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THE UNITED STATES IN
il.
THE CHANGING WORLD ECONOMY
Reproduced at the Richard Nixon Presidential Library and Museum
THE UNITED STATES IN THE CHANGING WORLD
ECONOMY
Statistical Background Material
This material provided the basis for briefings to the
President and the Council on International Economic
Policy during the year 1971. The first major brief-
ing which included much of this material, was on
April 8, 1971.
Peter G. Peterson
Assistant to the President for
International Economic Affairs;
Executive Director, Council on
International Economic Policy
December 27, 1971
the Richard Nixon Presidential Library and Museum
TABLE OF
CONTENTS
OVERALL TRENDS
page
I. OVERALL TRENDS
1
Share of World Gross National Product
2
Economic Growth and Investment
4
Growth in Capability
5
International Reserves
6
World Exports
7
II. TRADE TRENDS
9
US GNP Goods and Services
9
Exports in Relation to Production
10
US Foreign Trade
11
US Foreign Trade Trends -- By Product Categories
13
US Foreign Trade Trends -- Agriculture
14
US Foreign Trade Trends Minerals and Resources
15
US Foreign Trade Trends Manufactured Products
16
US Ratio of Exports to Consumption - Manufactured
Products
17
US Trade Trends - By Geographical Area
18
US Trade with Canada
18
US Trade with the European Community
19
US Trade with Japan
20
-i-
Reproduced at the Richard Nixon Presidential Library and Museum
page
Direction of Trade
22
Free World Trade with the USSR and Eastern Europe
23
III.
WORLD TRADE BARRIERS
24
Average Tariff Rates
25
Quantitative Restrictions on Agricultural Imports
26
Industrial Imports from OECD Countries Subject to
Quantitative Restrictions
27
Non-quantitative Non-tariff Barriers
28
IV.
BALANCE OF PAYMENTS
29
Introduction
29
US Current Account Balance
31
US Basic Balance
32
US Basic Balance of Payments Trends
33
US Basic Balance - -- Regional Composition
37
Liquidity Balance
38
Official Settlements Balance
39
Trends in US Liquid Foreign Assets and Liabilities
40
US Foreign Assets and Liabilities
41
V.
US DIRECT INVESTMENTS ABROAD
43
US Investment Trends (Plant and Equipment)
45
-ii-
page
US Direct Exports Versus Sales of US-Owned
Foreign Affiliates
46
OVERALL TRE NDS
The Multinational Corporation
47
VI.
LESS DEVELOPED COUNTRIES (LDCs)
49
Growth of Free World GNP
49
Per Capita GNP
50
Free World Financial Flows to LDCs
51
US Trade with Free World LDCs
52
Economic and Export Growth in Less Developed
Countries
53
VII.
US USE OF NATURAL RESOURCES
55
VIII.
OECD COUNTRIES ROLE IN THE WORLD ECONOMY
56
IX.
THE JAPANESE ECONOMIC MIRACLE -- A SPECIAL
REVIEW
57
Government-Business Partnership
57
Utilization of Capital Resources
58
Labor Resources
60
The "Lifetime Employment" System
61
Full Capacity Policy
63
Japanese Technology
65
Japanese Export Promotion Policy
66
-iii-
Reproduced at the Richard Nixo Presidential Library and Museum
page
Industrial Product Specialization
67
Government Business Partnership & Two Case
Studies
68
Japanese Natural Resource Requirements
71
- 1V -
Reproduced
sidential Library and Museum
- 1 -
I. OVERALL TRENDS
In seeking to understand the striking changes in the inter-
national economy since World War II, we will examine the decade
of the 1950s, when the Marshall Plan and other postwar recon-
struction plans were being implemented; the 1960s, when much of
this reconstruction was completed; and the early 1970s, which begin
the decade of "economic co-equality."
As this appendix quantifies some of the changes in the world
economy only since World War II, we should remember that the fre-
quent use of 1950 as a base year could lead to some distortea con-
clusions unless adequate allowance is made for the unusual and very
different circumstances which leading countries found themselves in
at that time. In 1950, Europe and Japan had had only a few years to
rebuild their war-torn economies. The U.S., on the other hand, was
in a much stronger position. Thus, during the 1950s, starting from
a much smaller but previously strong base, we would have expected
other industrialized countries to show more rapid growth in virtually
all respects--GNP, exports, etc. Thus, comparisons over more
recent periods, say the sixties, or the late sixties, are sometimes
more valid.
Further, since different countries might during any given
period have different growth potentials, for a variety of reasons,
simple absolute comparisons of growth rates may overlook the
quality of the economic performance in more meaningful and more
relative terms--i.e., in relation to a country's full potential.
Library and Museum
- 2 -
SHARE OF WORLD GROSS NATIONAL PRODUCT
The growth of world gross national product (GNP) and
the decline in the US share--from more than 39% to 34% are
features of Chart 1. Certainly, a reduction of the US share was
to be expected in the 1950s as the postwar reconstruction took
place. This decline has continued in the 1960s; our share dropped
to 30% by 1970. Nonetheless, we should not forget that from 1950
to 1970 the US has shown very substantial growth--from a GNP of
$285 billion in 1950 to $977 billion in 1970; and the absolute differ-
ence between the US GNP and that of other nations has grown since
1950. Further, the GNP share of the US is still the largest of any
nation--by far. Still, we should not too quickly explain away our
economy's lack of any significant real GNP growth in the latter half of the
sixties.
The share of the European Community (EC) has grown
steadily--approaching 15% by 1970. The United Kingdom's share
has declined in both decades. In the last ten years alone, the
decline has accelerated--a 25% decrease in GNP share from nearly
5% to 3. 6%. Even so, when one adds the United Kingdom to the
present EC and considers the other countries now being considered
for entry, the expanded EC accounts today for nearly 20% of the world's
GNP.
The growth of Japan since 1950 is unique. Historians will
relate that few other countries, if any, have ever grown so much so
fast. Japan's share of world GNP has about doubled every ten years
and stands in 1970 at more than 6% -- even though it began in 1950
with only 1. 5% of the world's GNP. Since 1955, Japan's GNP has
grown annually about 15% in current prices and about 10% in real
terms. Industrial production has increased even more rapidly.
To provide a further sense of postwar advance, Charts 2 and 3
show indexes of real GNP growth and industrial production for Japan,
the United States, the United Kingdom, Italy and West Germany. The
United Kingdom has lagged in rates of growth during all this past
decade. In recent years the United States has shown a slower rate
of growth than all except the United Kingdom.
The GNP share of the less developed countries (LDCs) has
increased slightly since 1950, but the gap between their per capita
income and that of the developed countries has widened because of
more rapid population growth in the LDCs.
- 3 -
Data on the GNP of the People's Republic of China are
necessarily estimates. These estimates show that their share
of world GNP has remained steady at about 4% for 20 years. In
fact, some contrast is provided by China and Japan; in 1950, China
was producing nearly three times as much as Japan; but by 1970,
Japan was producing about 55% more than China with only one-
World GNP
eighth the population.
The Soviet Union has increased its share slightly, although
100%
100%
100%
more slowly during the 1960s than during the 1950s. The Soviet
share is now 16-1/2% of world GNP.
39.3%
33.9%
30.2%
United States
14.8%
12.7%
11.1°
European Community
3.6%
4.8%
6.2%
United Kingdom
5.0%
2.9%
Japan
1.5%
10.9%
9.7%
10.5°
Other Developed
9.5%
10.0%
9.1%
Less Developed
5.3%
5.0%
Other
6.0%
4.5%
4.0%
China
4.0%
Communist
155
16.5%
USSR
135
1950
1960
1970
Trillion US $
$0.7
$1.5
$3.2
(current prices)
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 2
Index of Real GNP Growth
300
(1960 = 100)
287
Japan
250
200
173
Italy
159
West
Germany
150
148
United
States
130
United
Kingdom
100
1960
62
64
66
68
70
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 3
Industrial Production Index
400
(1960 = 100)
370
Japan
350
300
250
200
200
Italy
176
West Germany
161
United States
150
131
United Kingdom
100
1960
62
64
66
68
70
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 4
4 -
ECONOMIC GROWTH AND INVESTMENT
One critical factor in economic growth is the rate of invest-
ment. In the last few years, as Chart 4 shows, Japan has plowed back
39% of its total GNP, or twice the rate of US investment (18%). This
Gross Investment as a Share of GNP
does not tell the whole story, however, since these investment data
include housing - - which clearly received less attention in Japan. The
(1968-70 Annual Average)
rates of machinery and equipment investment in Japan, as well as in
Germany have in fact been two times that in the United States (Chart 5).
Japan's high rate of investment is aided by several key factors.
United States
18%
First, high rates of consumer savings--which last year ran about 20% of
Japanese personal income, compared with about 7% in the United States.
Put another way, Japanese consumers have more inclination than
Americans to defer the enjoyment of their incomes, and they allocate
United Kingdom
19%
much less to a currently improved standard of living. Second, Japan has
much lower defense expenditures, now just over 0. 8% of GNP--about
one-tenth of our rate of 8% of GNP (Chart 6). Third, lower Japanese tax burdens
reflect both lower defense spending and less social investment (Chart 7).
Italy
21%
Other major industrialized economies in Europe have also
invested a greater share of output than the United States. For example,
Germany, France, and the Netherlands--which maintain a variety of
Belgium
23%
investment incentives--invest 8 to 9 percentage points more of their
GNP than the United States, or more than 25% of GNP compared with
our 18%. Defense expenditures were 5. 6% of GNP for the United Kingdom,
3. 8% for France, and 2.9% for West Germany.
Canada
23%
Earnings are one of the important determinants of business
investment; a decline in profits not only hinders economic activity but
Netherlands
26%
also slows the rate at which new technology is acquired. Thus, recent
lower profits of American corporations have hindered US investment
in new plant and equipment. From 1969 to 1970, pre-tax earnings of manu-
facturing, service, and other non-financial corporations fell both in abso-
France
27%
lute amount and in percentage share of GNP, as shown by Chart 8. In
1970, profits in manufacturing reached their lowest level in three decades,
as a percent of GNP.
West Germany
27%
Japan
39%
Investment includes private and government.
Reproduced at the Richard Nixon ential Library and Museum
Gross Private Investment in Plant and
Equipment as a Share of GNP
(1968-70 Annual Average)
20%
19%
18%
13%
10%
United
Canada
France
West
Japan
States
Germany
Chart 6
Military Burden
Military Expenditures* as a Share of GNP, 1970
Japan
0.8%
Italy
2.6%
West Germany
2.9%
France
3.8%
United Kingdom
5.6%
United States
7.8%
USSR
8%
(Est.)
*Excluding nonmilitary space and atomic energy.
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 7
Tax Burden
Tax Receipts* as a Share of GNP, 1969
Japan
20%
Canada
29%
United States
29%
United Kingdom
33%
West Germany
35%
France
39%
*Including federal and local authorities.
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 8
Profits of US Nonfinancial Corporations
Billion US $ Before Taxes
100
80
Total
$70
Other Nonfinancial
Corporations
60
$63
Transportation,
Communications, and
Public Utilities
$44
1
40
5.8%
of GNP
t
t
3.3%
4.7%
of GNP
20
of GNP
t
4.4%
of GNP
Manufacturing
o
1956
58
60
62
64
66
68
70
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 9
5
GROWTH IN CAPABILITY
There have been some important structural or qualitative
World Production of Motor Vehicles and Steel
shifts reflecting increasing capability in the rest of the world. For
example, the gains made by other countries in two key manufactures--
Percent of World Total
steel and motor vehicles--are seen in Charts 9 and 10. The US share
of world motor vehicle production fell from 76% in 1950 to 48% in 1960,
to 31% in 1970. Japan's share of both manufactures has risen the
Motor Vehicles
fastest during the past decade--from 2% to 17% for motor vehicles and
100%
100%
100%
6% to 16% for steel.
76%
48%
31°
United States
Chart 10 portrays the production of raw steel measured in
tons. It shows J apanese production moving from the 1950 base of less
than 5 million tons (artifically low, of course, because of the devast-
ation of steel plants during the war) to over 93 million tons in 1970.
17%
Japan
Japan's economic projections suggest that by some time in the middle
seventies it might pass the US in steel output, and perhaps be the world
2%
12%
12%
leader.
West Germany
9%
9%
France
The EC has also recovered from World War II and its steel
7%
11%
United Kingdom
2%
output (with the United Kingdom included) has already surpassed ours;
6%
3%
Italy
in 1971 the USSR will top the United States in steel production.
8%
4%
4%
2%
Canada
1%
4%
12%
14%
Other
6%
Technological capability is, of course, another dimension of
overall industrial capability. It is obviously difficult to quantify this
1949-50
1959-60
1969-70
in a single chart, but a variety of studies show that other countries
Annual Average
Annual Average
Annual Average
have made major progress in reducing the so-called "technological
Steel
gap. Patents are one indication--bu only one--of technological
100%
100%
100%
strength. Below are data on applications to the U.S. patent office
and the growing share that are of foreign origin. Clearly, the U.S.
46%
28%
20°
leads and, just as clearly, the foreign share of these applications is
United States
growing significantly. As can be seen, the U.S. patent applications have
19%
increased slightly during the entire decade of the sixties, while patent
applications from foreigners have nearly doubled.
19%
USSR
16%
APPLICATIONS TO US PATENT OFFICE
Japan
14%
6%
10%
2%
8%
West Germany
Total
Foreign as
6%
7%
5%
(thousands)
US
Foreign
% of US
United Kingdom
9%
4%
5%
1961
83.1
66.0
25.8%
France
17.1
4%
25%
28%
1962
85.0
66.8
18.3
27.4%
19%
Other
1963
85.7
66.6
19.2
28.8%
1964
87.6
67.0
20.6
30.7%
1965
94.6
72.3
22.3
30.8%
1950
1960
1970
1966
88.3
66.6
21.7
32.5%
1967
87.9
63.8
24.0
37.7%
1968
93.1
66.8
26.3
39.3%
1969
98.4
67.9
30.5
44.9%
1970
103.2
76.2
27.0
35.4%
1971(est)104.
74.0
30.0
40.5%
Reproduced at the Richard Nixon sidential Library and Museum
Production of Raw Steel
Million Metric Tons
140
137.3
120
119.1
115.8
United States
100
93.3
87.8
80
European
Community*
60
48.4
USSR
40
27.6
20
Japan
4.8
o
1950
55
60
65
70
*Including the United Kingdom.
Chart 11
6
INTERNATIONAL RESER VES
Though the world's supply of international reserves almost doubled in
20 years, to a total of $92 billion in 1970 (Chart 11), this growth did not keep
pace with growth of GNP or the advance in world trade; reserves therefore
International Reserves*
fell as a percent of trade. In fact, GNP more than doubled in the 1960s
while reserves increased about 50%. The extraordinary growth in reserves
Billion US $
$115
from the end of 1970 to August 1971 is importantly attributable not only to
growing deficits in the US basic balance of payments, but also to speculative
$12.1
10.6%
flows of dollars into foreign currencies.
United States
The US share of international reserves declined from almost 50% to less
$4.8
4.2%
United Kingdom
than 16% in only 20 years. Much of the loss during the 1950s was to be
expected as other countries built up reserves from their abnormally low
$92
$37.8
32.9%
level of the immediate postwar period. The declining US share during the
$14.5
15.7%
1960s was largely due to the demand for additional international liquidity,
which was supplied mainly through our balance-of-payments deficits.
European
It should also be noted that the US share of international reserves is affected
Community
by the role of the U.S. dollar as the world's major reserve currency: when
$2.8
3.1%
the United States incurs balance-of-payments deficits, the resulting dollar
$30.0
32.5%
outflows become part of other countries' reserves. But when we have
surpluses, the returning dollars do not add to our reserves; instead overall
$61
world reserves decline.
$19.4
31.9%
$12.5
10.9%
The United Kingdom, whose pound sterling is a minor reserve currency,
has seen its reserve share drop from 6% to 3% in only ten years. The share of the
$49
Japan
present EC grew from about 6% of reserve holdings in 1950 to 26% in 1960 and 33%
$24.3
49.8%
$5.0
4.3%
Canada
in 1970. Its 1971 share was more than three times that of the United States. As
$4.8
5.2%
a measure of the rate of change in the international economic environment,
$6.6
5.8%
$3.7
6.1%
Switzerland
recall that less than 20 years ago there was concern about a dollar shortage in
$4.7
5.1%
$15.9
26.3%
Europe.
$5.1
5.6%
$15.3
13.3%
$12.1
13.1%
Other Developed
Japanese reserves have been growing rapidly from about 1% of the world
total in 1950 to 11% in 1971. By the end of 1970, Japan's reserves stood at
$3.4
7.1%
$1.9
3.2%
$4. 8 billion, and mainly because of a burgeoning trade surplus and the efforts
$3.0
6.1%
$2.0
3.3%
$0.6
1.2%
$208
180%
$1.8
3.8%
$2.3
3.8%
of Japanese firms to hedge against yen revaluation, her reserves topped the
$18.2
19.7%
$16
3.2%
$5.6
9.3%
$12 billion mark by August 31, 1971. LDCs markedly increased their reserves
$4.3
8.8%
Less Developed
in the 1960s--a significant part of these increased reserves accrued to oil-
$9.7
200
$9.7
18 1%
producing countries.
