The fallacy of economic security.

• Author: Kober, Stanley

THE CLINTON Administration has been looking for a new principle around which to formulate a foreign policy. Believing that military threats have diminished greatly since the end of the Cold War, Administration officials have focused on perceived threats to what they call economic security. "In the post-Cold War world, our national security is inseparable from our economic security," Secretary of State Warren Christopher told the Senate Foreign Relations Committee on Nov. 4, 1993, emphasizing "the new centrality of economic policy in our foreign policy." Indeed, he has indicated that economic security is his foremost priority, ahead of the fate of the former Soviet Union or nuclear proliferation.

The threat allegedly arises from the unfair trade practices of America's allies, which the U.S. indulged in the past because of the overriding priority of allied unity in the Cold War. As former Treasury Secretary Lloyd Bentsen has put it, "For four decades, we accepted protectionism elsewhere as the price of stability and winning the Cold War. But that day is over." With the demise of the Soviet Union, the U.S. is free to deal with the threat posed by protectionism, and it must do so for the sake of its economy.

"This is not tough for being tough," stresses U.S. trade negotiator Mickey Kantor. "This is tough on behalf of American jobs and the American economy."

By framing the argument in that manner, the Administration makes opponents of its position appear to be unpatriotic. After all, what American can be opposed to measures that promote jobs and the U.S. economy? The danger, however, is that the measures the Administration has been taking may not achieve that objective--indeed, they may have exactly the opposite effect. There are three fundamental problems with the policies designed to enhance economic security: the Administration's understanding of economics, and especially of trade; its appreciation of the current international economic situation, especially where Japan is concerned; and its assessment of the international political environment.

Over time, two types of capitalism have emerged. The first, typically called mercantilism, stresses the goal of national power and adopting regulation of economic life as the preferred means of ensuring the desired increase of wealth. Accordingly, the state should determine how surpluses are invested. The second is based on the market (i.e., on the people separately, rather than the government collectively, directing economic activity).

Although the Administration has supported the principles of free trade and the market economy, a closer examination indicates that it is guided to a large degree by mercantilist assumptions. For instance, although Clinton fought hard for the North American Free Trade Agreement, he did so primarily because he believed it would create American jobs, not because it would benefit the nation's consumers. The Administration's focus on expanding exports and its obsession with the U.S. trade deficit with Japan also are characteristic of mercantilist thinking.

Two points need to be made. First, the statistics on international trade can be misleading. For example, U.S. exports tend to be undercounted because customs agents understandably are more interested in accurately counting imports, on which they collect duties. Thus, Canada shows more imports from the U.S. than the U.S. shows exports to Canada. There also is the question of how the trade balance is calculated--it makes a difference whether the Japanese-American trade balance is valued in dollars or yen or by volume.

Similarly, the trade balance will differ depending on how trade is defined. The National Academy of Sciences suggests totaling companies' sales based on ownership, instead of the current practice of defining imports and exports depending on whether countries receive or ship goods. Using companies' sales, Commerce Department economists determined that the U.S. would have had an over-all trade surplus of goods and services of $164,000, 000,000 in 1991, instead of a $28,000,000, 000 deficit. Even if profits are substituted for sales of American companies abroad, on the theory that it is the profits that benefit domestic workers, the $28,000,000,000 deficit still turns into a $24,000,000,000 surplus. Newsweek estimated that the U.S. was running a trade surplus in the first quarter of 1992 if uncounted services were added to merchandise.

Second, a positive balance of trade is not necessarily a sign of economic health. For the first nine months of 1993, for example, Russia had a trade surplus of $14,300,000,-000, but no reasonable person would suggest exchanging the U.S. economy for Russia's.

During the 1980s, a number of books and articles appeared arguing that Japan was practicing a different, and superior, form of capitalism that represented a direct threat to the U.S. "The American Century is over," Clyde V. Prestowitz, Jr., a former U.S. trade negotiator, proclaimed in 1989. "Japan has . . . become the undisputed world economic champion with all the geopolitical power that implies."

Indeed, 1989 represented the high point of Japan's admittedly mercantilist policies. Alarmed by the runaway increase in asset values, the Japanese central bank began to raise interest rates, hoping to deflate gently the speculative "bubble." The bank had waited too long; consequently, Japan has suffered its worst postwar recession, which has cut the value of its stock market to approximately half of what it was in 1991. Company earnings have suffered an even greater decline, leaving the stock market more overvalued, on a price-earnings basis, than it was when the downturn began. Japanese property prices have been failing dramatically. Bill Sterling, manager of international economics at Merrill Lynch, estimates that Japan's real estate market has suffered a paper loss in excess of $10 trillion.

The Japanese are admitting the seriousness of their situation. "We have had two years of no growth, and it's becoming clear that what we are enduring is not merely a cyclical slump," Fumio Sato, president of Toshiba, noted in 1994. A 1994 Japanese government report maintains that, "if we are to develop a convincing blueprint for the Japanese economy of the 21st century, we must abandon existing economic policies, management styles, and ideas about living standards, and embark upon structural reforms of historical magnitude."

According to revisionists, Japan has a distinctive form of capitalism with three notable qualities: emphasis on expanding market share, targeting of critical industries, and low cost of capital. Those qualities are supposed to have given Japan a competitive advantage, but all of them have been brought into question.

In 1992, Massachusetts Institute of Technology economist Lester Thurow argued that it was wrong for the U.S. to disregard the supposedly predatory pricing of Japanese manufacturers. "This argument ignores what happens when an American industry is driven out of business" by those efforts to expand market share. "The Japanese business firm is not in the business of making permanent gifts to Americans. When competition is gone, prices rise."

If that were happening, though, Japanese firms should be showing the benefit of higher prices in...