IV. An Intensified Effort To Achieve and Maintain a Healthy United States Trade Surplus

A. Introductory Comments

The keystone of a sound international financial position for the United States and the dollar is a substantial trade surplus.

It is natural and desirable for a rich country like the United States to export capital, to give foreign aid, to provide its share of the common defense, and to have large numbers of its citizens traveling abroad. But all this is possible only if, in addition to income from foreign investments, the U.S. trade surplus is large enough to finance such expenses.

The U.S. has consistently had a trade surplus-an excess of exports over imports. In 1950-55, the surplus averaged $2.2 billion; in 1955-60 it averaged $3.8 billion; and in 1960-65 it averaged $5.2 billion. It reached an all-time high of $6.7 billion in 1964, but it narrowed in 1965 and dropped much further in 1966 when it reached $3.7 billion. There was some strengthening of our trade surplus in 1967 to approximately $4 billion. (See Chart VIII.)

Continued U.S. balance of payments deficits strongly suggest that the trade surplus has been inadequate. To determine what should be done about increasing it, we must first examine the basic forces affecting U.S. trade.

U.S. exports and imports are strongly influenced by the pressure of U.S. domestic demand, by changes in the U.S. competitive position, and by the economic growth and policies in our major overseas markets. What impact do these interrelated factors have on our trade?

1. U.S. Competitive Position in World Markets. As can be seen in Table 7, in the 1960's, U.S. unit labor costs in manufacturing declined slightly while those of our major European competitors rose significantly. If changes in relative costs were the only determinant of export performance, then we should have noticeably increased our relative share of world markets.

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TABLE 7.-Unit labor costs in manufacturing for selected industrialized countries

Ratio of wages and salaries (and including supplements) to production; national currency basis.
Preliminary.

NOTE. Data relate to wage earners in Italy and to all employees in other countries.
Sources: Department of Labor and Council of Economic Advisers.

In point of fact, the U.S. held its share of world trade between 1961 and 1964, as Table 8, shows.

Year

1961.

TABLE 8.-U.S. Share (%) of Total World Exports of Manufactures

1962.

1963.

1964

1965.

1966.

25.6

26.5

25.6

25.8

23.6

23.5

NOTES.-1. An adjustment for declassified U.S. special category exports was made by subtracting $1.0 billion from U.S. and world totals in 1965 and 1966. 2. Excludes intraEEC and intra-EFTA trade.

Source: United Nations Monthly Bulletin of Statistics November and December 1967.

In 1966 and probably in 1967, the U.S. competitive position was eroded by increases in U.S. labor costs. Another important reason for the decline in the U.S. share of world exports in the past two years has been the sharp difference in rates of economic expansion in Europe and the U.S.

2. Impact of Differences in Economic Expansion in the United States and Europe. The experience of the first half of the decade indicates the vital importance of sound domestic economic policies to growing U.S. trade surpluses. This is most clearly seen in an examination of the relationship of U.S. imports to the pace of U.S. economic expansion, as illustrated below:

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Source: Derived from Department of Commerce data.

As the annual growth rate in GNP (current prices) moves up, imports climb more than porportionately. In 1965 and 1966, a period in which GNP growth exceeded 8 percent per annum, our average growth in imports exceeded 16 percent per annum.

Clearly, it was not only the rate of increase of GNP that was the causal factor, but also the fact that the economic slack which had existed in the early 1960's was being taken up in 1965 and was completely eliminated in 1966. In short, if the United States can maintain a noninflationary pace of economic expansion, the growth in imports is likely to be much more moderate than in 1965 and 1966.

What happens in our major markets is obviously of great importance in determining the level of U.S. exports. When foreign economies-principally Western Europe and Canada-are expanding, total world markets are likely to be strong and U.S. exports are likely to rise with a general increase in world trade. Where expansion is weak as it was when it slowed markedly in Western Europe in 1966 and 1967-world trade and U.S. exports suffered. From 1960-63 to mid-1967, European industrial production increased only 26 percent while U.S. industrial production rose 36 percent-U.S. growth being more than a third faster. This was a major factor in the $1.7 billion decline in the U.S. merchandise trade surplus from 1961 to 1966.

3. Foreign Trade Policies.-Trade policy of foreign governments has an important impact on the U.S. trade accounts. The Kennedy Round, just completed, which will result in substantial reduction of barriers to trade, will strengthen national economies through expansion of both exports and imports. But, as far as we can now determine, this expansion will not basically alter the trade balance of any major country.

Other changes in trade policy, however, are not neutral in their impact on trade balances. In particular, recent changes in border tax adjustments-taxing imports and remitting taxes on exports—of some European countries, while consistent with the existing interna

tional rules of the General Agreement on Tariffs and Trade, will have an adverse effect on the U.S. trade balance.

B. Soundly Managing the U.S. Economy To Keep It Competitive and Stable

The above discussion shows the crucial importance to the U.S. trade balance of maintaining a noninflationary expansion in the United States. As in 1966, excessive increases in income-especially when we have full employment-will be quickly translated into higher prices and capacity bottlenecks with a resulting surge in imports and a slowdown in exports. We need the fiscal action proposed by the President on August 3, 1967-expenditures restraint and tax measures including surcharges on corporate and personal income taxes. The performance of our trade account in the last few years underscores the need for responsible financial management by the Executive Branch, the Congress, management and labor.

With the economy picking up momentum in 1968, and with cost and price pressures increasing, we are faced not with the assurance of a continued improvement in our trade surplus but the threat of another downward movement.

The recent devaluation of sterling and subsequent speculative pressures in the gold market-reflecting the view held by many that the U.K. move will put further pressure on the U.S. balance of payments position-reinforce still further the need for responsible action on the fiscal front.

All other efforts to improve our balance of payments position will be undermined unless we avoid the kind of excessive growth that floods us with imports and unless we return to relative price stability and cost competitiveness in the United States economy.

The prompt enactment of the President's tax increase program is the single most important and indispensable step this Nation can take now to improve our balance of trade and payments and protect the dollar and the international monetary system.

The role of the Federal Government in the maintenance of an economic environment in which price and cost stability can be sustained is widely recognized by international financial authorities. The Balance of Payments Adjustment Process Report by Workng Party No. 3 of the Organization for Economic Cooperation and Development stated:

"It is agreed that there are certain general principles (or 'rules of prudence') which should be followed by all countries in order to prevent as far as possible the emergence of balance of payments disequilibrium. In the field of demand management, it is agreed that it should be a general object of fiscal and monetary policy to maintain demand at a level which is neither excessive