[Congressional Record Volume 143, Number 158 (Monday, November 10, 1997)]
[Senate]
[Pages S12440-S12442]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   SIGNIFICANCE OF THE TRADE DEFICIT

  Mr. MOYNIHAN. Mr. President, there has been considerable discussion 
on the Senate floor in the last week in the matter of the fast-track 
legislation, as we refer to it, about the trade deficit and the size of 
the present deficit and the projections that it will increase.
  It has been suggested that this deficit began to take form in the 
context of the 1974 legislation providing fast-track authority to the 
President, and that to extend that authority would only be to continue 
and deepen that deficit.
  My very good friend from Maryland has been I think of this view. My 
colleague and friend from North Dakota has proposed a commission to 
look into the whole matter, which can do no harm as long as we keep to 
the economics of this matter as it is now understood.
  Many persons have opposed fast-track legislation because of the 
deficit, and it seems to me necessary, useful to put into the Record 
the fact that these are not in fact connected any more than in 1974 the 
fast-track authority represented some break in the Executive role in 
trade. It did not. From 1934 on, since the time of the Reciprocal Trade 
Agreements Act, the President has had one form or another of 
negotiating authority delegated to him by the Congress in the aftermath 
of the fearsome experience of the Smoot-Hawley Tariff Act of 1930, when 
we brought a tariff bill to the Senate floor and in the end disabled 
our own economy, or helped to do, and set the world economy into a 
downward spiral. If you would list five events that led to the Second 
World War, the Smoot-Hawley Tariff Act of 1930 would be one. And we 
have not had a tariff bill in the Chamber as such since 1930. We have 
proceeded in this mode, through periods of trade surpluses, trade 
deficits and relatively evenly balanced accounts.
  The most important thing to state is that the current trade deficit 
is not a result of trade policy. It is a result of budget policy. It is 
a result of the decisions which I think now are behind us in which 
during a long 15 year period we incurred an enormous national debt in 
consequence of a long sequence of very large budget deficits. This is 
not to say that the budget deficit is the only determinant of trade 
deficit, but it is the key indicator of the matter because it is the 
relationship between domestic savings, which until this year has been 
substantially reduced by annual Federal deficits in excess of $100 
billion, and domestic investment.
  That is the key, but not only factor in the sense of which, as 
economists would say, the trade deficit is a dependent variable. I have 
a chart to make this point. It is not any more complicated than most of 
the charts we bring to the floor these days in the age of television.
  In 1975, the United States was a creditor nation. We owned net 
foreign assets of some $74 billion. By 1996, we had become a debtor 
nation with a worldwide negative net investment of $871 billion. You go 
from a surplus to being a net debtor in the amount of almost $1 
trillion. Foreign investors have more capital in the United States than 
we have abroad on balance, and that reflects the increase in our 
Federal debt.
  In 1975, we had a Federal debt of $395 billion. In 1996, we had a 
Federal debt of $3.733 trillion. The net result was a trade deficit in 
a manner that is entirely predictable. What we understand about 
economics, the general consensus of economists is such that if you were 
to propose that such a change in net budget deficits would take place, 
the economics profession overwhelmingly would say then your trade 
balances will change in the same direction.
  It is also clear that foreign persons will end up with the dollars 
that we need to borrow. Given that our savings rate is so low because 
our deficits are so high, foreign persons will end up with dollars to 
lend us only if they export more to us than we export to them.
  Last week it was noted on the floor that an October 1997 report 
entitled ``The Trade Deficit: Where Does It Come From And What Does It 
Do?'' by Peter Morici, of the Economic Strategy Institute, a group 
founded in 1989, in effect challenged the traditional mainstream 
economic view that trade deficits are closely related to the imbalance 
between domestic savings and domestic investment. Again, I say, Mr. 
President, it is the mainstream view of economists that this is a 
pattern that is almost automatic; that the trade deficit is a dependent 
variable related to the level of domestic savings.
  I am not going to argue, dispute the fact that the causes of the 
trade deficit are complex. To quote from Dr. Morici's report, he says, 
``History seems to confirm the importance of multidirectional 
causality.''
  Here is an able economist looking at the conventional wisdom, which I 
have been setting forth, and saying, ``No, matters are more complex 
than that,'' which one welcomes. That is how any science, any field of 
inquiry advances. When persons challenge the accepted judgment of the 
time, sometimes a new paradigm emerges.
  But, in arguing the importance of multidirectional causality, Dr. 
Morici does not deny the importance of the deficits of the early 
1980's. He writes.