If one were to probe more deeply into the purpose of international reserves,
1950
1960
1970
Aug 1971
one would see that some countries are holding more reserves than needed for
liquidity requirements. (This can be seen by examining the high ratio of reserves
*Including gold, SDRs, reserve position in the IMF, and foreign exchange.
to trade in certain countries.) The International Monetary Fund System assumed
periodic devaluations and revaluations of foreign currencies to maintain payments
balance. The reluctance to revalue (because of revaluation's adverse effect on
the foreign prices of a country's exports), has built into the international monetary
system significant structural inequity and rigidity.
Reproduced at the Richard Nixon Pre
ntial Library and Museum
- 7 -
WORLD EXPORTS
Ours is a world of rapidly expanding trade--a fivefold increase in only
20 years (Chart 12).
A strong export position can be one important indication of a country's
competitive position. Exports are sometimes an early point of contact with
technological developments of competing countries and are therefore an
indication of technological advantages. Furthermore, increased exports
permit greater specialization and hence higher standards of living for the citizens
of the trading nations. Finally, exports sufficient to achieve balance of payments
equilibrium make it possible for countries to earn "the foreign exchange" with
which to buy imports--which, in turn, can make a large contribution to a real
standard of living. We must avoid therefore any inference that exports are
"good" and imports "bad." Our ability, through expanding and balanced trade,
to buy more imports helps achieve a fundamental purpose of trade--improving
the consumer's standard of living.
The US share of world trade has fallen slightly--about one percentage point
in each of the past decades--and is now about 14%. (Looked at in another way--
comparing the overall growth in exports during the 1960s among leading
industrialized countries shows that the US has lagged in manufacturing
export growth -- Chart 13.)
The growth in the EC's share of world exports has been from 15% in 1950
to 28% in 1970, including trade among EC members. If the other countries that
are being taken into the expanded EC are included, the enlarged EC will
account for nearly 40% of world trade. It will account for 50% of world trade
in industrial products, or three times the US share. In 1970, a single country,
Germany, slightly surpassed the United States as the leading exporter of
manufactures, with exports in this category exceeding $30 billion.
About half of the EC's trade, however, is among its members. But even
ignoring internal trade, the expanded EC would account for as much as 40%
more trade than does the United States.
The EC's internal trade has been growing about twice as fast as its external
trade, and many attribute this growth to the absence of internal barriers.
A question for the future is the extent to which EC trade will stimulate total
world trade, and how much of its activity represents diversion of trade within
the EC.
Since 1950 the UK share of world exports has dropped from 10% to 6%.
Japan's has risen from 1% to 6%. Japan's record of export growth is unmatched
among industrialized nations--an annual growth of 19% over the past 20-year
period. In only 20 years, the ratio between these two countries' exports has
shifted from ten to one in the United Kindom's favor to one of relative equality
today.
Pres ential Library and Museum
Chart 12
8
The LDCs' share of exports dropped from 33% to 19% in
the 20-year period, partly because of the sharp decline in raw
material prices from the high (1950) levels of the Korean War and
partly because the LDCs have not shared significantly in the growth
World Exports
of trade in manufactured goods.
The Soviet share has stayed at 4% for more than a decade,
100%
100%
100%
and two-thirds of this represents exports to other Communist coun-
16%
15%
14%
tries. Unlike the Western industrialized countries, the Soviet Union
has in the past rejected economic interdependence, apparently fear-
United States
ing the vulnerability that such relationships imply. Also, it is probably
true that some Soviet products may simply be less attractive values
23%
28%
15%
than those of other countries.
European Community
The People's Republic of China's very small share of world
exports--less than 1% is almost the same as it was ten years ago.
Again, the comparison with Japan is illuminating. Twenty years ago,
10%
United Kingdom
these two countries were at a standoff in world exports. In 1970, Japan
exceeded China's exports by almost 7 times. On the other hand, China
8%
Japan
1%
has enormous resources land, raw materials, and people and
16%
6%
large potential for future growth and development.
3%
Other Developed
6%
15%
15%
33%
23%
Less Developed
19%
7.5%
7.3%
Other
5%
Communist
1.5%
0.9%
China
1%
USSR
3%
4%
4%
1950
1960
1970
Billion US $
$62
$130
$310
Exports within the European Community accounted for 31% of total
EC exports in 1950; 35% in 1960; 48% in 1970. In 1970, Soviet
exports to Communist countries accounted for 65% of total exports.
Reproduced at the Richard Nixon Pre lential Library and Museum
9
II.
TRADE TRENDS
US GNP -- GOODS AND SERVICES
In considering the future of trade, long-term data show that
the United States is becoming an economy with a high proportion
of its output in services. Goods are becoming less important in our
US GNP: Goods vs Services
total economic output, and employment has been shifting to services
occupations.
Billion US $
By 1970, services made up about 40% of our output, but these
$284.8
$503.8
$974.1
industries employed about 60% of the labor force (Chart 14). This
Services
trend raises some important questions about the future structure of
Including
our economy. Increasing productivity in services is much more
transportation,
difficult than in manufacturing. Some economists predict and view
communications,
with equanimity the United States' international future as a "mature
wholesale and
creditor" -- engaged largely in services, drawing income from
foreign investments, and importing more goods than it exports.
retail trade,
Others are disturbed by this trend, and ask: To what extent is such
rentals, and other
$87.0
30.6%
an occurrence in our national interest? How dependent can a coun-
nongoods items
try be on services and goods produced by others and still be a world
$197.8
69.4%
$187.3
37.2%
power? Will investment income grow sufficiently to make it possible
Goods
$316.5
62.8%
to have balance-of-payments equilibrium with significant trade
$410.3
42.1%
Including
deficits? More positively, what kind of economy and, in particular,
$563.8
57.9%
manufactures,
manufacturing capability do we want for the United States in the 1970s
and 1980s? These are some of the kinds of questions that seem to
construction,
deserve more study than they have received. In the meantime, our
agricultural
current analysis should note that most services are hard to export;
products, and
thus a view of exports as a percentage of manufactured products
inventory changes
(rather than of GNP) is revealing.
1950
1960
1970
Chart 15
- 10 -
EXPORTS IN RELATION TO PRODUCTION
One can understand why a country such as Canada is so
about American investment and trade policy when one the sees
concerned that 63% of Canada's goods production is exported. Likewise, the US share
Exports in Relation to Production
United Kingdom production that is exported 1S four times
of The EC's external trade is only 22% of goods production, EC members. but half
(Including agriculture, forestry, fishing, mining, quarrying,
figure. the international trade of EC members is with other
and manufacturing)
of West Germany's export percentage, 37% of goods produced, is almost
times that of the United States. Japan's percentage approaches 15).
1950
three Germany's, with exports equal to 30% of goods produced (Chart
42.5%
42.8%
A high ratio of exports to total goods produced makes countries for our
aware of their exchange rates. One of the main reasons
17.7%
17.3%
18.3%
more balance-of-payments problems is that other countries have make been re- their
9.1%
to revalue their currencies--an action which would
3.0%
luctant less competitive abroad. (In fact, over the devaluations past 15 years, as there
exports been almost twice as many developed country
have revaluations. ) It is probably true that no one needs to have a are balance- tied
1960
of-payments to exports and can be protected by the maintenance of undervalued and
surplus who does not want it. Yet, many jobs
44.7%
37.8%
31.2%
directly currencies even if it is at the expense of higher domestic prices a
22.4%
24.9%
reduced variety of goods available to domestic consumers.
11.6%
6.9%
the USSR these problems should seem less important, since
Soviet To Union's ratio of exports to production is far lower than outside anyone
the else's (only 8%). But the Soviet Union is also less vulnerable to
threats and pressures.
1969
62.6%
47.9%
37.0%
30.1%
21.8%
12.8%
7.8%
United
Canada
European
West
United
Japan
USSR
States
Community
Germany
Kingdom
(Excluding
intratrade)
Reproduced at the Richard Nixon Presidential Library and Museum
- 11 -
US FOREIGN TRADE
US exports in 1970 were about $43 billion and imports were about $40
billion, yielding a favorable trade balance of about $3 billion (Chart 16).
For 1971, the balance has been projected as a deficit of about $2 billion,
a reversal of normal US experience, and the first trade deficit since 1893.
During the 1960s, both exports (8% growth annually) and imports (10%
growth annually) have been growing faster than our economy. This
expanding trade has been beneficial in many ways.
We are the largest individual trader in the world. Even though only
a small percentage of our GNP is devoted to trade, we have a heavy impact
on world total imports and exports. Our trade affects others more than it
does us.
It is noticeable that, in the period covered here, our favorable balance
has shifted from an average of about $4 - $5 billion in the first half of the
1960s to an average of about $2.5 billion in the five years ending 1970.
If we were to take out certain items that some would say are not properly
part of "exports" -- aid-related transfers -- and add costs associated with
imports -- for example, freight and insurance -- we would see that the
United States has run a trade deficit in recent years prior to the 1971 deficit
experience.
Our trade, of course, has human as well as economic aspects. There
are increasing and understandable concerns about the effect of our trade in
general, and imports in particular, on US jobs. It is estimated, for example,
that between 600, 000 and 750, 000 jobs were lost between 1964 and 1971 as
our trade balance shifted from a $6.8 billion surplus to an estimated $2 billion
deficit. A precise calculation of the effects of US trade on US jobs is difficult
to make and involves some conjecture. Most of the studies on job effects
come to three broad conclusions (although these types of studies have received
too little attention and are subject to many qualifications):
1.
The
net job effects are relatively small -- in the range
of a few hundred thousand jobs of a total US work force of more than
80 million. This is partly a function of the relatively small percentage
of our GNP accounted for by foreign trade -- about 4% each for exports
and imports and a much smaller fraction, of course, for the trade
balance itself.
2. The figures in the most recent Department of Labor job impact
studies show that trade has had a net favorable effect on US employment.
Library and Museum
Chart 16
- 12 -
Thus, if trade both ways stopped (where there were alternatives
to trade), our total employment would probably be reduced by a
small amount. An exception is 1971 when, because of the trade
US Foreign Trade
deficit, there may have been a small job loss as a result of trade.
But this should be reversed after the exchange rate realignments
and new trading arrangements now being negotiated have had their
Billion US $
effect.
50
3. On the whole, export-oriented jobs tend to be better paying
$46
than import-competing ones reflecting the fact that our primary
GAP-$2
competitive advantage in international trade is in industries requiring
$44
high-level skills. There are, however, important exceptions to this
$43
general rule.
40
$40
All this does not preclude dislocations and specific job effects in
particular industries. Some of those who lose jobs to U.S. imports seem
to be arguing that one can restrict imports and save those jobs without
affecting our exports, and our export-related jobs. But other countries can
directly affect our exports to them in response to our actions against their
exports to us. It is difficult to have everything our own way. Further,
Imports
virtually every study of this subject concludes that most job effects result
30
from changes and competitive factors within our own economy (i.e.,
have nothing to do with foreign competition).
$27
Nevertheless, job dislocations that do occur must be dealt with
GAP $6
effectively and promptly. And clearly, our programs in this area must
be handled on a far more comprehensive basis than any adjustment programs
Exports
now in existence. At the same time, a major emphasis must be placed on
20
$21
what new job opportunities can be created in the 1970s to employ not just
the workers who have been displaced but also the much larger number of
$16
new persons continually joining the work force. By 1980, a total of
GAP
$3
100 million jobs will have to be provided in order to be at "full employment"
or almost 20 million more jobs than today. Thus the creation of new
$13
jobs and new industries must command our attention.
10
Average Annual Growth Rate
It is obvious to all that if our employment were higher, the United States
Imports
Exports
would be better able to absorb the relatively small number of job dislocations
1961-65
7.3%
6.3%
caused by additional imports. Here is a point where foreign economic policy
1966-70
13.3%
9.8%
and domestic economic policy intersect.
1971
15.0%
5.0%
o
1958
60
62
64
66
68
70
Reproduced at the Richard Nixon Presidential Library and Museum
- 13 -
US FOREIGN TRADE TRENDS -- - BY PRODUCT CATEGORIES
In considering trade policy for the 1970s and 1980s, we should study
certain underlying economic forces. In what categories are surpluses
strong? Declining? Why?
The analysis is not meant to imply that the United States should, as
a matter of policy, seek surpluses in all sectors of foreign trade. The
purpose of trade is to permit each nation to produce and sell according to
its best comparative advantage; in some sectors the United States can be
expected to show trade deficits as we make best use of trading opportunities.
The crucial issue for national policy is not that of specific deficits, but of
the overall balance; to that end, trends in major commodity groups
provide some detail on the historical and projected 1971 overall performance.
Understanding these trends should help us to predict better the future outlook.
Reproduced at the Richard Nixon Pres ential Library and Museum
Chart 17
14 -
US FOREIGN TRADE TRENDS AGRICULTURE
The US agricultural surplus has grown recently, but the "green
revolution" in the LDCs and preferential area trade restrictions impede
US exports. Besides, everyone seems to strive for self-sufficiency in
food. Thus, despite US comparative advantage, our favorable balance
US Foreign Trade Trends
in agriculture is only about $2. 5 billion (Chart 17).
Agricultural Products
There is much talk about adjustment to economic dislocations
Billion US $
that is, change in employment patterns caused by changing competitiveness,
10
shifts in final demand, or productivity growth. The American farm is
one example: In only 20 years, farm workers have dropped from 7.2
million to 3. 5 million from 12. 2% to 4. 4% of the labor force (Chart 18).
Yet the fewer workers are producing 20% more, and the value of production
per worker in constant dollars has grown from $2, 700 in 1950 to $6, 600
in 1970.
8
$8.2
Given US international comparative advantage in agriculture, it is worth
Exports
$7.1
another major effort to persuade other countries to reduce restrictions.
GAP
$2.5
Our lower prices would benefit other countries too, if we could mutually
solve some of the political problems that underlie agricultural restrictions.
6
$5.7
$5.7
Despite foreign barriers, agricultural exports are a significant portion
of the total value of US production: almost 17% of total fruit production;
33% of the value of cotton and corn; 42% of tobacco; and more than 60% of
$4.4
wheat and soybean production are exported. This is both a tribute to the
productivity of our agricultural sector, and a reminder of our vulnerability
4
to trade retaliation in agricultural products if the United States were to
Imports
implement restrictive trade quotas. Precisely because other countries
$3.2
can expand their agricultural production, most students of world trade
expect US agriculture would be one of the early victims of trade retaliation.
2
In analyzing our agricultural balance, note that the United States subsidizes
agricultural exports under PL 480 at less than $1. 0 billion annually. This
outlay is partially offset by foreign currency receipts of about $330 million,
making a net outlay of about $650 million.
o
1951-55
56
58
60
62
64
66
68
70
Reproduced at the Richard Nixon Pre dential Library and Museum
Chart 1
US Agriculture
Billion 1958 US $
Million Workers
25
8
Output
$23.1
7.2
20
$19.4
6
15
4
Agricultural Workers
3.5
10
2
5
o
o
1950
55
60
65
70
Between 1950 and 1970, agricultural output increased 19% and the number of
agricultural workers decreased 52%. Meanwhile, agricultural workers as a percent
of total labor force decreased from 12.2% in 1950 to 4.4% in 1970.
Reproduced at the Richard Nixon Preside ntial Library and Museum
15
Chart 19
US FOREIGN TRADE TRENDS MINERALS AND RESOURCES
In minerals and resources (Chart 19) it is predictable that unless
there are some major breakthroughs in cleaner domestic energy
resources -- for example, a cheaper nuclear source -- our trade
deficit will continue to increase and that we will consume more and
more relative to what we produce. Some would say that oil imports,
for example, could climb by $12 billion by the end of this decade, unless
we find domestic alternatives.
US Foreign Trade Trends
Minerals, Unprocessed Fuels, and other Raw Materials
Billion US $
8
$7.7
$7.1
6
GAP
$3.3
Imports
$4.6
$4.4
4
$3.7
Exports
2
$1.6
o
1951-55
56
58
60
62
64
66
68
70
Chart 20
16 -
US FOREIGN TRADE TRENDS MANUFACTURED PRODUCTS
A more rapidly widening gap in our trade balance is found in the
so-called "nontechnology-intensive" manufactured products, and is
probably an inevitable result of spreading industrialization. As countries
begin production of products easiest for them, new sources of shoes,
textiles, sporting goods, and the like appear (Chart 20).
With more countries becoming our competitors in products requiring
less technology, it is likely that our exports of the future will depend
US Foreign Trade Trends
increasingly on "technology-intensive" products (Chart 21). More than
"Nontechnology-Intensive" Manufactured Products
half our foreign sales are in this category and our favorable balance
here is over $8 billion for 1971. It is expected that this 1971 "technology-
Billion US $
intensive" surplus will about equal our "nontechnology-intensive" deficit
16
There are, of course, important problems of definition in
$15.2
distinguishing "technology-intensive" or "nontechnology intensive"
products. Some argue that at least one whole class of products included
in the "technology-intensive" category -- as defined by Dr. Boretsky
$12.9
(Department of Commerce) -- does not belong in that category. (Automobiles
12
are an often mentioned example.) Still others argue that while particular
products of certain categories are "technology-intensive, 11 others of that
GAP
-$9.1
same category are not (certain chemicals would be an example). Such
Imports
definitions are matters of judgment, and the reader should look at the
specific product categories and arrive at his own conclusions (Chart 22).
