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CHAPTER 2 The Trade Deficit and u.s. Competitiveness Robert A. Blecker The u.s. merchandise trade balance soared to $132 billion in 1993, the highest level since the record of$160 billion in 1987.1 Although the large trade deficits of the late 1980s were widely attributed to an overvalued dollar, the dollar has depreciated substantially since that time. In this context, the persistence ofrelatively large trade deficits once again raises the question ofwhether there is an underlying structural decline in competitiveness about which American policymakers should be concerned. While mainstream economists are divided on whether the u.s. economy has suffered a decline in competitiveness in any sense, they almost unanimously deny that any such decline could be related to the origins and persistence of the trade deficit. Competitiveness cannot matter to the trade balance, we are told, because "the trade deficit is a macroeconomic phenomenon ." Based on this premise, economists generally attribute the trade deficit to the fiscal deficit, the (allegedly) low private saving rate, the exchange value of the dollar, mismatched business cycles at home and abroad, the attractiveness of the United States for foreign investment, and virtually any other macroeconomic cause one can think of-anything, that is, but the competitiveness of the nation's industries. All of these conventional macroeconomic causes of the trade deficit are genuine and important, although the precise degree to which each of them matters can be debated. And, indeed, it is correct that the trade balance is a macroeconomic variable. Where the conventional wisdom has a blind spot, however, is in denying that "structural" factors such as industrial competitiveness can have a macroeconomic impact. This chapter argues that macroeconomic and structural explanations ofthe trade deficit are not inconsistent with each other, and that our conception of macroeconomics should be broadened to incorporate those structural problems that have some impact at the aggregate level. When economists say that any explanation of the trade deficit must be macroeconomic, then, they are right, but that does not necessarily mean that we can attribute the causation ofthe trade deficit entirely to macroeconomic policies (especially just U.S. budget deficits) or even to national saving and 31 32 Competitiveness Matters investment behavior more broadly defined. Macroeconomics is simply the study of economic aggregates and economy-wide averages. It includes such factors as productivity growth, labor cost trends, prevalence oftrade barriers, preferences for home versus foreign products, and other aspects ofwhat most people would consider to be competitiveness. Structural explanations of the trade deficit are therefore not antithetical to macroeconomic explanations and, indeed, must ultimately find expression in a coherent macroeconomic model. Indeed, a nation's structural characteristics determine the parameters that influence how any given set of macro policies (both domestic and foreign ) impacts on the trade balance. The point, then, is that structural and macroeconomic explanations ofthe trade deficit are not mutually exclusive and must be combined in order to achieve a complete understanding of current trade imbalances in the U.S. economy and elsewhere. The argument that there is no connection between the trade deficit and competitiveness is often based on the assertion that macroeconomic problems cannot be explained by microeconomic phenomena. Since the trade balance is a macroeconomic variable, it is claimed, it must be explained by macroeconomic factors such as saving and investment rates, fiscal policies, and exchange rates. These macro-level forces supposedly determine a nation's trade balance independently of industry-level performance, which merely influences the composition of the nation's exports and imports. Such an attitude is curious in a profession in which the reigning theoretical paradigm prides itself on its methodological individualism: the view that everything in the entire economy ultimately reduces to the optimizing decisions ofindividual agents (households, factor owners, and firms). Surely such a theoretical tradition should admit the possibility that structural changes at the micro-level, if sufficiently widespread, could influence aggregative outcomes to some extent. Stated this way, indeed, the proposition is one that virtually all economists would be forced to accept. The question, then, is why it is so hard for economists to admit that the behavior of the aggregate trade balance (which surely is a macroeconomic variable) may be influenced by the shifting competitive positions of the individual business firms that either sell exports or compete with imports. Implications of the Equilibrium Method The reluctance to link trade balances to competitiveness rests fundamentally on the other cornerstone ofthe neoclassical paradigm: the insistence on using a general equilibrium model in...

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