries appear at present on two levels. One is that of professional diplomats who think that economic conflicts are unnecessary, the other is that of politicians and interest groups that accuse foreigners...