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C00002 00002	%trade[w88,jmc]		Coercing Japan and others to buy American is a bad idea
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%trade[w88,jmc]		Coercing Japan and others to buy American is a bad idea

	Coercing Japan and other countries to buy American as a way of
reducing our trade deficit is a very bad idea for a political reason that
has not yet been mentioned.  Suppose we do it or are even supposed to have
done it.  We will then be held responsible for any economic misfortune
suffered by any country some of whose politicians can grease their path to
power by accusing us.  It won't even matter whether we have actually
achieved our trade objective.  Indeed it will be worse if we haven't
actually done anything, because then we won't have anything to withdraw
in order to mollify the foreigners.

	This consideration applies both to Gephart's proposals to be
tougher and to the milder jawboning now being done by the Reagan
Administration.

	If some of our industries suffering from foreign competition
can muster the political strength, we can protect them by tariffs or
exaggerated health and safety requirements.  That will harm the
our country on the average, as is shown by the usual arguments for
free trade.  However, it will help the specific industry --- both
its workers and the firms.  To the extent that we do it, we should
avoid criticizing any particular foreign country.

	Our foreign trade situation has the following characteristics.

	1. Our superior economic position after World War II had two
causes.  First, we were undamaged by the war.  Second our economy was
organized better than other countries, and we were better at innovation.

	2. This economic superiority inevitably declined.  Other
countries recovered from the war and learned our methods.

	3. Our position was sustained a few industries.  For example,
Boeing sells more than half the commercial airplanes in the free world.
Our agriculture is still the world's most efficient.  We had the world's
most successful design for nuclear reactors.  We started the semi-conductor
industry.  These industries maintained the value of the dollar long
after we were producing more expensive steel and cars than other countries.

	4. The value of the dollar is now sustained by an enormous
foreign inflow of capital caused by nervousness in many countries
of the world.  If you were a rich Taiwanese or Arab, you too would
want a substantial nest egg in the U.S.A.  Japanese also see safety
in diversifying the location of their capital.  This results in a
delay in the dollar reaching a value that corresponds to the relative
productivity of American and foreign industry.

	5. All this results in an unstable situation.  The dollar is
still overvalued in that a Japanese producing more cars per man
hour than an American is paid less per man hour than an American.
However, when the dollar reaches its correct value, some industries
that cannot presently compete will be able to do so.