Increased foreign trade and interdependence with foreign economies are good for the United States.
This statement used to be an article of faith in economics and politics but the events of the 1970s suggest that faith may be misplaced. Increased interdependence with the world economy has been a very mixed blessing.
The case for foreign trade is as old as economics itself. Each nation should specialize in producing the goods and services it does best so that all nations will benefit from an expanded world economy. In addition to the economic benefits of foreign trade, interdependence of the world economics is desirable on a social and political basis to promote understanding and peace. When the foreign trade component of the United States gross national product rose from 4 percent in 1960 to 10 percent in 1979, economists of all schools considered it a positive development.
But increased foreign trade means increased vulnerability if that trade is cut off for any reason. The oil embargo in late 1973 showed how vulnerable the U.S. economy has become, much to the discomfort of every motorist who ever waited in a gas line. The frightened reaction of Europe and Japan to recent events in Iran demonstrates how vulnerable their economies are to a cutoff of oil. Even the Russians must be reassessing their own vulnerability in light of the recent U.S. decision to curtail exports of food and technology.
Vulnerability applies to what we import as well as to what we can't. Imported inflation has been a major contributor to the domestic price spiral. Not only oil but a wide range of imported consumer and industrial products has added to inflation because of rising foreign prices and a falling U.S. dollar.
Competition from imports often means lost jobs for U.S. workers and lost sales for U.S. companies, particularly in the textile, auto and steel industires. In time the displaced workers should move to more productive and more competitive jobs, but that does not make the transition any less painful for an unemployed steel worker in Youngstown.
Not only have foreigners been successful in selling here, they have become active in buying here, too. U.S. real estate and corporations are favorite targets of foreign investors in a reversal of previous postwar pattern of U.S. companies purchasing foreign ones. The ability of foreign investors to buy U.S. assets is enchanced by a weak U.S. dollar.
The weak dollar also undermines our ability to pursue an independent economic policy. Britain suffered through bouts of tight money and slow growth in an effort to defend the pound, but few thought it ever could happen here. It did happen here in November 1978 and in October 1979 when the Federal Reserve raised interest rates to prevent a run on the dollar. The continuing need to defend the dollar is a major constraint on the Fed's ability to respond to U.S. domestic economic needs.
A major problem for the Fed is the growth of the Eurodollar market, which is a large and unregulated pool of offshore dollars. Although the Eurodollar market has contributed to the problems of inflation and currency instability, its chief danger lies in the potential for an international financial crisis and a wave of defaults on loans of the kind that occurred in the 1930s.
If the assets of U.S. banks are at risk in foreign markets, then so are the assets of U.S. multinational corporations. The decline in U.S. military power and political influence removed the umbrella that U.S. firms operating abroad once had.
The growth of foreign trade may be of questionable value on political grounds as well as economic ones. Even before President Carter curtailed trade with the Soviet Union, there was a good case to be made against strengthening the economy of a political adversary with infusions of U.S. technology. Shipments of food may be justified on humantarian grounds and on the basis of providing markets for U.S. farmers, but providing the Soviets with technology that they may use to our detriment is a questionable benefit of increased foreign commerce.
The cooling of relations with the Soviet Union demonstrates our own economic vulnerability. Now we have to find something to do with all the grain it was going to buy without disrupting U.S. markets and depressing the income of U.S. farmers. Because the Soviets and their East European satellites paid for much of their imports on credit, our banks which advanced that credit are vulnerable to default.