On balance, however, the trends are so powerful that it seems safe to
8
conclude that our trade position has been heavily dependent on higher
$6.8
technology products.
$6.1
Charts 23 and 24 give examples of individual products that have
rising or falling trade balances. While our trade surplus grew for
4
$3.7
aircraft, computers, and chemicals, there are rapidly growing deficits
GAP
in motor vehicles, textiles, clothing, and footwear.
$1.8
Exports
$1.9
However, we should remember that in recent years the undervalued
currencies of certain other countries have made us unnecessarily
dependent on high technology products for which relative prices are often
o
a less important competitive factor. Conversely, fairer exchange rates
1951-55
56
58
60
62
64
66
68
70
will make some of our "nontechnology-intensive"" products much more
competitive in world trade.
Chart 25 summarizes trade balance trends covering the four basic
categories of products manufactured and nonmanufactured we have
used in this analysis.
Reproduced at the Richard Nixon Pre
ntial Library and Museum
US Foreign Trade Trends
"Technology-Intensive" Manufactured Products
Billion US $
25
$24.4
$22.6
20
GAP
$8.4
$16.0
15
Exports
$13.0
10
$6.6
5
GAP
Imports
$5.7
$0.9
o
1951-55
56
58
60
62
64
66
68
70
Chart 22
US Trade in Selected Manufactured Products
Million US $
Jan -Jun
Jan -Jun
1970
1970
1971
Technology Intensive
Exports
Imports
Balance
Balance
Balance
Fabricating Machinery
1,956
900
1,056
506
517
Motor Vehicles and Parts
3,549
5,479
-1,930
-1,045
-1,653
Aircraft and Parts
2,659
275
2,384
1,345
1,776
Basic Chemicals and Compounds
1,642
759
883
504
415
Power Generating Machinery (Non-
1,395
782
613
356
281
electric)
Computers and Parts
1,104
60
1,044
469
530
Scientific and Professional Instruments
857
356
501
255
282
Construction Machinery
733
49
684
334
340
Telecommunications Apparatus
661
1,104
-443
-157
-301
Synthetic Materials
653
123
530
276
257
Electric Power Machinery
611
247
364
193
198
Medicinal and Pharmaceutical Products
421
87
334
179
140
Nontechnology Intensive
Yarns, Fibers, and Fabrics
603
1,136
-533
-254
-402
Clothing
200
1,267
-1,067
-434
-571
Footwear
10
630
-620
-297
-380
Paper and Manufactures
622
1,087
-465
-225
-226
Iron and Steel
1,270
2,032
-762
-128
-930
Nonferrous Metals
964
1,652
-688
-299
-417
Furniture
54
231
-177
-93
-109
Wood Manufactures
132
414
-282
-124
-165
Reproduced at the Richard Nixon Library and Museum
US Trade Balance in Selected Commodities
With a Rising Trade Surplus
Million US $
3,200
$3,100
2,800
2,400
2,000
Aircraft
and Parts
1,600
1,200
$1,000
$970
800
$900
Basic Chemicals
400
and Compounds
Computers
and Parts
$52
o
$48
1960
62
64
66
68
70
US Trade Balance in Selected Commodities
With a Declining Trade Balance
Million US $
800
Motor Vehicles
and Parts
$643
$204
O
Iron and Steel
Products
$396
-800
Textiles, Clothing,
and Footwear
-1,600
$1,700
-
-2,400
-$2,700
-$3,000
-3,200
1960
62
64
66
68
70
US Trade Balance Trends
Billion US $
10
$9.6
8
$8.4
$7.7
"Technology-Intensive"
Manufactured Products
6
4
$2.5
2
Agricultural Products
$1.4
$1.1
o
-$1.6
Minerals, Unprocessed Fuels,
-2
and other Raw Materials
$2.5
-$2.4
-$3.3
-4
-6
"Nontechnology- Intensive
-$6.1
Manufactured Products
-8
-$9.1'
-10
1962
64
66
68
70
17 -
Chart 26
US RATIO OF IMPORTS TO CONSUMPTION MANUFACTURED PRODUCTS
Another way of viewing the penetration of foreign products into the
United States is by specific market shares. Foreign goods do dominate
some highly visible consumer categories: the foreign market share is
US Ratio of Imports to Consumption, 1970
in excess of 50% for amateur motion picture cameras, black and white
television sets, motorcycles, radios, cassette recorders, and 35mm
still cameras (Chart 26).
Textiles
12%*
(including apparel)
It should be remembered that the numbers presented in this chart
are aggregate market penetrations of some very large and diverse product
Steel
fields. In the case of textiles, for example, there are a substantial number
15%**
of specific and major product categories in which market penetration is
well over 50%. The situation in steel is similar.
Flatware
22%*
It would appear that the vast majority of consumers like the variety,
Footwear
richness, or lower prices of these imports. If restrictions were to limit
30%*
the availability or increase the price of such products, consumers would
(nonrubber)
no doubt feel that their "quality of life" had suffered. To illustrate this,
studies of such products as shoes and television sets suggest that without
Leather gloves
30%*
imports, their prices in the United States might rise 30%. For tape recor-
ders and a number of other key items, prices could rise as much as 50%.
Aside from unfavorable consumer reaction, restricting these products would
Sewing machines
49%*
obviously add to inflationary pressures.
Black and white televisions
52%**
Industry and labor view import penetration as competition which causes
significant adjustment problems. The speed of economic change can also
Amateur motion
aggravate this adjustment: in some of the cases, much of the penetration
66%*
took place within a period of ten years or less. At the same time, within
picture cameras
most of these product categories we will see individual domestic companies
that, by some combination of product innovation, quality, highly productive
Radios
70%**
techniques, and effective marketing compete effectively. And in examples
such as transistor radios or compact autos, consumer markets have been
broadened by imports.
Calculating machines
75%**
Market penetration is related to the rapidity with which technology,
Hairworks, toupees,
manufacturing know-how, capital, and goods are transferred around the
and wigs
85%*
world. It now takes much less time for a product first developed in one
country to appear again in very similar form in another country. During
Magnetic tape recorders
96%**
the first quarter of this century, some studies suggest this process took
about 20 years; by the second quarter of the century, this period had been
shortened to ten years; and finally, in the 1960s, it has been shortened to
35mm still cameras
100%**
three years.
Since, in the aggregate, imports are still a small fraction of our total
*By Value
output, in most product fields they are also a very small fraction of the mar-
**By Volume
ket. On the other hand, it is also clear that since the mid-sixties the overall
aggregate market share going to foreign products has increased significantly
-- approximately doubling.
Reproduced at the Richard Nixo esidential Library and Museum
Chart 27
18
US TRADE TRENDS--BY GEOGRAPHICAL AREA
US Trade with Canada
In addition to analyzing our trading patterns by type of product, it is
useful to review trade by geographical area.
Billion US $
In so doing, we should be careful not to conclude that our trade balance
with all countries must be the same, or that it is "bad" if we have a deficit
$12.7
with some. It is inevitable that we should have some deficits in an expanding
world of open trade, since our particular needs lead us to buy more products
12
from some countries than from others.
$11.1
GAP
On the other hand, it is true that bilateral trade barriers exist that
-$2.7
seriously distort natural and open trading patterns. Thus, some trade
negotiations are necessarily bilateral in nature and an understanding of
US Imports
10
$10.0
the reasons for bilateral trading patterns can be important.
$9.1
US TRADE WITH CANADA
The logical starting place is Canada, our principal trading partner. Our
8
exports to Canada, estimated for 1971, amount to about $10 billion and our
imports about $13 billion (Chart 27). Our deficit has been increasing for
several reasons; the US-Canadian Automobile Agreement has perhaps
accounted for about half of it, and has played a major role in the declining
"technology-intensive balance (Chart 28). We are growing more dependent
on Canada's oil and other raw materials. Also, the Canadian dollar has
6
been undervalued in the past, although that problem recently has been eased.
$5.6
Our position in agriculture, however, showed a positive balance of over
GAP
$0.8
$500 million in 1970, which, after we deduct agricultural transshipments,
leaves a net favorable balance of almost $220 million.
US Exports
$4.8
4
An important consideration is our heavy investment in Canada--over
$3.5
$20 billion--and the resulting remittances that help our balance of payments.
GAP $0.8
Also, as noted, 63% of Canada's production is exported. Since the United States
has invested heavily in Canada, exports were certainly to be expected. Thus,
$2.7
our simple analysis focusing only on the total trade imbalance does not tell
2
the full story.
o
1958
60
62
64
66
68
70
Reproduced at the Richard Nixon Presidential Library and Museum
US Trade Balance with Canada
"Technology-Intensive" Manufactured Products
Million US $
2,400
$2,195
<##
2,100
1,800
1,500
$1,412
1,200
900
$821
600
$584
300
O
1962
64
66
68
70
US Agricultural Trade with Canada
1,000
$810
800
$734
$620
600
US Exports
GAP
$400
400
$370
GAP $386
$334
US Imports
GAP $140
$234
200
$308
$230
O.
1958
60
62
64
66
68
70
During 1958-70, about 19% of US agricultural exports to
Canada were goods for transshipment to third countries.
19
US TRADE WITH THE EUROPEAN COMMUNITY
Our trade with the EC shows rapid growth in both exports and imports,
but very recently a shrinking positive trade balance of about $1. 8 billion in
US Trade with the European Community
1970 and an estimated $0. 5 billion in 1971 (Chart 29). This ba lance is aided
by a surplus in technology-intensive products with Western Europe estimated
at $1. 6 billion for 1971 (Chart 30).
Billion US $
9
In most commodities, the EC countries have until now been good customers
of and suppliers to the United States. There are, however, certain tendencies
$8.4
$8.5
in the EC that are probably not in the economic or political interests of the
GAP
United States, particularly for the future. The EC's variable import levy
8
$0.5
$8.0
system for agricultural goods (under which a levy is applied against the
imported product so that its final price in the EC tends to be at or above
internal prices) is already restrictive and its impact on some US products
7
is probably large. For example, exports to Europe of a major commodity
US Exports
such as soybeans--which is not subject to the levy--have increased more
$6.6
that 55% since 1956. Exports of grains subject to levies, however, have
grown much less--only 15% over this entire period. And, in recent years,
6
shipments to the EC of US grains under levy have declined 30%-35% from
their peak.
$5.3
Another problem relates to preferential tariff treatment granted some 30
5
countries by the EC; in turn, these countries permit preferential access to
their markets for EC manufactured products. The effects of these preferences
on our citrus exports to the Community is a clear example of what from our
GAP $2.0
4
standpoint is a discriminatory act, detrimental to both US economic interests
and the principle of a multilateral, open trading world.
$3.3
To sum up: In 1950, the EC was an idea; by 1970, it had become the world's
3
$2.9
most import trading area. In 20 years it has changed both the political and
economic shape of Europe and the world. The process of unification, while
US Imports
GAP
successful in overcoming old rivalries, has also created important new
$1.2
economic problems for the United States.
2
$1.7
1
o
1958
60
62
64
66
68
70
US Trade Balance with Western Europe
"Technology-Intensive" Manufactured Products
Million US $
2,400
$2,369
2,100
1,800
$1,624
$1,641
$1,640
1,500
1,200
900
600
300
0
1962
64
66
68
70
WORLD
US Agricultural Trade with the European Community
TRADE
1,800
$1,750
$1,600
1,500
$1,400
US Exports
GAP $1,350
1,200
900
$900
GAP $1,200
600
GAP $600
$400
US Imports
$400
300
$300
$200
o
1958
60
62
64
66
68
70
- 20 -
US TRADE WITH JAPAN
The story is told by the almost vertical growth curves of trade with our
No. 2 trading partner. Our exports to Japan have grown more than 17%
annually during the past five years, and their exports to us have grown even
faster. Japan is thus both a good supplier and customer. Only the Far East
absorbs a larger portion of Japan's exports than does the United States
which absorbs over 30% (Chart 31).
Much of the Japanese export effort is aimed at the United States, causing
pressures on some of our domestic companies. Even our superiority in
"technology-intensive" products does not show up in the US-Japan trade
balances. In fact, there is no other country in the world with which we have
a negative balance on technology-intensive products. This deficit was more
than $1 billion in 1970 and is estimated at more than double that for 1971. This
particular deficit is larger than it would have been had Japan had fewer
import restrictions on growth industries, such as computers and other
advanced electronic products in which the United States excels (Chart 32).
Since Japan is an insular nation and a country poor in raw materials,
it must import many basic commodities. The bulk of Japan's purchases from
the United States--about 73%--are agricultural products and industrial raw
materials, necessary for both domestic consumption and processing into
exports. Japan, in turn, tends to sell us increasing amounts of sophisticated
products, reflecting numerous gains in their technology and know-how.
Japan's overall trade surplus is unusually large, given its amount of
trade--in 1970 Japan's trade surplus exceeded $4 bi llion - - and it is growing
rapidly. It was estimated to reach more than $7 billion in 1971. And in
their five-year plans and projections, the Japan Economic Planning Agency
and other research groups project favorable trade balances averaging about
$11 billion by 1975.
Chart 33 shows Japan's trade balance and its foreign exchange reserves
before 15 August 1971. Not only has the growth of trade surplus and reserves
been substantial, but it has been accomplished during a period of full employ-
ment and rapid domestic growth -- conditions which should tend to increase
imports. It seems clear that an undervalued currency contributed heavily to
this situation--along with an apparent drive for "exports for exports sake."
Clearly, there is a large and growing dollar imbalance in our trading
relationship with Japan. Is there also a lack of symmetry, or more accurately
perhaps, even lack of equity, in Japanese-American commercial relationships?
21 -
As an example, examine the case of automobiles. Japan's automobiles
enter the US market unimpeded, but for a modest tariff. Japan's auto exports
to the United States are rising rapidly--from 69, 000 automobiles in 1967 to 354, 000
US Trade with Japan
automobiles in 1970. In the first half of 1971, Japanese auto exports to the
United States were up 124% over the previous year. Presumably because of
Billion US $
lower transportation costs, the Japanese effort is aimed at our West Coast
market. In the early months of this year, Japanese cars accounted for about
8
20% of new car sales in the Los Angeles metropolitan area.
On the other hand, our automobile manufacturers face a variety of
restrictions in Japan. Our two largest automobile manufacturers, General
$7.0
7
Motors and Ford, can own only a minority share of a company in Japan, on
terms which are specified. They are also subjected to restrictions on the
management composition of a Japanese affiliate.
If instead of investing, these US manufacturers should want to export
6
$5.9
automobiles to Japan they confront extensive restrictions. Commodity and
GAP
road taxes are aimed at the larger cars from the United States - taxes that
-$2.7
result in a Cadillac that costs $8,000 in the United States being sold for
$30,000 in Japan; even the Pinto which sells for about $2,000 in the United States
5
US Imports
sells for nearly $5, 500 when exported to Japan. General Motors, the largest
$4.7
exporter to Japan, accounts for only 0.1% of the very large Japanese market.
To be sure, some of our most popular automobiles may not be suited to the
$4.3
Japanese market, but these artificial burdens clearly impede our exports to
4
Japan.
There are a variety of other restrictions, quantitative and qualitative,
often aimed at protecting growth industries of the future (fields where the US
would be in a strong position to export). These measures include informal
3
agreements between the Japanese Government and business officials--
an elusive tactic known as "administrative guidance" that is effective because
$2.4
GAP
of the strong spirit of government-business cooperation existing in Japan
$0.3
WORLD TRADE DARRIERS
and the economic power the government can bring to bear against any violator.
2
Obviously, we should consider all these restrictions in our trade negotiations.
US Exports
$2.1
As will be shown later, we should also remember that Japan has already
made some progress on its own in the direction of removing some of these
restrictions.
$1.0
1
GAP $0.3
$0.7
o
1958
60
62
64
66
68
70
US Trade Balance with Japan
"Technology-Intensive" Manufactured Products
Million US $
300
$298
o
-$87
-300
-600
-900
-$1,034
-1,200
-1,500
-1,800
-2,100
-$2,245
-2,400
1962
64
66
68
70
US Agricultural Trade with Japan
1,200
$1,214
$1,216
900
US Exports
$876
600
GAP
$1,167
GAP $839
$485
300
GAP $442
US Imports
$43
$37
$37
$49
o
1958
60
62
64
66
68
70
Chart 33
Japan: Balance-of-Payments Trends
Billion US $
20
15
$11
$10
10
Foreign Exchange Reserves
$6.6
$4.8
5
Pre-August
Trade Balance
$4.0
Estimates
$1.9
o
$0.3
-5
1960
62
64
66
68
70
72
74
Reproduced at the Richard Nixon Presidential Library and Museum
- 22
DIRECTION OF TRADE
The well-developed pattern of trade that is apparent between the
United States and the EC is in contrast to the thin flow of trade between
Japan and the EC (Chart 34).
Direction of Exports, 1970
Japan sells over 30% of its exports to us, but only about 7% to the EC.
Billion US $ and
Earlier we saw how much larger a percent of world trade the EC accounts
Percent of Countries' Exports
for than does the United States. Thus, it becomes clear that Japan's share
of US imports is many times higher than Japan's share of EC imports.
