EMERGING ISSUE 5: Trade Goes Global

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"It is absolutely incredible," Rich said to his friend Judy as they were getting ready for their daily lunch ritual at the corner deli. "I've been involved in international banking for the last thirty years and I still can't seem to be able to make any sense of what I read in the daily newspapers. And most of the reports channeled up to me by the staff in the international department don't seem to make it any easier.

"Let me give you a few examples. Take, for instance, this business with the U.S. dollar. Way back during the Nixon and Ford administrations the dollar started to decline. I remember when my son went to Heidelberg for a short course in German at the Goethe Institute. I shelled out almost a whole dollar for each deutsch mark. Then when Reagan took over, the dollar began to rise. Suddenly, we were getting something like 2.5 DM for each dollar. I started feeling a bit better, particularly since my son decided to stay in Germany for further studies. Then I began seeing a lot of defaults in my accounts. Some of my good customers who were doing a lot of business overseas started complaining that they just could not sell anything. Their prices were just too high. They were accusing President Reagan of not caring for the country and were hoping that he would finally get the message and slam the door on all these cheap imports from low-labor countries and undervalued currencies like the Japanese yen.

"And I'm starting to believe these people are right. They do know what they are talking about. Look at our balance of payments: we managed to pile up some $170 billion in deficits in 1988. That's really a lot of money. And most of this deficit, some $80 billion, is with the Japanese."

Judy was listening to her friend very patiently. Judy wasn't in the banking business; she was the purchasing manager with a big department store in the city. Business the last few months had been absolutely great. She had managed to get the best buys ever. Her new supplier, the Yamoto Trading Company, had made great deals with producers in the Pacific Basin. The margins were absolutely superb; ladies' and men's shirts and shorts were coming in at prices that were a mere fraction of what she had to pay to the domestic suppliers; quality was great; payment arrangements were also very good. Just yesterday Judy had closed one of her largest deals ever: a huge order of $ 30 million. "It's terrific!" she exclaimed as she was explaining to Rich how she got hooked up with the Japanese trading company. "The deal just fell into my lap out of the blue."

"I don't know," interrupted Rich. "It just doesn't seem right. I see in the headlines that American companies are closing down because they can't get customers to buy from them, yet you seem to get a great deal of satisfaction out of the misery of all these people who are losing their jobs to foreigners. Because that's exactly what it is, you see. When you buy from overseas you put some people to work over there and you take some people off their jobs here at home. I learned in Econ 101 years ago that a purchase is consumption and consumption means production, which in turn means employment and income, which goes back into consumption and purchases, and the cycle goes on and on. When we purchase things made by people who are not employed by American companies, we provide employment for them and not for our own people. I bet you that by year's end the unemployment figures will skyrocket in this country. We might even see another 1930. I sure would like to see some legislation on these cheap imports. We just cannot afford to have our people jam the unemployment lines."

"I don't think things are that bad," said Judy. "Look, the deficit figure you just gave me, that $170 or so billion, that's really peanuts. That isn't even 5% of our GNP. Even if you were to add up everything that we buy from overseas it wouldn't amount to 7% of our GNP. Besides, no country can afford to close its borders to international trade. We are all interdependent. If we don't buy from overseas they can't buy anything from us. What will happen to all these farm products that our very efficient farmers produce? We have quite large surpluses, you know. And what about our airplanes and all the sophisticated military machinery that your friends are producing? Do you know how many shirts the South Koreans have to sell to us to earn the foreign exchange to buy one Boeing 747? I don't know myself, but I can guarantee you they must load that 747 several hundred times over with nicely made silk shirts. Their terms of trade are not that good, you know."

"If what you said is true," Rich answered, "how can we still buy things from the Japanese even though we have such a large deficit? Are they giving us credit because we are good guys, or what?"

"The Japanese are extending us credit, not because they think we are good guys, but because they think we are a good risk," said Judy. "Besides, they have to keep their people employed. Actually, the Japanese, the Germans, and other people with whom we have a trade deficit not only extend us credit to buy their products, but also loan us money to finance our own national debt. Some of the money needed to cover the deficit in our federal budget will come from American citizens like you and me. But a good portion of it will come from overseas. Foreigners invest in U.S. Treasury bills more and more every day. I just heard yesterday that when the Treasury Department auctioned some bonds the Japanese were the first ones to put in a bid for $5-6 billion. Just think—$6 billion in one day."

"That's another thing," Rich complained. "I've heard that foreigners own some half a trillion dollars' worth of assets across the country. And that doesn't include several hundred billion dollars' worth of commercial real estate and farmland, including forests in Oregon and apartments, hotels, and office buildings in Miami, New York, Atlanta, and Los Angeles. That really bothers me a lot. So many foreigners owning so much of the United States.... It seems like we are selling off our heritage—going back to the colonial days when everything belonged to the Europeans."

"Well, things aren't really as tragic as you make them out to be," said Judy. "So what if foreigners own that much land and other real estate? The United States is still the largest single international investor in the whole world. I bet if you were to add up all foreign investment in the United States it would not be more than 15% of the U.S. GNP or, for that matter, a mere fraction of the investment that the United States has overseas. We have some of the world's largest multinational corporations, you know.

"I wouldn't really worry about that foreign debt. At least we can pay the debt in dollars. Our currency is still strong—it's acceptable worldwide. If we were Brazil or some other country, and had to pay the foreign bankers in dollars because they didn't like our cruzeiros or pesos, we might have to worry that some bureaucrat from the IMF would come in and force us to take 'drastic measures' to increase our exports and limit our imports. But we own most of the IMF's money; we are beyond any kind of control.

"A few years ago I read a good article in The Wall Street Journal by Herbert Stein. He was the chairman of the Council of Economic Advisers under presidents Nixon and Ford. He said that even though he worries about the national debt, it doesn't really bother him that foreigners own a large percentage of it. I really liked his rationale. He said that almost everybody is better off because of the willingness on the part of the foreigners to lend money to the United States and the United States' ability to convince them to keep lending money. U.S. companies find cheap money readily; merchants buy cheap foreign goods easily; workers are getting more productive because of investments made by the U.S. companies with the foreign money; the government can keep inflation very low; and, of course, U.S. banks and brokers make a pile of money trading all these billions."

But listening to Judy hadn't convinced Rich. "As much as I respect your intellectual capacities, Judy, I must say that this time you really went off the deep end," he insisted. Then he brought up several questions that had occurred to him as she talked. These are listed below as issues for discussion.