       . . . the combination of Reagan Administration tax cuts and 
     new defense spending increased the combined government 
     current and capital account deficit from $34 billion in 1981 
     to about $146 billion in 1983, and the demands imposed by the 
     U.S. Treasury on capital markets drove U.S. interest rates 
     well above German and Japanese levels.
       High U.S. interest rates served the purpose of attracting 
     foreign private investment to finance growing U.S. government 
     deficits. * * *

  I will take the liberty of repeating that sentence: ``High U.S. 
interest rates served the purpose of attracting foreign private 
investment to finance growing U.S. government deficits.''

       In turn, these foreign private capital flows created much 
     increased demand for dollars in foreign-exchange markets and 
     the real exchange rate for the dollar rose more than 50 
     percent. In large part, it was the appreciation of the dollar 
     that caused the trade deficit to rise from $16 billion in 
     1981 to more than $100 billion a year from 1984 to 1988.

  Dr. Morici's analysis points to the causality. It may be more complex 
than we now suppose, but basically, if you have as large a budget 
deficit as we ran in the 1980's, you will raise interest rates, your 
dollar will appreciate, and the result is a trade deficit.
  Earlier, I was commenting with my friend from Michigan, Senator 
Levin, that the strong dollar of the 1980's seemed to many people a 
statement that somehow we had a strong economy. Just the opposite. And 
Senator Levin suggested, if we can, we get rid of that usage ``strong 
dollar'' or ``weak dollar' as if they were some reflection on the 
general state of the economy as against the price of money, which is 
what it is all about.
  What has puzzled many is why the process has not reversed since we 
have brought the deficit down. Why hasn't the trade deficit declined as 
the budget deficit has declined? This is a fair question. However, 
economists have never argued that budget deficits caused trade deficits 
but, rather, that trade deficits result when domestic saving is not 
sufficient to support domestic investment.
  In the early 1980's, it was easy to identify the huge Federal budget 
deficits as the source of the savings shortfall. Now it is more 
complex, but let me note several factors. We have a strong economy with 
expansion now in its seventh year. For the first time in

[[Page S12441]]

10 years the growth of real gross domestic product has averaged more 
than 4 percent for four quarters. Not unexpectedly, with a strong 
economy straining at full employment, investment has increased over the 
past 5 years from about 9 percent of GDP to 10 percent as firms strive 
to meet demands by adding new plants. At the same time--and here is a 
mystery for which you will find no explanation on the part of this 
Senator--at the same time, private saving has declined from about 16 
percent of GDP to about 15 percent during this period. That is why, 
during the period 1992 to the present, the trade deficit as a 
percentage of GDP has not declined, even as the budget deficit has 
fallen dramatically.

  In an op-ed article last month in the Wall Street Journal, Robert 
Eisner, a distinguished professor emeritus at Northwestern University 
and former president of the American Economic Association, reminded us 
of the gains from trade that accrue to all nations. He wrote:

       The U.S. has the mightiest economy in the world, and 
     generally the most productive. The classical economic law of 
     comparative advantage, going back to David Ricardo, tells us 
     that, even if a country is more productive than other 
     countries in all areas, it can gain from trade. It does so by 
     specializing in those industries in which it has the greatest 
     advantage, and exporting their products. It then imports from 
     others the products of industries on which it has a lesser 
     advantage.

