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THE SOUTHEAST IN A GLOBAL ECONOMY
Remarks by Robert P. Forrestal, President
Federal Reserve Bank o f Atlanta
T o the Southeastern International Trade Conference
April 30,1987
Good afternoon! I'm pleased to be involved in this forum on the Southeast's role in
the international economy.
From my position as one who represents our region in
discussions o f national monetary policy, this annual conference is one o f the most
gratifying developments in our area.
It demonstrates the admirable desire o f business
and civic leaders in Alabama and its neighboring states to keep in step with one o f the
most important trends in recent history—the American business community's rising
consciousness o f the global market in which it competes.
This growing econom ic interdependence can bring great benefits to all the world's
citizens, but it also places certain demands upon us.
Today 111 talk about both these
aspects o f our internationalization—or should I say re-internationalization—as they
a ffect us in the Southeast.
First, 111 show how international developments will be
reflected in the general outlook for the region's economy. Then Til turn to one o f the
demands placed upon us by changes in the world's econom ic environment, and that is the
requirement that we resume our traditional defense o f open markets in the face of a
rising tide o f protectionist sentiment.
Outlook for the Nation
The main factors that will determine the economic prospects for the nation as a
whole will also be evident in the Southeast in the year ahead; so w ell take a quick look at
the national outlook before narrowing our focus to our own region. I look for GNP to
expand once again at a rate o f 2 1/2 percent or even a bit faster this year. The first
quarter rise o f 4.3 percent is not likely to be sustained since much o f that growth was a
buildup in inventories. Given this expectation, it is difficult to project an unemployment
rate for 1987 much better than the current 6.6 percent, since the number o f new jobs will
probably just keep pace with the number o f people who want them. Inflation, however,
should accelerate from last year's average pace o f less than 2 percent as measured by the
consumer price index to 4 or even 4 1/2 percent in 1987.
The importance o f international developments to our domestic economy is driven
home in the outlook for 1987.
The higher prices in my forecast—an increase that is
faster than even in 1985—are in large part due to international developments.
These
include not only the stabilization o f oil prices but also the rise in other import prices,
which as o f the end o f last year were up 8 percent.
The international sector is also
critical to the outlook for GNP growth. I look to the foreign trade front to provide the
stimulus that will maintain our moderate growth rate. The other major components o f
GNP—consumption, investment, and government purchases—don't look all that strong.
An improvement in the U.S. international sector is expected for two reasons. One
is the decline in the value o f the dollar in foreign exchange markets. While this factor
works with a lag, the dollar has been declining for two years now and we have begun to
see an impact: In fa ct, exports began picking up in real terms in the last 3 months o f
1986 while imports flattened. In the first three months o f this year, real net exports—
the change in exports less that in imports—improved by $13.8 billion. The second is the
fa ct that we cannot keep increasing our borrowing from abroad indefinitely. For some
time now we have been spending more on consumption, investment, and government than
we actually produce domestically.
The substantial expansion o f the federal budget
deficit has contributed to this situation. To meet our aggregate demands we have been
f
importing far more than we export and borrowing from abroad to finance these imports.
O f course, this cannot go on forever. Our creditors may becom e less willing to lend, and,
just as any borrower eventually learns, debt service inevitably rises along with the debt
and becomes a burden. So the time has com e to start repaying. While GNP or national
output will grow at about the same rate in 1987 as it did last year, more o f that increase
in output will be exported and less o f it will be available for domestic use. However,
even if overall consumption does not increase much, gains in production to meet greater
demand for American-made products should help us achieve the moderate rate o f growth
I foresee.
Outlook fo r the Southeast
The satisfaction o f more demand domestically, together with another positive
development—the recent stabilization in energy prices—would help those areas o f the
country most dependent on mining and manufacturing. These developments would foster
a greater balance among economic sectors and regions o f the country than we have
experienced in the last several years.
More balanced growth would be especially
welcome news to certain parts o f the Southeast, which includes not only prosperous and
fast-growing localities like Atlanta, Nashville, and most o f Florida but also weak or even
depressed places such as Louisiana. Stabilization o f the energy sector will be especially
important to Louisiana and parts o f Mississippi, both o f which have been adversely
affected by last year's sharp fall in oil prices.
There is at least reason to hope that
things will not get any worse even if they don't get much better any time soon. Along
with the energy sector, agriculture will be a lingering area o f weakness in the Southeast,
not only during 1987 but perhaps for several years to com e due to continuing imbalances
between supply and demand. At least the e ffe cts o f the drought that devastated much o f
the Southeast last summer should be largely behind us.