$6.6
Looking at the reverse flow, only about 2% of the EC's external exports go
15%
to Japan, whereas 15% go to the United States.
European Community
Further growth of Japanese imports into the EC is impeded by nontariff
barriers, including quotas and less formal "safeguards." Many of the EC
quotas are on textiles; others are on porcelain, cutlery, footwear, umbrellas,
Total Exports
steel and, in the case of Italy, motor vehicles. In 1969, for example, Italy
$45.4*
imported 12 motor vehicles from Japan; and in 1970, only 481. Liberalizing
$8.4
negotiations are stalled on the issue of formulating the escape clause that
20%
EC countries could invoke against rising Japanese imports.
$1.0
United States
This asymmetrical trading pattern puts Japanese export pressure on
2%
the United States-while the EC undergoes a more "orderly" pattern of
trade growth. Increased Japan-EC trade would be advantageous to the
United States for another reason: lost US sales in these two markets
Total Exports
resulting from their increased competition would not be very great
Japan
$42.7
since we are not typically selling the same kinds of products.
$1.3
$4.7
7%
MYOM
11%
Total Exports
$19.4
$5.9
30%
*Excluding trade within the European Community.
23 -
Chart 35
FREE WORLD TRADE WITH THE USSR AND EASTERN EUROPE
The first striking feature of Chart 35 is the growth of Free World
trade with Eastern Europe and the USSR, now totaling about $10 billion
each way -- imports and exports.
Free World Trade with the USSR
The second is the small US share -- only $350 million of exports --
and less imports. Our allies are getting the dominant share of these
and Eastern Europe
sales.
Billion US $
The third feature is the tight hugging of the almost vertical lines,
which is no accident. Trading with Communist countries usually re-
quires barter, since they do not have sufficient convertible currency.
10
$10.1 Exports
Other Free World countries have set up special corporations and special
financing arrangements for handling some of the unique aspects of trade
$9.7 Imports
with the Communist countries.
We all realize there are many political and national security con-
siderations in East-West trade, particularly in high-technology products
8
and strategic materials. One specific contribution of our Council will
be to provide accurate economic input to this complex equation. In
each case, the Council on International Economic Policy will be working
closely with the National Security Council and the other interested
Government agencies.
6
4
$3.7
WORLD TRADE BARRIERS
2
$1.3
$1.0
$0.34
$0.08
$0.11
$0.19
$0.35 US Exports*
o
$0.23 US Imports
1947
50
55
60
65
70
*Including exports to Asian Communist countries prior to 1952.
- 24 -
III. WORLD TRADE BARRIERS
World trade has been encouraged in recent years by the reduction
of tariff rates in the post-Kennedy Round of GATT. Tariffs are now
less important barriers to trade in most high-technology manufactures
between developed countries.
Quantitative restrictions (quotas), used at one time by the EC and
Japan to almost entirely exclude certain categories of imports, have
been substantially reduced. However, the EC has substituted a protec-
tive Common Agricultural Policy and variable levy system to shield its
agriculture, and Japan still has a number of quantitative restrictions.
In the United States, the number of quantitative restrictions has been
increased in an attempt to moderate the growth of imports of particular
commodities such as oil, steel, textiles, and meat.
As tariffs are reduced and quantitative restrictions dismantled,
other restrictions, called qualitative or nontariff barriers, are obviously
increasing in relative importance. These include informal agreements
between government and business officials, product standards, govern-
ment procurement regulations, health and safety standards, and other
measures.
Chart 36
25
AVERAGE TARIFF RATES
Average tariff rates on manufactured and semimanufactured
products will be virtually the same among major industrialized
nations after completion of the final Kennedy Round reductions
scheduled for 1 January 1972. The United Kingdom, Japan, and
Canada will have average rates slightly above those of the United
States and the European Community (Chart 36).
Developed nations have benefited most from tariff cuts applied
to sophisticated manufactures. Rates remain high on some non-
Average Tariff Rates after the Kennedy Round
technology-intensive manufactures, especially textiles, which the less
Manufactured and Semimanufactured Products
developed countries (LDCs) produce at lower cost. Overall, raw
materials were already duty free or subject to very low rates.
(Weighted by OECD Trade)
Tariff reductions under the Kennedy Round are scheduled to be
completed 1 January 1972; however, there remain possibilities for
improvement. Under the Kennedy Round, average duties were re-
duced by one-third,and most rates were cut by all countries; but cuts
United States
8.3%
in those tariffs remaining offer additional opportunities to stimulate
trade.
European
In seeking opportunities for further trade negotiations, it is
Community
8.4%
natural to examine high-tariff products first. The United States,
along with Canada and Japan, has relatively more rates above 15%,
where the best trade-off possibilities may exist. Also, in the low
United
range, progress in eliminating "nuisance" duties is probably possible.
Kingdom
10.2%
(Chart 37.)
But each commodity or tariff case must be examined on the facts
of its market and competitive characteristics; and tariff reductions
Japan
10.9%
will require Congressional authority.
Estimated
Finally, the mere fact that a duty is low and might be termed by
some a "nuisance" duty may have little to do with its protective effect
Canada
between
10.0% and 12.0%
or its trading potentials. The aluminum industry, for example, con-
siders our present 3% ingot duty crucial in its competition with Canada.
Reproduced at the Richard Nixon sidential Library and Museum
Tariff Distribution, 1970
Percent of
Product
Categories
100%
100%
100%
100%
100%
21.3%
9.1%
33.1%
14.7%
25.0%
Less than 5%
57.0%
48.4%
62.0%
43.0%
28.4%
6% to 10%
21.1%
21.6%
22.8%
17.2%
11% to 15%
13.7%
13.3%
13.2%
8.3%
16% to 20%
8.3%
6.5%
More than 20%
3.2%
0.2%
2.8%
3.7%
2.1%
United
European
Japan
Canada
United
States
Community
Kingdom
26 -
Chart 38
QUANTITATIVE RESTRICTIONS ON AGRICULTURAL IMPORTS
The American farmer, with his high productivity, has earned a significant
international competitive edge and can be expected to support a liberal trade
policy.
Though many factors besides a single percentage number can determine
the actual effect of a restriction, we can probably use such data to suggest
broad trends or draw comparisons between countries.
Agricultural Imports Covered by
Quantitative Restrictions, 1970
An important quantitative restriction is the EC's variable import levy
system which applies to almost 34% of agricultural imports by value.
Chart 38 shows the extent of this system by the dollar value of imports
33.7%
subject to the levy. As indicated earlier, these levies inhibit imports
by keeping the import price at or above the domestic price.
27.9%
In the case of Canada, where agricultural restrictions are low, there
has been much healthier growth of our agricultural exports and our resulting
23.9%
balance of trade in agricultural products.
21.6%
4.2%
Canada
United
United
Japan
European
States
Kingdom
Community
Billion US $
$0.07
$1.2
$1.2
$0.8
$2.6
Including quantitative restrictions imposed by statute, "voluntary"
export controls, and variable levies (European Community).
Chart 39
27
INDUSTRIAL IMPORTS FROM OECD COUNTRIES SUBJECT
TO QUANTITATIVE RESTRICTIONS
Chart 39 shows the number of quantitative restrictions by major
trading areas against industrial imports from members of the Organization
for Economic Cooperation and Development (developed countries). The
mere number of quantitative restrictions is not the only criterion, since
Industrial Imports from OECD Countries
some quotas, of course, restrict imports far more than others. Nevertheless,
this chart helps us see certain trends that are probably significant.
Subject to Quantitative Restrictions
132
A look at the United States figures shows the significant number of
such restrictions added since 1963. Meanwhile, the Community and, in
particular, Japan have reduced their quantitative restrictions.
Looking elsewhere, of most significance is the large number of special
restrictions in some 73 categories -which the EC exercises to discriminate
Categories
specifically against Japan. These restrictions help explain why trade is
1963
1970
relatively light between Japan and the EC, and why the export pressures
from Japan are far heavier in our direction.
81
76
One might wonder how such discrimination could be practiced within
the GATT structure. As part of the original negotiation on Japanese entry
67
65
into GATT, the member states of the EC legally reserved the right to
continue discriminatory restrictions against Japan. Clearly, these rights
have been applied and have apparently helped achieve their desired effects:
protecting European industries and markets, thus accentuating Japanese
competitive pressures on the United States. Other countries, including the
US, also retained the right to maintain those restrictions in violation of
GATT which they had in force when GATT was established.
28
10
7
7
2
Canada
United
United
European
Japan
Kingdom
States
Community
Discriminatory
against
8
21
1
73
Japan
(Reported to GATT)
The prevailing view is that restrictions other than quantitative and tariff
are greater in Japan than in other Free World developed countries.
Reproduced at the Richard Nixon ential Library and Museum
28 -
NONQUANTITATIVE NONTARIFF BARRIERS
In considering the quantitative restrictions picture of Chart 39, we should
remember that the relative importance of nonquantitative nontariff barriers
has been growing, and that our trading partners perhaps tend to be more subtle,
ingenious, and less direct than we about announcing the existence of some of
these qualitative barriers.
Yet we should not become overly self-righteous in this regard, since
the United States certainly has some important barriers of this type; for
example, other countries find our "Buy American" policies in government
procurement an important barrier.
There may be a growing tendency in Europe to use the device of internally
adopted industrial standards as trade barriers. The area of pollution abatement
cost sharing and standards affords potentially very important opportunities to
impose qualitative restrictions. Even more broadly, business barriers that
discriminate against foreign companies (taxes, incentives, etc.) can play
restrictive roles.
Reproduced at the Richard Nixon Pres dential Library and Museum
- 29 -
IV. BALANCE OF PAYMENTS
INTRODUCTION
While a balance of payments problem is an international monetary
problem, its roots often rest in policies that a country takes to meet domestic
economic or political needs or security objectives. Thus, balance of payments
problems are often really problems of defense spending, or aid, or trade, or
investment abroad. We also find that these last four elements are interrelated
and have cross effects (e.g., investment abroad leads to later income, while
in some cases inducing exports to the new foreign affiliate). Therefore,
while the solutions to balance of payments problems will inevitably involve
"bankers, 11 those solutions may often be found in nonmonetary policies.
Domestic policies that touch off balance of payments troubles are often
implemented with the knowledge that they may result in short-term instability
in the international monetary system, and costs to domestic consumers.
Under these circumstances, appropriate exchange rate adjustments can make
very large contributions to equilibrium in the international economic system.
Moreover, if the adjustment system can be made more flexible, adjustment
will be more gradual and thus less politically sensitive.
Under the present monetary system, exchange rate adjustments have
been infrequent as each country has pursued its own economic interests.
We must formulate cooperative and constructive programs to deal with
persistent balance-of-payments problems that have resulted.
The United States has run a basic balance-of-payments deficit in almost
every year since 1950. According to the presumptions of a responsive
monetary system, this should have resulted in an effective devaluation of
the dollar. Yet, note that because of changes in effective prices of other
currencies (mostly devaluations), the dollar has, in effect, been revalued
since 1959 (Chart 40). The "comparative official dollar" had in fact risen
4. 7% relative to other currencies at the beginning of 1970.
Balance-of-payments deficit problems have tended to be of two broad
types:
1.
Long-Term Persistent Problems These are caused by
a variety of factors that can be influenced by longer-range policies
concerning trade and export matters, defense expenditures, foreign
investment, etc., as well as by fundamental domestic policies
affecting relative prices, costs, and productivity.
2.
Short-Term Transitory Problems--Highly erratic move-
ments have usually been caused by differences in interests rates between
countries or by stock market investment flows. In recent years,
lential Library and Museum
Chart 40
30
anticipation of possible currency adjustments has also resulted in
large international capital flows. Businessmen and bankers want
to protect their short-term assets by moving out of currencies which
may be devalued and into those which might be revalued; and specu-
lators hope for quick profits by similar actions. Short-term movements
have become an even greater problem during the 1960s because of
growing amounts of mobile Eurodollars (loosely defined as dollar
balances held in banks overseas).
Movement in the Effective Rate
A variety of balance-of-payments measurements exist which
indicate our net position--i.e. the difference between our inflows
of Exchange of the US Dollar
and outflows. The current account and basic balances reflect persistent
long-term movements and the liquidity and official settlements balances
include the effects of short-term flows.
130
January 1959=100
120
110
104.7
100
90
80
60
62
64
66
68
1950
52
54
56
58
Reproduced at the Richard Nixon Preside Library and Museum
Chart 41
31
US CURRENT ACCOUNT BALANCE
The current account balance measures the difference between US
purchases of foreign goods and services, and sales of US goods and services
abroad. The definition commonly used in the United States also includes
payment of pensions and personal and organized charitable remittances
to foreigners, as well as the foreign exchange cost of our military dis-
bursements in foreign countries.
This account was in surplus every year between 1960 and 1970, although
US Current Account Balance
there were wide variations as seen in Chart 41. Surpluses averaged almost
$6 billion in the mid-1960s and shrank to about $2 billion in recent years;
(Merchandise, investment income, services, military, and
for 1971 the current account may show a $1 billion deficit.
transfers, excluding government grants)
Billion US $
8
6
4
$3.3
$2.2
2
o
-$1.0
2
1950
55
60
65
70
Best measure of US competitive position and transfer abroad of US real resources.
Reproduced at the Richard Nixon Presid ntial Library and Museum
Chart 42
- 32
US BASIC BALANCE
The basic balance adds private long-term capital movements and
government grants and capital transactions to the current account
balance. As Chart 42 indicates, since World War II we usually have
had a basic balance deficit in the $1. 5 billion-$3 billion range, but it is
estimated this deficit will reach a record $8-$9 billion in 1971. The
US Basic Balance
persistence of this deficit has, of course, contributed significantly to
the buildup of foreign reserves and US dollars abroad.
Billion US $
4
The United States has a large net outflow on the capital account,
mainly attributable to US private direct and other investment abroad and
government grants and loans. For example, in 1970 a current account
surplus of $2. 2 billion was outweighed by a deficit of $5. 3 billion on
2
the grants and long-term capital account, producing a basic balance deficit
of about $3. 0 billion.
o
-2
$3.0
$3.2
-4
-6
-8
-$8.4
10
1950
55
60
65
70
Adds long-term capital movements to current account balance.
Best measure of persistent features in US payments position.
Chart 43
33 -
US BALANCE OF PAYMENTS TRENDS
One purpose of this overall presentation is to help predict the likely
future--and understanding the past is, of course, one basis for doing
that. Any reasonable prognosis of our future balance of payments requires
US Basic Balance Trends
an examination of the major components of the basic balance--which, it
Merchandise
will be seen, is a composite of very different forces and trends.
Billion US $
Clearly, the chief contributor to our deteriorating basic balance has
8
been our declining trade position. As Chart 43 illustrates, the trade
surplus, which averaged over $5 billion annually in the early 1960s, was
only slightly more than $1 billion in 1968 and 1969. The situation improved
somewhat in 1970, but this was mainly because of an unusually large
increase in exports of basic commodities. The deteriorating trend con-
tinued in 1971, with pre-August projections indicating a trade deficit
6
for the year of about $2 billion.
Our worsening trade balance trends can be seen even more clearly
when the data are adjusted to eliminate the influence on our trade of the
various stages of the business cycle at home and abroad. The resulting
4
long-term US trade trend has been steadily worsening since 1964, and
prior to the recent international currency adjustments, our adjusted trade
deficit for 1972 was predicted at more than $3 billion. By comparison,
those of West Germany and Japan have been sharply improving since the
$2.1
mid-1960s and would have probably reached surpluses of over $7 billion
in 1972 without the currency adjustment actions that have been taken.
2
$1.1
o
-$2.0
-2
-4
60
65
70
1950
55
Reproduced at the Richard Nixon Pre
tial Library and Museum
Chart 44
34 -
However, there are other divergent trends that also affect the
balance in significant ways. A major deficit item has been government
outlays abroad for the military, and for economic and military aid. As
Chart 44 shows, these combined expenditures resulted in an outflow
of $7.2 billion in 1970, or $3 billion more than in 1950.
The deficit on US military expenditures has gradually increased from
about $0. 6 billion in 1950 to $3.4 billion in 1970. This is made up of gross
US military expenditures abroad of $4.8 billion, less foreign military
US Basic Balance Trends
purchases from the United States of $1.4 billion.
Government
Ananalysis of the geographic composition of this deficit indicates that
$1. 2 billion (or somewhat less if one takes credit for certain offsets) is
Billion US $
in Europe, and that most of the remainder is in the Far East, including
o
Japan. The military deficit in the Far East is expected to decline in the
post-Vietnam period, probably to be offset to some extent by whatever
-$0.6
we decide to do in additional economic support in Southeast Asia. A
Military
major part of our military deficit balance is almost $700 million paid to
Japan for various bases, support services, products, and other mis-
cellaneous items. Thus, one significant factor in America's basic balance
-2
in the 1970s will be the rate of progress made in defense burden-sharing.
Foreign aid outlays in 1970 stood at $3. 8 billion or about the same level
-$3.4
as in 1950, when most aid was under the Marshall Plan.