  Even though there is an advantage in both cases, you maximize by 
concentrating on the most pronounced.
  As Professor Eisner notes, the United States has the mightiest 
economy in the world. We are in a period of unprecedented economic 
expansion with real growth at 4 percent; unemployment at 4.7 percent, a 
24-year low; measured inflation of about 2 percent and a budget deficit 
rapidly approaching zero. Our economy is the envy of Western Europe and 
Japan. On average, G-7 countries have roughly half our growth rate and 
half again as much unemployment.
  While undesirable in the long run, our trade deficit has not 
undermined our economy. As the chart makes clear, there appears to be 
no relationship between the size of the trade deficit and the 
unemployment rate. The unemployment rate has gone up and down, up and 
down. It was very high in the early 1980's when the interest rates were 
very high, and the Federal Reserve Board undertook to break the 
inflation at the time, and now down to the lowest level in 24 years. In 
the meantime, this trade deficit has grown. But as should be very clear 
from this chart, there is no relation one to the other. It is not a 
causal relationship of any kind. At least, it has not been established 
as such, and I do not think it is possible to do so.
  U.S. industrial production increased 18 percent from 1992 to 1996. 
Over the same period, U.S. manufactured goods exports increased 42 
percent, agricultural exports grew by 40 percent, and service exports 
by 26 percent. These are not the signs of economic weakness, 
notwithstanding the trade deficit.
  Finally, I make the point that if there is one cloud over the horizon 
with respect to the trade deficit, it is the looming retirement of the 
baby boom generation. With this in mind, I agree that it would be 
preferable to run trade surpluses to accumulate assets abroad so that 
the burden of financing the retirement of the baby boom generation can 
in part be financed with earnings from those foreign assets. Last week 
I introduced a Senate resolution which resolved that:

       It is the sense of the Senate that:
       (1) any unified budget surpluses that might arise in the 
     current expansion should be used to reduce the Federal debt 
     held by the public; and
       (2) to achieve this goal during this economic expansion 
     that there be no net tax cut or new spending that is not 
     offset by reductions in spending on other programs or tax 
     increases.

  Adoption of that resolution and the policies it suggests will 
increase national savings, as we should during an expansion phase of 
the business cycle. Even if one believes, as the Economic Strategy 
Institute report suggests, that mainstream economic theory does not 
adequately explain the trade deficit, that view does not require one to 
oppose fast track. In fact, Mr. Clyde Prestowitz, president of the 
Economic Strategy Institute, supports this legislation. In an op-ed 
article in the Washington Post last month, Prestowitz wrote:

       Congress must give the President fast track. It is 
     inconceivable that the United States will not be at the table 
     when the globalization cards are dealt.

  Inconceivable last week. Very near to probable today, I have to say 
with great regret. But it is a point to be made that in the U.S. 
Senate, by 2-to-1 margins, we have supported fast track, and should 
there be a change of spirit in the other body, we will be here in that 
same position, hoping to be of service and knowing the consequences of 
failure on all our parts.
  With that, Mr. President, I ask unanimous consent the Prestowitz 
article be printed in the Record, and I yield the floor.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                [From the Washington Post, Oct. 9, 1997]

                        Keeping On Top Of Trade

                         (By Clyde Prestowitz)