Aside from the e ffe c t o f macroeconomic factors like energy prices, the Southeast's
growth is heavily influenced by some unique regional factors.
Probably the most
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important o f these is population growth, or more specifically in-migration. Continuing
inflows o f people and corresponding gains in employment and personal income are major
reasons for the more rapid growth o f Florida and Georgia.
Expectations o f continued
growth nationally suggest that movement to the Southeast will persist, since most people
who want to relocate will be able to sell their homes elsewhere. In addition, the dollar's
decline should have a positive impact on another kind o f in-migrant—a temporary one,
namely the tourist. Florida attracts more overseas visitors than any other state and, as
you know, large numbers o f Canadians visit Florida. A lower dollar translates not only
into more visitors from other countries but also a shift to more domestic travel by
Americans. Tourism tends to stimulate demand for services and trade in much the same
way as permanent population growth.
Thus, tourism will help boost job creation,
especially in the service and trade areas, thereby contributing to an expected increase o f
about half a million new jobs in the region's total employment in 1987.
Construction—the other population-driven economic sector—will not, however, do
as well as one might expect, given the anticipated amount o f population expansion.
Single-family housing may continue to expand, but multi-family building along with
construction o f offices and retail space is likely to be weak.
The reasons for this
apparent anomaly are the tax law changes. These were necessary since tax changes in
1981 had overstimulated construction to the point where many local markets in the
Southeast are substantially overbuilt and need time for all the new space to be absorbed.
On a more positive note, improvements in the trade balance nationally would spell
good news for many southeastern manufacturers who have been subject to either
intensified import competition or greater difficulty in marketing abroad for the past few
years. One particular problem that has slowed improvement in many industries here was
the dollar's failure to depreciate against major foreign competitors such as Canada and
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the newly Industrializing countries o f the Pacific rim.
Consequently, the Southeast's
important forest products industry continued to be battered by Canadian softwood; the
same has been true o f apparel makers who com pete with clothing manufacturers in
Taiwan, Korea, and Hong Kong.
Fortunately, this situation has finally begun to show
some progress. In recent months the new dollar index, developed by economists at the
Atlanta Fed in part to measure the differential impacts o f currency changes on
particular regions and industries, has indicated that the dollar is on a downward trend
relative to most o f these currencies.
However, the margin o f decline is still quite
small. Thus, the amount o f improvement in some traditional southeastern industries—and
those areas dependent on them—may not be very dramatic even though on average the
region will continue to outpace national growth.
Protectionism
In this environment it is tempting to seek easy and immediate solutions to prop up
faltering industries and the communities that depend on them. However, the Southeast,
along with the rest o f the nation and even the rest o f the world, could end up much worse
o ff in the long run (and much sooner) if we opt for one o f the quick fixes currently
gaining support, namely, protectionism.
Fd like to examine this concept with you and
explain why I consider it a serious threat despite the degree o f support it has seemingly
mustered among the American people and some o f our leaders in the past few years. My
reasons can be expressed in terms o f the effects o f protective trade barriers in the
marketplace, in the workplace, and on the international stage.
protectionism raises consumer prices and limits choice.
In the market place,
In the workplace, it creates
distortions by attempting to save low value-added jobs at the expense o f other, more
productive jobs.
On the international stage, it evokes retaliatiatory measures that in
sum could wreck the world's economy as it has in the past.
Let's look at the marketplace effects first, since every m e o f us is affected by
higher consumer prices.
In an open market, consumers benefit from the competing
efforts o f several companies that produce and market similar products because the prices
o f each are held to their lowest profitable leveL
When foreign products are made
artificially expensive by tariffs, the test o f market discipline is eased for American
producers. Imported goods now cost consumers more, and even domestic prices for the
same items often rise because there is less competition driving them down. Another form
o f import barrier is the quota.
Quotas serve not only to raise prices but to limit the
variety o f goods available as welL
cloth
In the case o f quotas like those imposed on cotton
imports o r "voluntarily'' accepted by the Japanese auto industry, foreign
manufacturers are able to take advantage o f the basic law o f supply and demand when
supplies o f their products are artificially limited.