-$3.6
Foreign Aid
Outlays for economic aid, about $1. 9 billion, represent resources
-$3.8'
4
diverted by the U.S. They do not, however, automatically add to our
payments deficit because aid allocations increase U.S. exports and
-$4.2
because repayments of principal and interest on past U.S. loans show
up as receipts in the current account. If these offsetting items are
netted against the outflow for economic aid, part of the stated deficit
Total
would be eliminated.
-6
-$7.2
-8
1950
55
60
65
70
*Of the - $3.8 billion, $1.7 billion are grants
and -$2.1 billion are loans.
Reproduced at the Richard Nixon Pres tial Library and Museum
Chart 45
35 -
As Chart 45 illustrates, our overall service transactions have remained
at about a $1 billion deficit during the 1960s. But within the category there
have been two important and diverging trends. Our earnings on fees and
royalties--mainly from sales of our advanced technology abroad--tripled
US Basic Balance Trends
between 1960 and 1970 and, after considering the small amount paid to
foreigners for their technology, this account showed a $2. 2 billion surplus
Services
in 1970. On the other hand, our net payments abroad for travel and
passenger fares have grown steadily, reaching a deficit of $2. 3 billion
Billion US $
in 1970. About $300 million annually is spent for travel to Canada and
3
Mexico. This growth reflects a series of technological and marketing
revolutions in the last decade--jet travel, tours, expansion of travel for
business purposes, and growing US affluence. Part of this deficit is
$2.3
compensated for in major ways in other accounts--such as the sale of
US jet aircraft to overseas airlines.
2
Royalties and Fees
1
$0.2
o
Other Services and
-$0.2
Private Transfers
$0.4
-1
$1.0
Total Net Services
Travel and
-2
Passenger Fares
-$2.3
-3
1950
55
60
65
70
Reproduced at the Richard Nixon Pr
Intial Library and Museum
Chart 46
36 - -
Perhaps the most surprising deficit compensators in our basic
balance are private capital-related flows. As Charts 46 and 47 illustrate,
income from our foreign direct investment has been greater than our new
capital outflows, and the gap has been widening. The surplus was $1. 6
billion in 1970, compared with $0. 7 billion in 1960 (Chart 47). If all
US Basic Balance Trends
private US investment income earnings abroad are counted, including
Private Capital Related Flows
us FOREIGN DIRECT INVESTMENTS ABROAD
bonds and stocks and short-term assets, our gross income has more than
quintupled in 20 years--from $1. 5 billion in 1950 to $8. 7 billion in 1970.
(Chart 46. This does not include about $2. 5 billion earned abroad in 1970
Billion US $
that was not brought back to the U.S., i. "unremitted" earnings.)
10
Deducting income, interest, and dividend payments to foreigners who
invest in the United States, the US still had an investment income balance
$8.7
of $4. 5 billion in 1970. Another improvement in the private capital-related
Gross Income from
account has been the recent acceleration of foreign direct investment in
Private US Investments
the United States--which reached $1 billion in 1970, compared with a small
8
Abroad
net outflow during 1963 and 1964. Furthermore, in 1970, foreigners
invested here $0. 5 billion more than they took home in direct investment
income (Chart 46).
LESS DEVELOPED COUNTRIES
6
4
US Direct Investment Abroad-
Outflows and Income
2
$1.6
$1.5
$0.5
US USE OF NATURAL RESOURCES
$0.7
o
-$0.1
Foreign Direct Investment
in the United States
Inflow and Income
-2
65
70
1950
55
60
Reproduced at the Richard Nix sidential Library and Museum
Chart 47
US Direct Investment Abroad
Income and Outflows
Million US $
8,000
$6,026
6,000
$4,445
4,000
Investment Income
Investment Outflows
$2,355
2,000
$1,674
o
1960
62
64
66
68
70
Reproduced at the Richard Nixon Pres ential Library and Museum
Chart 48
37 - -
US BASIC BALANCE--REGIONAL COMPOSITION
Another way of examining our basic balance is to break down these
flows with our main economic partners. In 1970, as shown in Chart 48,
and in recent years, our major deficits have been with Canada and Japan,
US Trade, Current Account, and Basic Balances, 1970
and in both cases the trade and basic balances have been about the same.
Million US $
This similarity, however, hides fairly large nontrade movements: for
instance, in 1970 we earned $300 million more from direct investment
in Canada than we invested there. On the other hand, our net travel
deficit with Canada amounted to nearly $200 million. In the Japanese
TRADE
case, we earned on a net basis more than $400 million in 1970 from
Worldwide
selling services but these earnings were offset by our military-related
outlays in Japan of nearly $700 million. Private capital-related dealings
$2,110
with Japan are minute since Japan keeps out most direct foreign invest-
European Community
ment. Our relatively large trade surplus with the EC--$1. 7 billion--was re-
$1,718
duced to amuch smaller basic surplus because of our military outlays there
of $1 billion. Also in 1970, our new direct investment in the EC topped
our investment income from there by $200 million. However, on the
plus side, our net earnings from fees and royalties amounted to $500
million. With LDCs we have a basic balance deficit,as our trade surplus
CURRENT ACCOUNT
BASIC
United
is more than offset by our economic and military aid outflows.
Kingdom
$532
$444
$497
As mentioned above, the $ 5 billion jump in our 1971 basic balance
$302
$266
deficit is mainly attributable to a worsening of our trade balance. On
a country-by-country basis--estimated from data for the first six months
of 1971-our growing deficit with Japan accounted for roughly half of the larger
overall basic balance deficit (Chart 49). Declining surpluses with the EC
and the United Kingdom were also important. Although our trade deficit
with Canada grew, our basic balance position with Canada improved slightly.
-$476
-$596
While we expect to run basic balance surpluses with some countries
and deficits with others, each country's own overall balance of payments
position should be near zero. Such equilibrium is a sign of a well-functioning
-$1,246
international monetary system. But the United States recorded by far its
Japan
largest basic balance deficit in 1971--estimated at more than $8 billion--
-$1,545
-$1,577
-$1,676
-$1,651
while other countries were recording large surpluses. As Chart 50 indicates,
Japan is expected to have the largest surplus--$3. billion--and Canada
Canada
is next with $1. 5 billion. Smaller surpluses are expected for numerous other
countries, including $0.4 billion for the United Kingdom and $0. 3 billion for
France. This demonstrates that the international monetary system and
exchange rate parities existing before August 15 failed to bring into equilibrium
the payments positions between the United States and other countries.
-$3,038
Reproduced at the Richard Nixon ntial Library and Museum
Chart 49
Swings in the US Basic Balance
(First half 1970-First half 1971)
Million US $
Canada
European
United
Japan
Community
$69
Kingdom
Worldwide
-$157
-$257
-$431
$689
-$829
$940
-$1,238
-$2,080
Total
Merchandise
-$2,596
Reproduced at the Richard Nixon Pre tial Library and Museum
Chart 50
Estimated Basic Balance, 1971
Billion US $
US FOREIGN DIRECT INVESTMENTS ABROAD
$3.5
$1.5
$0.3
$0.4
West
United
Germany
States
Canada
France
Japan
United
-$0.1
Kingdom
-$8.4
Reproduced at the Richard Nixon idential Library and Museum
Chart 51
- 38
US LIQUIDITY BALANCE
The liquidity balance formulation of the balance of payments measures
the annual change in short-term claims of all foreigners (both private
US Liquidity Balance
and official agencies) against U.S. reserves. The liquidity balance adds
FOREIGN DIRECT INVESTM ENTS ABROA D
to the basic balance movements of U.S. private liquid short-term capital.
Billion US $
Chart 51 shows the liquidity balance since 1951.
2
These capital movements have been volatile and have had major and
sometimes traumatic effects on both the level and distribution of world reserves.
Further, the liquidity balance has been generally worsening: during much of
the 1960's the deficit was about $4 billion; in 1969 and 1970, it was closer to
$6 billion; and for 1971, the deficit will be about $9-$10 billion.
o
Negl.
- 2
LESS DEVELOPED COUNTRIES
-4
-$4.7
-6
-8
Adds liquid short-term US capital movements to basic balance
leaving "below the line" liquid dollars held by both private
and official foreigners and US reserve assets. Best measure of
potential short-term foreign claims against the US dollar.
-$9.4
10
1951
55
60
65
70
Reproduced at the Richard Nix
sidential Library and Museum
Chart 52
- 39 -
US OFFICIAL SETTLEMENTS BALANCE
The official settlements balance adds liquid short-term private foreign
capital movements to the liquidity balance. It measures changes in claims
against us held by foreign official monetary agencies and in the level of
US Official Settlements Balance
US FOREIGN DIRECT INVESTMENTS ABROAD
US reserves. It is probably the best indication we have of the pressure on
the U.S. dollar in foreign exchange markets.
Billion US $
5
Large gyrations in world short-term capital movements occur because
national economies may be in different phases of economic growth and cycles.
In turn, these different phases often call for different national monetary
policies--different rates of growth in money supply and rates of interest.
o
Money naturally flows where it can earn the highest rate of return for
a given risk. Since the dollar is the principal transaction currency, vast
capital movements most often are into or out of dollars. These short-term
-$3.4
movements of billions of dollars have at times put heavy strain on the
-5
international monetary system, and have provided some countries more
LESS DEVELOPED COUNTRIES
dollars than they wanted to absorb into their domestic reserves.
A world of rapidly growing economies requires adequate growth in global
-$9.8
reserves, in order to keep pace with the growing level of exports and imports.
-10
It is generally agreed that several billion dollars of additional reserves are
needed annually. US deficits provided large portions of this annual growth
in other countries' reserves in the 1950s and 1960s, and our own reserves were
therefore reduced.
-15
As Chart 52 illustrates, our official settlements balance has swung widely
in recent years. In 1968 and 1969, the United States had a surplus because
interest rates were higher here than in other major money markets. In
1970, when our interest rates dropped below foreign rates, short-term
-20
capital funds flowed abroad and we experienced a deficit of nearly $10 billion.
Adds liquid short-term private foreign capital movements to liquidity
In 1971, our large deficit estimated at $30 billion-- was only partially due
balance, leaving "below the line" US reserve assets and
official liabilities to foreign monetary authorities. Best measure of
to the interest rate differential. More important, especially after mid-April,
short-term position of US dollar in foreign exchange markets.
was the fact that US and foreign firms and banks were shifting from short-term
dollar assets into German marks and other foreign currencies in anticipation
-25
of their revaluation.
$30.0
-30
1950
55
60
65
70
Reproduced at the Richard Nix
idential Library and Museum
Chart 53
40
Trends in US Liquid Foreign Assets and Liabilities
TRENDS IN US LIQUID FOREIGN ASSETS AND LIABILITIES
Billion US $
While the liquidity and official settlements balances indicated annual
64
changes in our payments position, Chart 53 shows total foreign short-term
claims against the dollar, both official and private, and our total reserves
$61
at the end of each three-month period. Foreign claims exceeded our
us FOREIGN DIRECT INVESTMENTS ABROAD
reserves at the end of 1970 by $30 billion. This gap had widened to $37
billion by June 1971, and to almost $50 billion by September 1971.
56
However, only official liabilities could be submitted to the United States
for redemption in gold prior to August 15, 1971. The United States can also
use other reserve assets (i.e., the SDRs or "Special Drawing Rights") to
make foreign payments, or may draw some foreign currencies from the
International Monetary Fund and use those funds to repurchase dollars
48
from foreign monetary authorities. Even so, as we moved through 1971
it was increasingly obvious that our remaining reserves were highly
vulnerable. By the end of 1970 our liquid liabilities to foreign official
agencies exceeded our combined reserve assets by $6 billion. By
September 1971 the excess was $30 billion.
$42
40
LESS DEVELOPED COUN IRTES
Including near-liquid liabilities in these figures, the shortfalls of our
reserve assets on these two dates become $9 billion and $39 billion
respectively.
Liabilities to
All Foreigners
32
Reserve Assets
24
16
$12
Liabilities to Foreign
Official Agencies
8
0
1950
52
54
56
58
60
62
64
66
68
70
Reproduced at the Richard Nix
sidential Library and Museum
- 41 -
US FOREIGN ASSETS AND LIABILITIES
References to our balance-of-payments problems are often measurements
of annual cash flows into and out of the United States. We have also discussed
our position in official terms--that is, the US assets held by foreign official
agencies in bank deposits, securities, and the like. However, much of this
nation's overall wealth is not in government hands but in the hands of the
private sector. We should therefore consider also an overall balance
sheet of America's international position--our overall net worth.
When we combine all private and official assets and liabilities abroad, we
see a new picture. Total US assets abroad increased rapidly from a level of
about $86 billion in 1960 to $167 billion at the end of 1970 while our total
liabilities have moved up less. The result, shown in Chart 54, is an improve-
ment in the "US net worth position" from about $45 billion to $69 billion between
1960 and 1970. Remember that this figure includes for our net worth only the
"book value" of our direct investments. Their market value would be much
higher.
The question is often asked, How can we have balance-of-payments diffi-
culties and still have a net worth increasing at such a rate? In the first place,
much of this net worth is in private hands and therefore not available to offset
official claims against our government's reserves. Also, a substantial amount
of earnings abroad (about $2.5 billion annually in recent years) is reinvested
abroad, rather than being remitted.
Let us not leave a discussion of our balance of payments on such a high
note since there are pressing problems.
To summarize briefly:
1. It seems that those who say there is some persisting imbalance in
the international monetary and payments system are correct. We have
seen the reluctance of most countries to revalue their currencies because
of the effect it would have on their competitiveness and local jobs. We
have seen how many countries like to see their reserves go up and dislike
seeing them drop. So long as such efforts to preserve surpluses exist,
and so long as deficit countries' currencies remain overvalued, it will
be difficult to reach a sustainable pattern of world payments -- and this,
in turn, will invite trade and payments restrictions.
Exchange rate parity changes were seen as an essential adjustment
mechanism in cases of fundamental payments disequilibrium. Exchange
rate flexibility may also be helpful in coping with short-term capital flows.
How far and in what ways is the world willing to use these avenues of
providing a smoother and more stable payments pattern? What should we
do to encourage appropriate exchange rate adustments?
Chart 54
42
2. Efforts to resolve our balance-of-payments problems entail some
costs and bring about conflicts with other goals. An effective devaluation
of the dollar is supposed to improve our balance of payments mainly by
US Foreign Assets and Liabilities*
reducing the dollar costs of our products abroad and increasing the prices
we pay for foreign goods. Thus, while more jobs may be created here, our
Billion US $
consumers' standard of living declines because of the higher prices that
they have to pay for foreign goods.
FOREIGN DIRECT INVESTMENTS ABROAD
Net International
In some instances, conflicts between balance-of-payments consid-
Investment Position
erations and our national interests go beyond the desires of a smoothly
$69.1
functioning monetary system. For example, how far are we willing to go
$61.6
in modifying our policies in the field of foreign and security affairs to
achieve an improved balance of payments? To put the matter differently,
perhaps only an improvement in the balance of payments may permit us to
$44.7
continue our policies in the field of foreign and security affairs. Along
this line, defense cost-sharing is a subject receiving increasing attention
within our government. To what extent should its impact on balance of
payments intensify these efforts?
$166.6
3. We have also seen that various economies of the world can be out
LESS DEVELOPED COUNTRIES
of phase with each other, and some say this leads the United States and
1960
1965
1970
other countries to make monetary decisions affecting money supply and
interest rates that can have important short-term balance-of-payments
effects. To what extent is it really practical to ask this country, or others,
to distort in important ways the decisions they would otherwise make in
$120.4
the interests of promoting growth and price stability at home--in order to
help stabilize the international monetary system? In what specific ways
would we expect ourselves and other countries to harmonize our stabili-
$97.5
zation policies? Or, are there new approaches to dampening the impact
of large short-term swings of capital?
$85.5
This brief examination of the balance-of-payments issue makes clear
that there are a variety of problems involved: some monetary, some non-
monetary; some long term, some short term. It is a field in which
$58.8
important progress seems to be made only in an environment of urgency,
Total Assets
US USE OF NATURAL RESOURCES
if not in a time of crisis.
$40.9
Total
Liabilities
1960
1965
1970
*Long-term book value and short-term market value.
Reproduced at the Richard Nix
residential Library and Museum
-43-
V.
US DIRECT INVESTMENTS ABROAD
American businessmen have made increasingly heavy investments
abroad. We have seen some of the immediate effects on our own balance-
of-payments position and have anticipated some of the long-range benefits
to be gained by this broadening of the base for our national income. There
are, however, other consequences here and abroad to be taken into account
for the future.
During 1960-1970, US direct investments in plant and equipment abroad
more than doubled, to a total of $78 billion (Chart 55). The share going to
Europe, where our investments have nearly quadrupled to more than $24 billion,
has risen most rapidly--causing periodic concern in important European
quarters about a possible "American takeover" of existing businesses. (All
studies in this field suggest that the preponderant amount of this US invest-
ment is "new" investment and not the purchase of existing companies.) In
only ten years the European share of total US foreign direct investment rose
from 21% to 31%. On an overall basis, a study covering the year 1964 showed
that US enterprises accounted for about 6% of total manufacturing sales in
Europe--with US representation somewhat stronger than that in "advanced"
industries in which large firms play a dominant role: machinery and trans-
port equipment (automotive, for example). A highly visible exception is the
computer industry, in which US companies have a larger market share.
