Page 216 - Global Political Economy_Understanding The International Economic Order

THE TRADI NG SYS TEM
One pernicious misunderstanding in the United States at the open-
ing ofthe twenty-first century is the idea that a nation’s trade deficit
is due to the “unfair trade practices” of a country’s trading partners.
Obviously, some countries do cheat and gain temporary advantage in
trade. However, a chronic trade deficit like the one the United States
experienced during much ofthe last quarter ofthe twentieth century
was due to macroeconomic factors and not to cheating by trading
partners. The trade/payments balance ofa country is a result ofa
nation’s spending patterns and is due, in particular, to the difference
between national savings and domestic investment. A country with a
high savings rate relative to its investment rate will have a trade/pay-
ments surplus. On the other hand, a nation with a savings rate that
is low relative to its investment rate will have a trade/payments defi-
cit. The behavior of a nation’s trading partner does not affect the
former’s trade/payments balance. In the 1980s and 1990s, the huge
and persistent trade/payments deficit ofthe United States was due
primarily to the low rate ofAmerican savings. Nevertheless, incor-
rectly blaming Japan for the deficit, in the early 1990s the Clinton
Administration launched an aggressive attack on Japan as an unfair
trader. 14
Another and equally unfortunate misunderstanding is the belief
that imports from low-wage developing countries are responsible for
increasing wage inequality in the United States and for unemployment
in Western Europe. Most economists agree on the facts regarding in-
come inequality in the United States. Late in the twentieth century,
income inequality increased significantly. Between the end ofWorld
War II and 1973, rapid economic and high productivity growth did
raise income uniformly for Americans of all income brackets, and
incomes approximately doubled. Between 1973 and the mid-1990s,
however, the pace ofincome growth slowed and income inequality
increased. Whereas median family income increased 10 percent be-
tween 1973 and 1999, income in the highest bracket (95th percentile)
grew more than a third while income in the lowest income grouping
(20th percentile) remained virtually unchanged, especially for women.
The real earnings ofmany low-wage and middle-class workers stag-
nated or experienced only modest gains, while the wealthier 20 per-
cent of American families gained greatly. In brief, after the 1970s, the
standard ofliving ofmany American workers grew very slowly, while
income inequality increased considerably.

14
This subject is discussed in Gilpin, The Challenge of Global Capitalism, Chapter 8.
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