The summer’s renewed decline of the dollar against the yen, at long last making one US cent worth less than one Japanese yen, has once again concentrated public attention on America’s difficulties in international economic relations. Concerns along such lines were also widespread a decade or so ago, when a combination of surging American demand for foreign goods and weak demand abroad for American-made products resulted in an overall US trade imbalance that widened to record proportions. But in the mid-1980s the dollar was expensive in relation to most foreign currencies, and it was plausible to suppose that both the rise in US imports and the weakness of US exports were in large part just the consequence of an overvalued dollar. Today the dollar is cheap, yet America’s trade imbalance is once again large and growing steadily larger.
Not surprisingly, a much discussed question in recent months has been what, if anything, the Clinton administration intends to do to support the dollar, and what the administration intends to do to reverse the nation’s widening trade deficit. Also not surprisingly, much of this discussion has centered on America’s economic relationship with Japan. Although lately the dollar has fallen against other major currencies too, the major decline—12 percent since the beginning of this year—has been against the yen. And although America now has a trade deficit with many more countries than just Japan, in 1993 our $60 billion bilateral deficit with Japan accounted for almost half of the $132 billion overall US trade deficit. (The same $60 billion imbalance accounted for a modestly smaller share of Japan’s overall trade surplus, which amounted to $142 billion when measured in dollars.) By not intervening to support the dollar against the yen, is the Clinton administration deliberately pursuing a “cheap dollar policy” (which is the same as an “expensive yen policy,” although somehow nobody calls it that) in order to slow down Japanese exports and open Japanese markets to American products? If so, does this mean the administration has abandoned its highly publicized effort to gain access to Japanese markets by direct negotiations over restrictive trade practices?
And beyond these immediate questions about current policies and the specific actions they imply, which understandably absorb the daily attention of both the interested public and, especially, the financial markets, what about the more fundamental issues at stake? Should Americans care whether the dollar is expensive or cheap in foreign currency terms? Should we care whether we import more than we export, or vice versa? At a deeper level still, what does it mean for a nation to be competitive in the world economy, and why should we care whether America is competitive or not?
The conventional answer, at least among economists, is that Americans should care about such matters—but in specific ways, and for specific reasons, that are at odds with many of the suppositions on which…
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