       President Clinton needs the ``fast-track'' authority he has 
     requested from Congress to keep the United States involved in 
     the critical international negotiations that are reshaping 
     the world economy. But to persuade reluctant members of 
     Congress to go along and to be able to negotiate effectively, 
     he also needs to articulate a comprehensive, concrete global 
     action plan.
       Today's trade negotiations are akin to the arms talks of 
     the Cold War era, for in the age of geo-economics they will 
     determine the balance of power just as surely as did the 
     political and military bargaining of the past. The United 
     States must be at the table when the deals are being done.
       Just as important, however, is the ability to deal 
     intelligently from a position of strength and to ensure 
     actual fulfillment of bargains once they are struck. So far 
     the fast-track debate has focused on whether or not the 
     president should be compelled to demand adherence to certain 
     environmental and labor standards by our trading partners. 
     These are no doubt important issues and worthy of debate, but 
     they are likely to be irrelevant if the United States is not 
     equipped to analyze, negotiate, monitor, finance and enforce 
     potential deals as well as its trading partners.
       In the past, this has not always been the case, and as the 
     administration now requests authority to enter the most 
     complex trade talks it has ever attempted with China, Latin 
     America and the World Trade Organization, the shape of the 
     U.S. global economic team and effort can only be described as 
     anemic.
       For example, the President's Commission on Trade and 
     Investment in Asia, on which I served as vice chairman, 
     reported in April that despite rapidly rising exports, U.S. 
     firms are actually losing market share in Asian markets 
     because U.S. exports are not keeping up with market growth. 
     Indeed, during the past 10 years, the growth of European 
     exports to Asia has far outstripped that of U.S. exports. 
     Reasons for this were found to be inadequate. Export-Import 
     Bank financing, the virtual elimination of U.S. aid donations 
     in the region, the absence of U.S. concessionary loans, the 
     closure of consulates and inadequate staffing of business-
     promotion positions at U.S. embassies.
       Beyond these inadequacies in Asia is the fact that the U.S. 
     international economic team in Washington is too lean to be 
     mean. In the Office of the U.S. Trade Representative, only 
     two professionals make up the staff of the section dealing 
     with all of the negotiations with China. The Commerce 
     Department's China office has only four people left after 
     recent budget cuts. The trade representative's Japan office 
     also has only two people to deal with the enormous range of 
     issues that continually arise with Japan. Six attorneys 
     struggle to keep on top of the 36 cases the United States is 
     currently litigating in the World Trade Organization.
       Another example of U.S. organizational weakness became 
     apparent last year when the American Chamber of Commerce in 
     Japan conducted an evaluation of all the various trade 
     agreements between the United States and Japan over the past 
     20 years. This turned out to be a more difficult task than 
     initially anticipated because chamber officers could find no 
     one in the U.S. government who had even a list of all the 
     deals--much less any idea of whether their terms actually 
     were being observed. After the chamber complied its own list 
     and polled industry negotiators, along with current and past 
     government negotiators, it concluded that, of 45 agreements, 
     only 13 were being fully implemented. Based on its review, 
     the chamber made several recommendations regarding how to 
     achieve better success in future negotiations. Among other 
     things it called for concrete, measurable objectives, better 
     industry and country knowledge and language skills among U.S. 
     negotiators, and persistent follow-up of agreements once 
     made. With the U.S. trade deficit with Japan exploding again, 
     these recommendations take on added urgency.
       Congress must give the president fast track. It is 
     inconceivable that the United States will not be at the table 
     when the globalization cards are dealt. But the United States 
     also must have the means and a plan to mount a serious 
     international economic

[[Page S12442]]

     effort rather than simply negotiating agreements that are not 
     enforced and that no one remembers.

  Mr. BENNETT addressed the Chair.
  Mr. LEVIN. Will the Senator from Utah yield for a unanimous-consent 
request? I ask unanimous consent that immediately following the remarks 
of the Senator from Utah, that I be recognized for up to 15 minutes in 
morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. BENNETT. Mr. President, may I inquire as to the parliamentary 
circumstance? Are we in morning business?
  The PRESIDING OFFICER (Mr. Burns). The Senator is correct. The Senate 
is in morning business with Senators permitted to speak for up to 10 
minutes.
  Mr. BENNETT. May I ask unanimous consent that I be allowed to 
continue for up to 20 minutes, if that becomes necessary?
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from Utah is recognized.
  Mr. BENNETT. I thank the Chair.
  (The remarks of Mr. Bennett pertaining to the introduction of S. 1518 
are located in today's Record under ``Statements on Introduced Bills 
and Joint Resolutions.'')
  Mr. JOHNSON. Mr. President, I ask unanimous consent to speak in 
morning business immediately following the remarks of the Senator from 
Michigan.
  The PRESIDING OFFICER (Mr. Thomas) Without objection, it is so 
ordered.
  Mr. LEVIN addressed the Chair.
  The PRESIDING OFFICER. The Senator from Michigan is recognized for 20 
minutes.
  Mr. LEVIN. I thank the chair.

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