Canada continues to be the largest single recipient of US investment by a
wide margin, but its share had declined from about 35% in 1960 to 29% of the
total in 1970, or about the same as all of Europe. Thus, during the 1960s, the
rate of increase of US investment was obviously slower for Canada than for
Europe. This concentration of US investment in Canada is a major factor leading
Prime Minister Trudeau to say that "living next to the United States is like
sleeping with an elephant. " On the other hand, we should not forget that 63%
of Canada's manufactured goods are exported--which, of course, means Canadian
jobs--and our investments in Canada contribute importantly to her export capability.
Latin America's share of total US direct investment abroad has fallen
sharply--from 26% in 1960 to less than 20% in 1970. Our total investment in
Latin America, however, increased by about three-quarters during the 1960s
and accounted for about 14% of total new US investment abroad. But in the
last year or so the rate of increase in US investment in the region has slowed,
due in part to the growing fear of expropriation of American assets, an issue
with which we must deal. Some studies of a few years ago suggest that about
16% of Latin America's manufacturing output is US owned -though this of course
varies greatly by type of manufacturing (such fields as rubber and chemicals
have stronger US representation).
Chart 55
-44-
Note the small and relatively unchanged amount of US investment
Japan in ten years--still less than 2% of total US foreign investment and in
lack only slightly more than $1 billion. This is certainly not the result
investment of interest or ardor by US business. Rather, it reflects Japanese of a
restrictions born of a traditional fear of control of their
enterprises by "outsiders, " and the special problems such outside
US Cumulative Foreign Direct
and present government. in an economy with such close interrelationships of labor, business, interests
Investment Abroad
Direct foreign investments in the United States are less than $12 billion,
Billion US $
is about of one-sixth of what we have invested abroad, even though the US
$78
the course larger than that of all Europe. Much could be said for increasing GNP
$3.6
4.6%
Unallocated
amount of foreign investment in the United States.
$5.1
6.5%
Other Less Developed
$1.6
2.1%
Middle East
$4.3
5.6%
Other Developed
$15
1.9%
Japan
$14.7
18.8%
Latin America
LESS DEVELOPED COUNTRIES
$50
$2.0
4.0%
$2.9
5.9%
$1.5
3.0%
$22.8
29,2%
$2.3
4.6%
$0.7
1.4%
$109
22.0%
$32
Canada
$1.4
4.4%
$1.6
4.4%
1611
$15.3
30.8%
$1.2
$0.3
0.8%
$8.4
26.3%
$24.5
313%
$11.2
35.1%
$14.0
283%
Europe
US USE OF NATURAL RESOURCES
$6.7
210%
1960
1965
1970
Reproduced at the Richard
esidential Library and Museum
Chart 56
-45-
US INVESTMENT TRENDS (PLANT AND EQUIPMENT)
times being as much in 1970 on domestic operations as abroad, but the more than
Chart 56 shows American companies were still investing six
between years is running at twice the rate of domestic expansion; over the
ten reduced. The rate of growth of overseas investments ratio past is
large, this investment by US-owned companies increased by 247%.
by 119%, 1960 and 1970 domestic investment in plant and equipment whereas increased
markets is explained by the following factors: (1) more rapidly By and
US Investment Trends
trade US market, (3) lower production costs, (4) movement
itive than abroad, the (2) the belief that some of those markets were less growing compet-
Plant and Equipment
pate in restrictions, these and (5) most important, if American firms to behind
which in turn foreign markets, competitive conditions require local are production, partici-
Billion US $
requires a direct investment.
100
How in this much has direct investment abroad resulted in lower
markets? scale To country? Was it always a necessary condition to economies these of
1960-70
Increase
what extent does it continue to be? What is the effect capturing
119%
United employment? How does this large investment affect export on US
80
$80.6
investment States? Answers to these questions will help us formulate potential a trade from and the
LESS DEVELOPED COUNTRIES
policy geared to market conditions in the 1970s.
Domestic
60
40
$36.8
1960-70
20
Increase
247%
US-Owned Companies Abroad
$13.2
$3.8
US USE OF NATURAL RESOURCES
o
1960
62
64
66
68
70
Reproduced at the Richard Nix
esidential Library and Museum
Chart 57
-46-
US DIRECT EXPORTS VERSUS SALES OF US-OWNED
FOREIGN AFFILIATES
Sales of our foreign affiliates are now about two and one-half times our
direct exports of manufactured commodities, and nearly 75% greater than
total US exports. Moreover, foreign affiliates' sales have been growing almost
twice as fast as our exports during the past decade, even though our exports
have more than doubled in that period (Chart 57).
Several factors underlie this development.
US Direct Exports vs Sales of
--Many foreign markets for our products are growing rapidly
US-Owned Foreign Affiliates
but, at the same time, are growing more competitive. Both the
size of the markets and their competitiveness have made it
Billion US $
attractive or necessary to invest abroad in order to tap them.
80
$76.8
1960-70
Chart 58 shows that most sales of US foreign manufacturing affiliates
Increase
are in the local market abroad-78% in 1968. When we add another
225%
14% of sales that go to third markets overseas, we find that only about
8% of sales are back to the United States. This last figure has grown
in recent years--though it appears on closer examination that a
LESS DEVELOPED COUNTRIES
60
Sales of Foreign
dominant portion of increasing exports to the US by American affiliates
Manufacturing
abroad results from the US-Canada Auto Agreement.
Affiliates
--As foreign markets grow more sophisticated in their requirements,
it becomes necessary to tailor products to meet specific customer needs
$42.3
in specific markets. This does not mean that such plants necessarily
40
limit US exports of that product. Quite the contrary, the presence of a
plant abroad to complete the final assembly often makes available an
$29.3
1960-70
outlet for US exports that otherwise would not have existed.
$23.6
Increase
138%
--Some argue that the United States has not done enough to make
20
$17.4
exporting attractive to US firms.
Exports of Manufactured
$12.3
Commodities
--The emergence of the multinational corporation has facilitated
the development of worldwide markets and sources. The multinational
US USE OF NATURAL RESOURCES
corporation, to be discussed, is a major phenomenon in the world
economy.
o
1960
62
64
66
68
70
Reproduced at the Richard Nix
dential Library and Museum
Chart 58
Sales of Foreign Manufacturing
Affiliates of US Firms
$59.6
Billion US $
14%
8%
$42.3
78%
14%
4%
82%
Exports to
$18.3
Third Countries
10%
6%
Exports to the
84%
United States
Local Sales
1957
1965
1968
Reproduced at the Richard Nixon Pr
Library and Museum
-47-
THE MULTINATIONAL CORPORATION
Americans must come to know the new industrial type--the multi-
national corporation (MNC)--which will increasingly affect our way of life
during the 1970s and 1980s. Here are some of its distinctive characteristics:
First, MNCs depend heavily on overseas income. There
are many American companies now earning from one-fourth to
one-half of their income abroad. The MNC is sensitive to policies
affecting foreign investments--investments which, as we have
seen, provide return flows of income that are a major positive
factor in our balance of payments.
Second, the MNC has the resources and the scope to think
and act with world wide planning of markets and sources. Many
international opportunities require capital and technology on a
scale only large multinational corporations can supply.
Third, since the MNC operates across national boundaries,
it speeds up the transfer of know-how. It hastens changes--bringing
important benefits but also accelerating adjustment problems.
Fourth, the development of the MNC has aroused serious
concern among labor unions. They claim there are major US job
losses resulting from these companies which are characterized
as "job exporters." As "evidence" of this, it is said that about
50% of the US international trade transactions are "intracorporate"-
which are assumed to result in lost US jobs. Actually, as pointed
out earlier, many of these transactions result in increased exports
from the United States that would not have been possible without the
foreign plant. One study shows that over half of all exports of manu-
factured products from the United States flow from MNCs and in
turn about half of these go from the parent to the subsidiary plant
abroad. A more recent study indicates that among America's
larger MNCs, their positive net trade balance with their affiliates
increased 85% from 1960 to 1970. Also, as mentioned above only
about 8% of the output of US foreign manufacturing subsidiaries is
imported back to the US (Chart 58).
the Richard Nixo
esidential Library and Museum
-48-
Fifth, the MNC is also a source of concern to some governments,
since from its wide base it is often able to circumvent national
monetary, fiscal, and exchange policies. The possibility of
distortions arising from intracorporate pricing practices to take
advantage of national variations in tax laws has also been cited
with concern.
Sixth, studies indicate that MNCs tend to be companies that are
growing at rates significantly higher than for all manufacturing
industries as a whole--including their growth in domestic employment.
Not enough is known with certainty about the specific economic effects
of MNCs, including their effect on jobs in this country. One thing, however,
is already clear. These corporations are a major force in expanding both
world trade and America's role in the world economy. Also, MNCs are an
integral part of our technological and managerial expertise. To seriously
restrict the activities of these corporations in their foreign operations would
obviously be a major step back from the relatively open and interdependent
world we have tried to help build.
Reproduced at the Richard Nixo esidential Library and Museum
Chart 59
-49-
VI.
LESS DEVELOPED COUNTRIES (LDCs)
The comparative view of world economic affairs is that the gap between
rich and poor countries continues to widen. Some LDCs are making sub-
stantially more progress than others, but poverty and misery still extend
widely over the less developed world.
GROWTH OF FREE WORLD GNP
Real Growth of Free World GNP
Both the developed and less developed economies grew at fairly similar
(Index 1960=100)
rates during the past decade, with the LDCs having a slight edge at 5.4%
(Chart 59). However, since population growth is significantly more rapid
180
in LDCs, their per capita income growth is significantly less than in the
Average Annual
industrialized countries--less than 3% compared with 4% in the developed
Growth Rate, 1960-70
169
countries. Inevitably, the per capita income gap between the developed
5.4%
5.1%
countries and LDCs continues to grow.
164
3.9%
160
2.8%
GNP
In the next three decades the world's population will probably have
increased by 3 billion to some 6.5 billion, and the LDCs' share of the total
will also increase. Thus, unless some fundamental new forces affect this
explosive equation, we are likely to see an ever increasing number of
GNP
Per Capita
147
people left on the low side of the income gap.
140
132
129
Per
Capita
128
120
121
113
Blue Developed Countries
Red Less Developed Countries
US USE OF NATURAL RESOURCES
100
1960
62
64
66
68
70
Reproduced at the Richard
idential Library and Museum
Chart 60
-50-
PER CAPITA GNP
With two-thirds of the Free World's people living in LDCs, it is important
to look behind the figures and try to understand what life is like on an income
of $200 per year, as compared with $3,000 for the one-third living in developed
countries (with due allowances for statistical difficulties in these figures.)
Free World
(Chart 60).
Per Capita GNP, 1970
Productivity is so low in the LDCs that there is usually little left over to sell
once subsistence needs have been satisfied. Perhaps as many as 10% of children
$3,000
die before the age of four, and as many as a quarter are undernourished, some
of them to the point of physical impairment. Only about a third of the present
high school age population is in school.
Percent of
Even if per capita GNP in the LDCs were to grow substantially faster
World Population
than in the developed countries, the absolute dollar gap would continue to increase.
This is because the economic base in the developed countries is so much larger
Free World Countries 60%
that a small percentage growth will provide a substantial increase in dollar terms.
For example, a $200 increase in per capita GNP would mean a doubling in the
Developed countries 20%
LDCs and only about a 4% to 5% rise in the United States.
Less developed
countries
40%
"Closing the gap" is not a feasible objective, but increasing standards of
Communist Countries 40%
living is possible. However, to put this in perspective, if the population of an
LDC is increasing 2. 5% annually and its real GNP is climbing at 10% annually,
(very few are), then per capita GNP will double in a decade. In the more
typical case where GNP is increasing at only 5% annually, it would take a
quarter of a century for per capita GNP to double--from $200 to $400. These
levels, by the year 2000, do not hold reassuring prospects for the populations
of LDCs.
US USE ORAL RESOURCES
$200
Less Developed
Developed
Countries
Countries
Reproduced at the Richard Nixor dential Library and Museum
Chart 61
-51-
FREE WORLD FINANCIAL FLOWS TO LDCs
Other countries are providing an increasing share of the official aid
to LDCs while our support is dropping. In 1969 the US Government's share
fell below 50% of the total. Given our decreasing share of the world's GNP
compared to other developed countries, and our much larger share of the
defense budget on behalf of ourselves and the Free World, we should be
Free World Financial Flows
pleased that the rest of the Free World is picking up an increasing share of
to Less Developed Countries
responsibility (Chart 61). As a percent of GNP, a number of leading
industrialized countries are already giving more aid than we.
Billion US $
For all this, however, we need to remember that "aid" can cover trans-
10
actions that are normal, commercial dealings.
$9.3
At least two reasons explain the rapid growth of the private capital
flows from other industrialized countries to LDCs. One is that these other
Total Other Developed
developed countries, and in particular Japan, are trying to build LDC
8
Free World Countries*
markets and are extending export credits on an expanded basis. For example,
it is estimated that almost 40% of Japan's foreign aid programs have been
of this type. Another is that the market for raw materials from LDCs is becoming
very important and competitive, and other countries are therefore investing
6
heavily in certain LDCs. Japan, in particular, is committing major financial
$5.3
$5.4
resources to long-term loans to these LDCs--in return for which Japan receives
long-term access to low-cost raw materials, and also sells Japanese capital
Total US*
$4.3
$5.0
equipment to mine the raw materials.
$3.8
4
$3.8
$3.4
$2.7
Official US**
$3.0
$2.5
Official Other Developed
Free World Countries**
US USE OF URAL
2
$2.0
o
1960
62
64
66
68
70
*All financial flows to less developed countries including private investment.
**Government-to-government and to multilateral organizations.
Reproduced at the Richard Nixon idential Library and Museum
Chart 62
-52-
US TRADE WITH FREE WORLD LDCs
In 1970, US exports to LDCs reached the record level of $13. 2 billion.
With imports of $10.8 billion, our trade balance with LDCs was $2.4 billion.
About 25% of our exports to LDCs are financed through foreign aid (Chart 62).
Chart 63 shows that the share of US exports going to Free World LDCs
remains nearly the 1960 level-about 31%. However, the share of our imports
coming from LDCs has fallen sharply--from about 37% in 1960 to about 27%
in 1970. Raw materials account for the bulk of our purchases from these
US Trade with Free World
countries, and our imports of those materials have increased more slowly
Less Developed Countries
than our imports of manufactured goods. (US tourists add significantly to
the dollar receipts of some LDCs, even though such dollars do not show
Billion US $
up in the trade balance.)
14
$13.2
12
GAP
$2.4
$10.8
10
EXPORTS*
$9.0
8
GAP $1.8
$6.4
$7.2
IMPORTS
6
GAP $0.8
$5.6
4
2
o
1960
62
64
66
68
70
US USE OF NATURAL RESOURCES
*About 25% of 1969 exports were financed by aid programs.
Reproduced at the Richard Nixor esidential Library and Museum
Chart 6
Less Developed Countries'
Share of US Trade
Percent of Total
40
37%
US Imports from Less
Developed Countries
35
34%
31%
33%
US Exports to Less
30
Developed Countries
27%
25
1960
62
64
66
68
70
-53-
ECONOMIC AND EXPORT GROWTH IN LESS DEVELOPED COUNTRIES
There is a distinct ambivalence in some of our attitudes about LDCs
and their exports to us. Those of us in the industrialized world know that
these countries will not become economically and politically viable, stable,
and independent until they attain minimum levels of income far higher than
at present. Most of these countries cannot depend on agriculture alone to
achieve these income levels. A modern economy typically requires both
industry and services; if LDCs are to grow rapidly, they must industrialize.
This is where our ambivalence appears. On the one hand, we know that
this growing industrialization will concentrate initially in low-technology,
labor-intensive products -- whose production usually requires less capital,
less training, and few technical skills -- in short, where there is relative
ease of entry. Increased industrial capacity generates export potential --
and yet, as we have seen earlier, it is precisely in these nontechnology-
intensive products where we see the largest US balance-of-trade deficit.
It is also where we see the largest job and company dislocations in our own
country, and where we hear the loudest appeals for protection. On the
other hand, we also know that if LDCs cannot sell their exports, they will
not be able to buy imports from other countries. Still, it appears that the US is
absorbing a disproportionate share of LDC manufactured exports-
one-third--aboutdouble our share of imports generally.
The importance to LDCs of their exports is shown in Chart 64. Notice
that in those countries whose GNP growth is 5% annually or less, exports
are growing even more slowly -- 3% to 5% Examples are India, Morocco,
Tunisia, Columbia, and Ecuador. However, when GNP grows in the 6% to
7% range -- exports grow on the average somewhat faster. In this category
we find Greece, Nicaragua, Portugal, Columbia, El Salvador, and
Pakistan. And, in those LDCs that have achieved a GNP growth rate of 8%
or more, we see a major leap in exports -- an average export growth of 18%
in such countries as South Korea, Panama, Taiwan, Iran, and Spain.
Furthermore, when we look at the faster growing LDCs, we see they are
not relying on exploitation of natural resources. Most concentrate on
"nontechnology-intensive" manufactured products; and their growing exports
are taking place in spite of reduced or halted US foreign aid.
