- Historic Sites
Land Of The Free Trade
Foreign trade—import and export alike—has been indispensable in building America from the very start, and many of our worst economic troubles have arisen when that trade wasn’t free enough. A historic overview.
July/august 1993 | Volume 44, Issue 4
In the immediate postwar years the United States was the world leader in nearly all high-technology and capital-intensive industries, such as automobiles and electronics. But as Germany and Japan recovered from the war and other countries, such as Korea and Taiwan, began to develop modern economies, competition intensified.
Further, having to start from scratch and to capture markets that had been dominated by American companies, foreign companies were often much more innovative, both in design and in manufacturing techniques. Foreign companies, in other words, were lean and hungry. American companies, used to the easy profits in the post-war American market that they had largely to themselves, were all too often fat, dumb, and happy. Our automotive industry, for instance, was as late as the 1970s selling cars whose engineering had not basically changed since the 1940s.
America’s once-huge trade surplus in manufactured goods began to slip away. Our self-sufficiency in raw materials also rapidly eroded. The trade balance in such vital commodities as petroleum, iron ore, and copper turned sharply against the United States. For a while the reversal of trade flows was masked by an increase in agricultural exports. In 1959, however, for the first time in this century, the United States ran a trade deficit.
Within a decade such bedrock American industries as steel and automobiles were losing their shares of world markets as well. Gold began to flow abroad, and in 1971 the United States unilaterally severed the link between gold and the dollar. Inflation took off. Then came the sudden increase in the price of petroleum after the 1973 Arab-Israeli War. Foreign automobile companies, which had long met their local markets’ demands for small, efficient cars, invaded the American market and took increasing chunks of market share from the stunned American giants. American exports rose in volume and value thanks to agriculture, aircraft, and very high-tech equipment, such as supercomputers. But imports rose much faster.
By the early 1980s the United States was running the largest merchandise trade deficits since colonial times, and calls for protection were more loudly voiced than at any time since the Second World War. In fact, these deficits were offset by two other trends. One was that in intellectual trade and services, notoriously hard to quantify and measure but growing explosively in the late twentieth century, the United States was ever increasingly the world leader. In movies, television, books, and music—multibillion-dollar industries all—the United States was first by a very wide margin and holding its lead.
In computer software the United States had, for all intents and purposes, no competition at all. In 1975 William S. Gates, then nineteen, founded Microsoft on a shoestring. By 1992 he was the richest man in the United States, and Microsoft dominated the software industry around the world. Hundreds of other American software firms were prospering alongside it and exporting increasingly.
Second, foreigners were investing more and more in the United States. These capital inflows offset the trade deficits and helped to fund the profound restructuring of the American economy in the 1980s. Faced with intense competition from abroad and at home, thanks to free trade, American companies and unions had little choice but to cut costs and to innovate. The invisible hand moved. Wages were held down; layoffs in inefficient industries multiplied while total employment increased sharply; productivity in manufacturing soared. By 1988 the United States had become the low-cost producer in many industries, and American exports, as a result, were booming. In 1980 American merchandise exports were $220.6 billion (1991 dollars). In 1991 they were $421.9 billion.
Even the American automobile industry, once the glory of the American economy, and in much of the eighties the despair, has largely closed the gap in quality and cost with its overseas rivals. The domestic market share of American automobile companies is rising significantly, and the largest-selling car in the American market is, once again, American designed and built, the Ford Taurus.
Today the American overall trade gap has nearly vanished. Vanishing with it is a world economy made up of separate sovereign national economies. Industrial companies have been operating in many countries since the 1920s, but until the sharp drop in shipping and communications costs, such multi-national companies tended to act as collections of independent units. Today intracompany trade over national borders is growing by leaps and bounds, and the question of where a particular product is “manufactured” is becoming increasingly meaningless. AT&T is Taiwan’s largest exporter of electronics.
These multinational companies are rapidly becoming effectively stateless. General Motors, deeply troubled as it is, last year had worldwide sales of $132 billion, a “gross national product” larger than all but a handful of countries. In 1990 Philip Morris exported $3.1 billion from the United States, but its overseas subsidiaries had sales of more than $13 billion.