We see in many of these LDCs migrations of rural populations into
cities unable to accommodate them; new nonagricultural jobs increase
very slowly in many countries. Thus cities suffer very high rates of
unemployment -- often 25% to 40% of the labor force. In this situation,
those developed countries restricting exports from LDCs can obviously
be painted as villains responsible for the lack of jobs. It has been said
Chart 64
54
that when economics becomes important enough, it becomes political --
and in the 1970s, political problems with the LDCs are likely to be
economic problems.
There are also important financial aspects to LDC growth requirements.
Current LDC export earnings are inadequate to finance investment and to
service their rapidly growing debt. It has been estimated that by the mid-
1970s, LDCs' debt service will run about $10 billion per year.
Economic and Export Growth
The LDCs can meet their foreign exchange needs in one of three ways.
in Less Developed Countries, 1960-69
One is through rapid increases in new foreign aid loans, which, given the mood
at least in the United States, seems unlikely. A second way is to attract
18%
more foreign investors by improving the conditions for and security of
foreign investment. The third way is to avoid continuing debt crises and
refinancing problems through rapid export growth. This last will require
expanded access to the large markets of the developed countries.
Average Annual
Export Growth
8%
4%
3%
US USE OF RESOURCES
Real GNP Average
8% or
6%-7%
5%
4% or
Annual Growth
more
less
Reproduced at the Richard Nixon Pr idential Library and Museum
Chart 65
-55-
VII.
US USE OF NATURAL RESOURCES
Along with men, methods, and money--access to low-cost raw materials
importantly affects a country's competitiveness. While the first three of
these factors are somewhat under the control of individual countries, raw
US Production and Consumption
materials are where one finds them; and none of the major economic powers
is self-sufficient in materials. The USSR comes closest to being self-
of Selected Raw Materials
sufficient; but at the other extreme, Japan must import virtually all of its
industrial raw materials.
Percent of World Total in 1970
Developed countries, facing expanding demands for raw materials and
limited supplies available domestically, are turning increasingly to less
Iron Ore
Copper
developed countries. Competition for LDC raw materials will intensify,
and expanded transport facilities will be needed to move them from source
18%
Consumption
Consumption
to point of processing.
12%
30%
25%
6%
Although we are a major producer of raw materials and fuels, we must
import 15% of our requirements. Among important crude materials, we
import 10%-15% of both crude oil and copper, 30% of iron ore, and more
5%
than 80% of bauxite needs (Chart 65). We are self-sufficient in coal and
zinc, while we must import all or most of our tin, natural rubber, nickel,
and chrome.
As good-quality domestic resources are depleted, we find it is cheaper
to turn to higher-grade foreign sources. Long-range projections indicate
that by the year 2000 we will import 30%-50% of our mineral requirements,
including a significantly increased share of our oil needs.
Our growing dependence on foreign raw material resources has major
Bauxite
Crude Oil
policy implications, including:
5%
Consumption
24%
Consumption
1. A growing trade deficit in basic commodities--especially oil- -
21%
and increased capital outflows to develop and exploit foreign mineral
25%
resources have major balance-of-payments implications.
3%
2. A greater US impact on world raw material markets. The United
States will compete with other developed countries, notably the Japanese,
who will also be faced with shrinking domestic sources and rapidly growing
needs.
3. Environmental effects of the mounting energy requirements of a
Production
rapidly expanding industrialized world.
Imports
4. The effects of this entire raw materials equation upon America's
future competitiveness in the world economy, and our vulnerability due
to reliance upon foreign supplies.
In 1970 the United States imported 15% of its mineral requirements.
By the year 2000, this share will increase to at least 30%-50%.
5. Finally, the implications of all these factors for the development
of new clean energy sources--the subject of the President's recent
message.
Reproduced at the Richard Nix esidential Library and Museum
Chart 66
-56-
OECD COUNTRIES ROLE IN THE WORLD ECONOMY
The 1970's will present us with some new problems and some old,
if aggravated, frustrations. Yet, we shall always want to remember that
the countries that account for much of the world's industrial production
OECD Member Countries*
and world trade are also our allies in an economic and security partner-
ship that has led the world to an era of unprecedented peace and
Role in the World Economy, 1970
prosperity (Chart 66).
World
Clearly, both Europe and Japan now have the potential to become
Industrial
major inward-looking blocs with the GNP, trade, and the monetary
World Trade
reserves to do what they must do in their own economic self-interest.
Production
In the same vein, each of these areas have the technological base --
nuclear and missile to construct atomic weapons systems in a few
years.
65%
61%
Thus, as we adjust to the new economic realities of the 1970's,
this chart helps remind us of the need to avoid actions and attitudes that
World
could provoke our partners or ourselves to withdraw into large economic,
Population
political, and perhaps ultimately, military shells.
20%
The task, to put it more positively, is to build a structure for peace
OECD
in the 1970's that takes into account the growing resources of our partners
resources that enable them both to compete and trade in an open, peaceful
way and to share in the security and development burdens of the Free World.
REST of
WORLD
35%
39%
80%
*Australia, Canada, Free Europe, Japan, and the United States.
Reproduced at the Richard Nixon Pr
dential Library and Museum
-57-
THE JAPANESE ECONOMIC MIRACLE A Special Review
America's traditional and cultural ties have been with Western Europe.
Our language and our impetus as a nation grew from our European heritage,
as did most of our economic institutions. Throughout our history, most US
trade, investment, and security relationships bound us with the Atlantic nations.
America's familiarity with European ways of thought and action is
obvious. Less familiar to us are the institutions and history of Japan, the
country selected for description in this special review. It is because Japan
is both culturally distant from Americans and because that nation has achieved
a remarkable growth of output and trade that this special review is devoted to it*.
Only about ten years ago, if one had been asked to think aloud about
Japanese products one would probably have mentioned verysmall market
shares of Japanese photographic equipment, some electronic equipment, and
toys -- but certainly nothing as basic as steel or automobiles.
Today, the Japanese have passed the economies of West Germany,
France, and the United Kingdom and rank behind only the United States and the
Soviet Union in total output. Their growth rate of the past 20 years has
surpassed everyone's expectations.
GOVERNMENT-BUSINESS PARTNERSHIP
Japan is a special kind of economic phenomenon. There is an assumption
that the key objectives of government and business are essentially the same:
the maintenance of Japan's economic health at home and the promotion of
the nation's economic interests abroad.
The system of government-business interaction which underlies Japan's
successful growth does not lend itself easily to description in Western terms.
Japan's is neither an unplanned, free-enterprise economy like that of the
United States, nor a centrally planned economy like those of Eastern Europe
and the Soviet Union.
Many factors have brought about the Japanese phenomenon. Any list
of them would have to include the insular psychology of an island nation, a
homogeneous culture and sense of racial identity, and the need and will to
recover from the devastation of World War II. The Japanese appear to have
asked themselves, "What are the implications for us of trying to recover a
powerful position in the world, while maintaining our low profile in overall
foreign and defense policies?"
*A variety of sources were used to prepare this material. One of the most
important was the Boston Consulting Group, which has specialized in a
variety of studies of the Japanese economy.
Reproduced at the Richard Nixon Pre ntial Library and Museum
-58-
-59-
Part of the answer to this question has been a complex apparatus of
interaction involving several government ministries such as the Ministry
currently accounts for nearly 80% of capital. For major Japanese corporations,
of Finance, the Ministry of International Trade and Industry (MITI), and
debt-to-equity ratios often run four or five to one, in sharp contrast to the
Fortune average for 500 U.S. corporations of less than 0.5 to one. This
the Bank of Japan; and formal hierachial groups of industries, trade associa-
tions, and labor.
practice enables major Japanese corporations to expand capacity much faster
than would be possible if they had to depend mainly on retained earnings or
the underdeveloped Japanese security markets.
A major segment of Japanese government officials devote themselves
to stimulating growth and improving business prospects the Japanese
How can Japanese companies assume the level of risk associated with
government sees itself as a partner with business in facilitating economic
such heavy debt, and what are the implications for resource allocation
growth.
within the economy? In brief, the government of Japan stands behind the
debt position of major companies, ensuring both that financing will be
The situation is far different from that in the United States -- where it
available for rapid growth and that the government can play a central role
is probably true that major efforts of government officials are devoted not
in determining the nature and direction of that growth. As fewer guarantees
to growth and stimulation, but to restraint and regulation of business and
apply to smaller or less efficient firms, the system encourages a rapid
labor: the role of the umpire.
move toward concentration of production in the hands of the larger, more
efficient producers.
The Japanese system includes a range of formal and informal channels
of communication between government and industry. Thus, by the time a
Since the commercial banks of Japan provide the major source of funds
new policy decision is announced, widespread consultation has taken place,
to corporations via an aggressive lending policy, they are ultimately dependent
and a consensus has often been reached. Communication is facilitated by
upon the Bank of Japan. The fact is that no major company's loan is likely
the close personal ties of business and government officials.
to be called unless the Bank of Japan wants it called. On several occasions
in recent years, the Bank has earmarked funds to be channeled through the
The Japanese recognize the need for broad, long-range economic
commercial banks to major companies that have been, for all practical
planning, while avoiding overly detailed implementation. Plans of the Japan
purposes, bankrupt. Major changes in management, organization, and
Economic Planning Agency are prepared in consultation with leading industry
operations have been the conditions attached to these financings.
experts. While these plans lack legal sanction, they exert a powerful
influence on the thrust and direction of the Japanese economy.
Another institution characteristic of the Japanese system, conglomerate
groupings called Zaibatsus, operate to decrease the financial risk of large
Japan is not a socialized economy in the sense of detailed government
companies.
production plans. However, viewing the Japanese economy as a type of
informal conglomerate is helpful. It is a form of business organization
These groups usually include, besides numerous manufacturing firms,
which, through strong financial management, can channel cash flows rapidly
a major commercial bank and an international trading company. Zaibatsus
from low-growth to high-growth sectors.
would normally dwarf any conglomerates in this country. The heads of the
major companies review operating results, growth plans, and capital
The Bank of Japan is the financial center and, following guidelines of
requirements much as do the heads of divisions of a U.S. conglomerate.
the Planning Agency, determines the nature and direction of growth by
They are usually in unrelated fields or in the relationship of supplier and
allowing companies in rapidly growing industries to employ more debt than
user. Largely because of the dependence of Japanese companies on
they could safely incur by themselves.
short-term debt, a bank in each Zaibatsu plays a central role.
UTILIZATION OF CAPITAL RESOURCES
Japan's high capital reinvestment rate (39% of GNP) was noted earlier.
The Japanese system for the allocation of this capital deserves comment.
First, Japanese corporations employ large amounts of debt in their
capital structure. In the Japanese steel industry, for example, debt
Reproduced at the Richard
esidential Library and Museum
Chart 67
-60-
LABOR RESOURCES
A persistent myth about Japan is that of "cheap labor. " It is commonly
assumed that the growth of the Japanese economy is based primarily on low
labor costs. Many countries of Asia have far lower labor costs and far more
raw materials but none has the combination of Japan's efficient use and
allocation of labor and capital resources, and a government-business
Average Hourly Earnings of Wage
partnership to promote growth.
Workers in Manufacturing, 1970
Japan's labor rates have, of course, been low compared with those
of some Western countries (Chart 67). However, in the sophisticated
sectors of the economy -- those like steel and machinery that are growing
US $
fastest and are most competitive in world trade -- direct labor rates are at
European levels. Wage increases of about 14% annually during 1965-70 in
manufacturing sectors have been justified by high productivity rises of about
Italy
$0.96
15% annually, or even more. In steel, Japanese annual growth in productivity
of 18.5% outpaced wage gains. In the United States, on the other hand, wage
Japan
$0.96
gains exceeded productivity increases during the last half of the 1960s. As
a result, the unit labor cost gap continued to widen to the disadvantage of
the United States. Productivity growth in Japan has also spurred major
France
$1.01
gains in Japanese real wages relative to the United States and other developed
countries (Chart 68).
United Kingdom
$1.25
Labor is indeed a critical factor in Japan's success -- not so much
because it is "cheap labor, " but because it is efficient and flexible and
because its organization in both companies and unions stimulates rather
Netherlands
$1.27
than impedes economic growth.
Belgium
$1.32
West Germany
$1.62
Sweden
$2.33
Canada
$2.98
$3.36
United States
Reproduced at the Richard Nixon P
ntial Library and Museum
Chart 68
Index of Real Average Hourly Earnings
of Wage Workers in Manufacturing
220
(1960 = 100)
203
Japan
200
182
Italy
180
173
West
Germany
160
146
France
140
137
Canada
United
135
Kingdom
120
United
113
States
100
1960
62
64
66
68
70
(Est.)
Reproduced at the Richard Nixon Pi ential Library and Museum
-61-
THE "LIFETIME EMPLOYMENT" SYSTEM
Japanese workers are typically hired directly out of school
and spend their careers with one company. This permanent employ-
ment system, which appears inflexible to the Western observer,
has contributed importantly to Japan's economic miracle:
1. Since the worker enjoys lifetime job security, he more
readily accepts technological change. If his job is displaced
by automation, he knows he will be retrained by the company for
another task.
2. Conversely, management is probably willing to expend
larger sums to retrain a worker, knowing that such an investment
is less likely to accrue to another company through the worker's
leaving.
3. While the Japanese industrial labor force is unionized
in about the same proportion as in the West, unions are organized
by company and not by trade. The union tends to identify its long-
range interest with that of the company. In 1968, Japan lost 2.8
million man-days to strikes versus more than 49 million in the
United States. Furthermore, virtually all strikes are of short
duration. For all practical purposes, there have not been any
major strikes for many years. In the last 15 years, the United
States has lost more days per 1, 000 non-agricultural employees
than Canada, France, Germany, Sweden, or the United Kingdom--
only Italy's rate exceeds the United States.
4. This company identification has important morale effects.
Only if the company is successful can the employee enjoy a
prosperous career and comfortable retirement.
5. Since wages are tied importantly to age, labor costs are a
direct function of the average age of the work force. Thus, the fast-
growing firm (or industry) recruiting large numbers of young workers
directly from school, has a relative cost advantage over the slow-
growth enterprise. The slow-growth enterprise, therefore, encounters
increasingly noncompetitive labor costs.
This employment system is not as inflexible as it first appears.
Mandatory retirement age is 55 -- when the employee is given a lump-
sum pension that is not really adequate to support him for the remaining
15 years of his life expectancy. He is therefore available to be rehired
by his company (or a subsidiary or sub-contrator) as a temporary worker.
esidential Library and Museum
-62-
- 63
Top management is not subject to early mandatory retirement:
FULL CAPACITY POLICY
after being designated a director of the company, usually in his
forties or fifties, a Japanese executive is exempt from any mandatory
One consequence of the Japanese lifetime employment policy is that
retirement requirement. Presumably, this permits the selection of
labor tends to be treated as a fixed cost. Also, because of the propor-
the most outstanding to stay past fifty-five.
tion of debt in its capital structure, the financial costs of a Japanese
company are largely fixed. Therefore, a Japanese company is driven
The effectiveness of worker training is dependent upon the literacy
to operate at high capacity as long as its revenues cover variable or
and education of the population. Japan's educational level is high:
"out-of-pocket" costs. This can produce export prices which are
illiteracy, for example, is negligible. A higher percentage of Japan's
extremely low.
secondary school age population is in secondary school than in the
United States about 91% versus 78%. While college enrollment in
In an economy where industrial output has consistently increased
the United States exceeds that in Japan, the Japanese college enrollment
more than 20% annually for all industry, it is reasonable to place main-
per thousand exceeds European levels.
tenance of market share as a primary corporate objective. These gains
plus the effective commitment of the government to stimulate rapid
The Japanese emphasize technical training. For example, Japan
economic growth have caused Japanese companies to add capacity in
now graduates more engineers than the United States - with about half
anticipation of market expansion. Given the capital costs of new facili-
of the population. (The United States, however, still graduates more
ties, much is done to ensure that they will be operated at capacity and
Ph. D. 's) Japan's vocational-technical educational system is highly
available products moved onto world markets. This explains in part at
developed, permitting them to direct the young into skills that will be
least the tendency of Japanese exports to increase sharply and quickly
in high demand in the future.
when the increase in domestic demand slackens periodically, and helps
explain some of the problems foreign competitors have with short-term
In the next pages, we shall review data on productivity and unit
Japanese pricing policies.
labor costs that are the composite result of many objective factors
capital input, training, increasing technology, longer work hours,
Their use of labor, capital, and good management practices has
etc. (In Japan, the average work week is about 49 hours, versus
yielded Japanese productivity improvements unmatched by other indus-
37-39 in the US). While it is hard to quantify in a chart, it is worth
trial countries. The following charts add statistical substance to this
noting that a variety of foreign journalists visiting Japanese automobile
conclusion.
plants, for example, refer to various worker motivational factors:
"willingness to work,' " "discipline," "pride," "finishing up the work,"
In unit labor costs (Chart 69) the United States has an excellent
etc.
performance from 1960 through 1965-66, when annual productivity in-
creases equaled, or even exceeded, wage increases. More recently,
we see that relative German costs have risen sharply, spurred by an
inflationary boom and a substantial currency revaluation. In the case
of Great Britain, we see a strong trend of rising unit costs, in spite of
substantial devaluation.
The chart speaks eloquently of Japanese productivity performance--
made even more remarkable by the fact that wage increases were about
14% annually between 1965 and 1970. An important question is how long
Japan can continue this unique performance; inflationary pressures are
building there too.
Reproduced at the Richard residential Library and Museum
Chart 69
- 64
By very competitive export pricing and by tax and other incentives,
Japan has been able to use its productivity growth to keep prices down for
its export products (Chart 70) even though consumer prices have risen.
Unit Labor Costs in Manufacturing
Since consumer prices obviously include the cost of services (which in
Japan have risen very rapidly), the disparity between export and consumer
(Index 1965=100) =
prices is necessarily overstated to some degree in these numbers. More
analytical work must be done in order to establish valid comparisons of
140
United States
this type, based solely on the prices of comparable goods that are both
121.4
consumed domestically and exported.
120
103.0
100
80
140
Japan
120
103.6
100
80.3
80
140
134.5
West Germany
120
100
81.1
80
140
United Kingdom
120
107.1
100
85.7
80
1960
62
64
66
68
70
Based on series expressed in US $.
Reproduced at the Richard Nixon Presid ntial Library and Museum
Chart 70
Consumer and Export Price Indexes
(1960=100)
180
176
160
United States
Japan
140
131
Consumer
Price Index
120
122
Export
Price Index
105
100
180
160
West Germany
United Kingdom
148
140
130
120
115
117
100
180
160
France
Italy
151
147
140
120
114
108
100
1960
62
64
66
68
70
1960
62
64
66
68
70
Chart 71
65 -
JAPANESE TECHNOLOGY
Japan: Direct Investment vs Technology Purchases
The Japanese put major emphasis on high technology. Much
Million US $
foreign technology has been acquired through royalty agreements and
800
various kinds of technical agreements. In some cases, it has been
brought in by foreign companies as their equity in Japanese companies
but with a handful of exceptions, the foreign firms have received only
$720
minority participation in such joint ventures.
Royalty and
Japanese payments abroad for royalty and
700
management were about six times that of
management
Many American companies, knowing of severe investment
direct investment income payments abroad dur-
payments abroad
restrictions (and in some cases import restrictions on these high
ing 1968-71. The similar ratio for West Ger-
$652
technology products), chose royalties as the most practical way to
many is roughly 1:1 and for the United King-
get revenue for their technology.
dom 1:2.
600
Thus, while most countries depend on direct foreign investment
or domestic R & D to acquire advanced technology and know-how, Japan
has purchased these needs outright through licensing agreements.
Japanese royalty and management payments abroad were more than
$650 million in 1970, and more than half was paid to the United States.
500
The comparison between Japanese royalty payments and those
of the US and Germany is striking: from 1964 to 1970, while Japanese
payments grew from $200 million to $650 million, US royalty and
management payments abroad increased from $108 million to $198
400
million; comparable West German payments totalled $192 million in
1967. Japanese royalty and management payments to foreigners were
about six times greater than Japan's direct investment income payments
to foreigners. A similar ratio for West Germany is roughly 1:1 and for
the United Kingdom 1:2 (Chart 71).
300
In total, Japan has paid out $3. 4 billion over the past ten years
for access to a vast amount of foreign technology. The costs of develop-
ing this technology internally would have been much higher. In the
future, Japanese plans suggest an increase in R & D investment from
200
about $3 billion in 1970 to nearly $13 billion in 1980. Clearly, Japan has
decided to accelerate the development of its own technology.
$163
Direct investment
$140
income payments
$110
$125
Direct investment
100
$93
inflow into Japan
$44
$22
o
1961
63
65
67
69
71
1971 cumulative direct foreign investment in Japan excluding
re-investment earnings: $900 million.
Reproduced at the Richard Nix
esidential Library and Museum
- 67 -
-
often form joint ventures to exploit raw material sources. (Generally,
POLICY
the Japanese government does not attempt to extend its antitrust regulatory
powers outside Japan and, indeed, often encourages various cooperative
Japan is the view that Japan's growth
efforts.)
Japan exports less of its pro-
The continued existence of disparities in ocean freight rates will deter
export expansion. This is particularly true in trade with Japan. Fre-
have been built upon high levels
quently the rate on the same commodity is higher from the U.S. to Japan
frames to motorcycles, the initial
than vice versa. For example, the estimated ocean freight cost of an
rapidly expanding local market,
automobile imported from Japan is $70; and exported to Japan $250.
hree to five years later.
For all the reasons mentioned above, Japan's competitive strength in
to live, " and there is truth in this.
exports has increased steadily in recent years. However, a coordinated
Japan imports to live. 11 The country's
government-business trade promotion campaign, including various financing
is little in abundance and much
and tax incentives, as well as an overall national commitment to exports,
imports are industrial raw
also explains Japan's successful export performance.
coking coal, 98% of its iron ore,
foreign exchange to purchase the
INDUSTRIAL PRODUCT SPECIALIZATION
of critical importance; they are
economic growth.
Because so many of Japan's exports to the United States are highly
visible (e.g., home electronics products, automobiles, and motorcycles)
advantage enjoyed by Japanese companies
or basic industrial products (e.g., steel), it would be natural to assume
is the Japanese trading company,
that the Japanese push exports of every product they make. However,
ficient international marketing channel.
Japan has not made the mistake of seeking unlimited objectives with limited
Japan's international trade, maintaining
resources. In fact, the Japanese have chosen selected products in which
ecting market intelligence worldwide.
to pursue international competitive supremacy. In 1970, about 60% of
Japan's exports were accounted for by four industrial groupings: trans-
products and can efficiently fill its
portation equipment (ships and cars), 17%; steel, 16%; electrical and
is estimated that the top 12 of these
electronic equipment, 13%; and textiles, 12%. No other industry accounted
of Japan's exporting companies.
for as much as 6% of the total.
about three-fourths of all Japanese
them to operate on small margins
The London Economist has made a historical study of Japan's industrial
sales in 1969). They also assist in
specialization. First, it pointed out that Japan thought of certain industries
result is that small and medium-
as "throw-away industries, 11 not only because Japan was no longer competi-
products to world markets at
tive in these industries, but also because it was regarded as a mistake to
United States, conversely, are often
try to gain a competitive position in those areas. Coal, paper pulp,
and still sell their products at
nonferrous metals, and agricultural products are cited examples of such
industries.
mpete vigorously overseas (e.g.,
Second, the Japanese identified "early stage industrialization" activities
However, when a trading company
(cotton textiles, sewing machines, bicycles, pottery, etc.) in which they
company in an industry, it may
no longer wished to compete in a vigorous way or invest precious capital.
competition in this case occurs
Companies in these fields had to release men, materials, and resources
ween individual producers. In
for more efficient and rapidly growing enterprises. It is, of course,
manufacturers and trading companies)
Reproduced at the Richard Nixon Presidential Library and Museum
68 -
69
exactly this transfer of resources from the less efficient to the more
It is important to note that the government avoided the role of central
efficient sectors that facilitates rapid economic growth. A review of
planner and concentrated on defining general directions and creating
Japan's spending priorities for the 1970s shows a substantial scaling
incentives for growth. Liberal depreciation and reserve policies favored
down of the Japanese textile industry as it shifts to other countries in
growth companies over stagnant ones.
Southeast Asia, and substantial expenditure for retraining today's textile
workers.
When steel demand slackened in 1958, over-capacity and the high
breakeven cost nature of the industry led to plunging prices as firms
Third, the Japanese focus on industries of the future and employ a
strove to keep their facilities operating at full capacity. The Ministry of
variety of protective and incentive devices to develop their capabilities
International Trade and Industry (MITI) took the initiative in achieving
in these critical fields.
consensus among producers on temporary production cutbacks.
To make clear the modes of government-business interaction by
To meet the underlying need of avoiding excessive additions to capacity,
which such goals are attained, we will examine briefly the cases of the
MITI began in 1959 to prepare four-year demand forecasts and then allow
Japanese steel and computer industries.
companies to work out voluntary adjustments in their plans if planned ad-
ditions to capacity appeared excessive. MITI in effect played a role of
GOVERNMENT-BUSINESS PARTNERSHIP: Two Case Studies
arbitrator for collusive action by the companies that would be illegal under
U.S. antitrust laws.
Steel
While growth has been spectacular since 1960, problems of excessive
For many basic steel products, Japanese domestic prices are 20% to
capacity and price fluctuations have intensified. In the 1965 recession,
40% below U.S. prices. Japanese government and industry have worked
Sumitomo, the third largest company, refused to agree to voluntary limits
together to enhance the competitive strength of their steel industry; and
on production. The conflict lasted many months and was publicized as
low capital, material, and labor costs have been systematically combined
MITI's first failure to obtain consensus on steel production allocations.
with advanced know-how to make Japanese steel the world's cheapest.
Similar disagreements have arisen recently with Sumitomo over the size
and timing of capacity increases. As steel approaches a mature product
At the end of World War II, with only three of 35 wartime blast furnaces
phase in Japan and growth slows (the forecast for 1970-75 is less than 10%
still producing, and raw materials unavailable domestically, the Japanese
annually versus 16% in the 1960s), such problems of forging consensus
Cabinet decided to make steel one of the priority industries in their recovery
will intensify.
plan (along with coal, electric power, and chemical fertilizers). The
Ministry of Finance granted special tax advantages to these critical indus-
More recently, spurred by MITI, the steel firms Fuji and Yawata
tries, and helped them get capital by advising commercial banks to give them
merged to form Nippon, the largest steel producer in the world. MITI's
priority and low interest rates on loans
announced objective was to increase the efficiency of two of the older but
very large firms by integrating their manufacturing efforts.
Steel plants were built on filled-in land next to deep water ports; and
the Japanese set out to minimize transportation costs by building the world's
Computers
largest and most efficient ships to carry ore directly to the plants and carry
away finished steel exports.
Japan entered computer development in the late 1950s, well behind
then-current technology. In the early 1960s, the Japanese electrical
As demand for steel rose following the outbreak of the Korean War,
companies sought out technical licensing agreements with U.S. com-
industry and government agreed on the First Rationalization Plan (1951 to
panies involving manufacturing, engineering and programming assistance.
1955) to achieve scale investments and advanced techniques $356 million
The surviving firms in the Japanese computer industry, Hitachi-Fuji and
was invested in these years. Sixty percent of machinery investment was
Nippon Electric were major recipients of this technology. However, since
spent on imported equipment on which import duties were eliminated.
the mid-1960s, MITI has played an aggressive role in the industry's
development including protecting it from foreign competition. The
Reproduced at the Richard Nixon ential Library and Museum
70
71 -
tionale for protection is the classic "infant industry" argument, under
3. In 1961, 70% of the Japanese computer market represented imported
hich an embryonic domestic industry is allowed to establish economies
machines (not counting IBM's Japanese production). A wide range of import
large scale production while foreign suppliers, who are already
restrictions has reduced this share to 25% during the 1960s.
roducing in volume markets, are prevented from competing in the
fant industry's home market.
4. In 1961 the Japan Electronic Computer Corporation, a joint market-
ing service and finance venture between the government and computer
The Japanese government supplied the computer industry with
manufacturers, was set up to purchase from manufacturers and rent and
nancial and tax incentives; the government also underwrote technological
service domestic computer systems for end users. (Foreign makes were
ograms in support of this industry. In brief, MITI has been a catalyst
forbidden from using the facilities of this Corporation.)
sponsor for the Japanese computer industry; this sponsorship has not
ctated to the industry, but has provided crucial protection and stimulus.
5. A further example of government support to the computer industry
is the special levy on the import of large American computers. This
Specific examples of government-business cooperation during the
special levy is transferred directly to an R&D fund which is allocated to
dustry's development follow.
the Japanese firms for the purpose of building a large-scale Japanese
1. The Electronic Industry Act of 1957 authorized financial assistance
computer.
computer hardware manufacturers, including direct subsidies for
In all of these measures, business and government have cooperated
search and development, government loans to products just entering
closely. However, recent MITI attempts to spur further mergers and
mmercial production, and loans and accelerated depreciation for invest-
consolidations have been rebuffed by computer manufacturers.
ents designed to "rationalize" operations (specialize production by firm)
accordance with MITI policy. These fiscal "carrots" which lubricate
In 1970 Japan was the world's second largest computer manufacturer.
consensus process have been rather modest in amount, but indicate to
Like the steel industry, the computer industry in Japan exhibits planning
ospective creditors MITI's recognition of computers as an important
and industrial support approaches quite foreign to U.S. practice.
velopment area. Such signals can be important in a manufacturing sector
hose capital is 80% debt.
JAPANESE NATURAL RESOURCE REQUIREMENTS
The Act also authorized MITI to selectively exempt any portion of the
For years, economists talked about the serious handicap suffered by
ectronics industry from the Anti-Monopoly Law. Cartels for production,
Japan with its lack of raw materials. While the vulnerability implicit in
&D, and raw materials were permitted. Under this authority, MITI
tablished a cartel in 1969 allocating the production of peripheral equip-
dependence on others for critical raw materials still exists, the Japanese
have made genuine progress in minimizing the economic effects of this
In a large-scale computer project sponsored by the government,
lack of raw materials.
firms are cooperating to develop a large time-sharing system.
1. Japan could turn its full attention to making arrangements for
2. After lengthy negotiations, the government allowed IBM to establish
100%-owned subsidiary in Japan under severe restrictions and in return
foreign sources of raw materials without having to face the internal
the licensing by IBM of basic patents to all interested Japanese manu-
pressures resulting from closing down higher cost or lower quality
cturers. These restrictions include (a) market share ceilings, (b)
domestic production--difficulties which have been experienced in other
parts of the world.
quirements to export computers in amounts equivalent to sales in Japan,
prior announcement of new product introduction and clearance of
anufacturing schedules, (d) approval of new plant facilities, (e) control
2. Raw materials have been obtained under long-term contracts
(10-25 years) which provide low prices, a steady flow, and minimize
technology transfers, including approval of new laboratory facilities and
price fluctations.
development. In spite of these restrictions and because of others, it
ould be said that IBM in Japan is very successful.
3. The Japanese profited from development of natural resources in
LDCs while maintaining a low political profile there. Rather than establish
wholly-owned subsidiaries, Japanese firms often extend loans to foreign
Reproduced at the Richard Nixon Presidential Library and Museum
Chart 72
72
mining firms to expand capacity and provide them with know-how
through management contracts. The loans are usually tied to purchases
in Japan, and repayment is in the newly mined output. Profits are earned
through sales of machinery and equipment, on management contracts, and
from interest on loans. The Japanese avoid the sometimes politically
sensitive large- scale repatriation of profits. Also, repayment in kind
Japan's Selected Raw Materials Requirements*
seems less onerous to LDCs than cash repayments. Direct ownership,
when it does occur, is usually through a minority share.
Iron Ore
4. As the dramatic growth of Japan's steel industry illustrates, the
170
Coking Coal
disadvantage to Japan of the long distances over which raw materials must
Million Metric
95
be transported has been overcome by super-sized ore carriers and tankers,
Imports
Tons
Million Metric
by the tidewater location of most plants, an efficient sea transportation
1
Tons
network (Japan is now the world's largest builder of ships), and the cartel-
Domestic
ized high-volume, long-term purchasing policy of Japan's producers.
Output
105
1
59.1
As Chart 72 indicates, Japan is already the world's largest importer
Rank as world
1
of iron ore, coking coal, copper ores, and crude oil and ranks second only
importer (1970)
behind the United States in imports of bauxite. It is also the world's most
dynamic growth market for raw materials and will likely continue so at
least through the mid-1970s, as Japan's 1975 projected requirements are
1.6
about double the 1970 level. The Japanese are undertaking steps to assure
1.0
12.3
12.0
adequate future supplies. Long-term contracts with foreign mineral
1970
1975
1970
1975
producers--including many U.S. firms--are being concluded. Japan is
expanding its fleet of super-sized ore carriers and tankers to keep shipping
costs down. Tokyo's long-term economic plans indicate that greatly in-
Copper
creased investment in raw materials will be one important use of their
Concentrates
Crude Oil
(30% cu) 3.04
Bauxite
2.0
rapidly growing international reserves.
9.5
Million Metric
Billion Barrels
Tons
Million Metric
1
Tons
1
1.2
2
After the
United States
1,57
No discussion of the Japanese economic miracle should leave the
impression that Japan is without problems. Industrial pollution is high
and budget projections for the 1970s show large increases in expenditures
3.7
Domestic
for environmental protection. Another problem is the potential limitation
Output
Insignificant
No
of power availability. Still another is the growing and largely neglected
Domestic
need for social services--such as housing, highways, and health. Again,
Output
04
0.4
projected Japanese budgets for the 1970s show increases of three times or
more in some of these key areas. Labor unions may become more demanding
1970 1975
1970
1975
1970 1975
and consumers may be less willing to save. Productivity increases may be
*Domestic output and imports.
harder to gain.
Reproduced at the Richard Nixon Presidential Library and Museum
73
Yet, the Japanese have not only a unique government-business
partnership, they also display a high degree of cohesiveness. They
exhibit excellent morale, work hard, and have a sense of their future.
It would be a mistake to underestimate or overestimate their potential,
just as it would be a mistake to believe we could or would want to trans-
plant their whole system to the United States. Nonetheless, the developed
countries of the world can undoubtedly learn from the Japanese experience.
Reproduced at the Richard Nixon Presidential Library and Museum