They often respond by narrowing
exports to the more expensive items covered by the statutory limits and raising their
{vices. In this way they make up much o f the difference and even increase profits. Here
at home we are le ft with fewer selections and ones that cost more. Even if they don't
make such substitutions, our choices as consumers are limited to some extent by the
quotas.
types
The cumulative e ffe c t o f Elimination o f competition through these and other
of
non-tariff
barriers like subsidies and loca l content requirements are
considerable. A recent government study estimates that if all existing tariffs and quotas
were removed, the benefits to our economy would be nearly $13 billion per year. That's a
rather hefty amount in itself, but one might be willing to pay it if doing so could preserve
American jobs. However, if we turn to the e ffe cts o f protectionism in the workplace, we
will find this is not the case.
It is true that certain manufacturers have been forced to lay o f f workers after
being hurt by foreign competition.
In our own region, the apparel industry comes
immediately to mind. Plants have closed across the Southeast as retailers have turned to
cheaper
products
from
outside
the
country,
and in particular from
the newly
industrialized countries o f the Pacific rim—Taiwan, Hong Kong, and Korea.
The
protectionist argument is that relatively cheap labor in those countries constitutes an
unfair advantage, one that could and should be remedied by discriminating against
countries that discourage the organization o f trade unions, have no minimum wage, and
otherwise ndeny worker’s rights.”
I would remind advocates o f this tactic that trade
unions and laws which place floors under wages emerged in our own country only when
industrialization had reached a level o f maturity that allowed the economy to support
them. I believe that the interests o f labor will be better served in those countries too as
their economies grow, but it is inappropriate for us to attempt to impose the
organizational forms o f an industrialized nation on developing economies.
It should also be pointed out that the apparel industry is one that we have protected
with tariffs and quotas for some time through the multi-fiber arrangement, and that
protection did not stem the loss o f jobs. The reason?
Apparel is an industry that has
always thrived upon low wages because it is labor intensive. In the late nineteenth and
early twentieth centuries, apparel companies relocated from northern states to the South
in search o f cheap labor.
Many o f them are now repeating that process abroad, where
relatively lower cost structures enable them to turn a profit.
It's folly to think that
stemming the tide o f imports will also staunch the flow o f U.S. multinational firms
abroad, where they can earn higher profits by lowering their costs. Thus protectionism
will not solve the problem o f job losses in certain industries where the comparative
advantage we once had has eroded. If we still want to keep the factories at home, the
textile industry's approach is the best example. By substituting capital for labor, fabric
and carpet producers were able to turn record profits last year. Not every industry lends
itself as readily to automation, but we should be able to do better than we have done
lately in applying technological advances in industries that could benefit as the textile
-
producers have.
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This won't save jobs, o f course, since more efficient producers need
fewer workers to produce the same output.
Those that are le ft, however, can earn
legitimately higher wages—because they are more productive.
displaced,
there
are
other
remedies
that
are
less
As for those who are
costly—and
dangerous—than
protectionism, and FU get to these in a moment.
Before I leave the employment issue, I want to point to another facet that is often
overlooked, namely that protecting jobs in one industry can lead to losses in another. For
example, one estimate put at over 14,000 the number o f retailing jobs that would have
been lost in the South alone had the President not vetoed the 1985 textiles and apparel
trade bilL
By blunting competition, tariffs cause prices to rise and so hurt retailers.
Thus from the viewpoint o f the larger economy, protectionism is like cutting o ff our nose
to spite our fa ce.
saves, protectionism
Aside from costing at least as many—probably more—jobs than it
robs our econom ic system o f one o f its great advantages, the
continuous process o f change that makes industry responsive to the needs o f consumers.
By keeping capital and labor resources in noncompetitive industries which survive only
because they are propped up by trade barriers, we choke o f f the creation o f potential
new firms, industries, and jobs.
Aside from protecting jobs and whole industries from import competition, some
advocates o f protection feel we need to use such measures as a bargaining chip to open
foreign markets for U.S. exports. They point out that Japan, Taiwan, and the European
Economic Community have measures in place which pointedly discriminate against our
products and cause us righteous indignation. Lest we appear self-righteous, however, we
should examine our own practices to see if we are free from using such devices
ourselves.
T ariff rates are on average somewhat lower than those o f our trading
partners, but these duties are unevenly applied from sector to sector. Apparel products
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are probably protected at an effective rate over three to four times higher than the
average U.S. tariff, for example. U.S. farm products are also heavily subsidized, so much
so that current projections o f higher agricultural exports are based largely on the effects
o f subsidies.
Countries that export such products might well claim they are at a
disadvantage against their American competitors in our markets because they are so
heavily protected.
What's more, we have a range o f non-tariff barriers like subsidies,
quotas, licensing requirements, safety inspections, "buy-American" provisions, and
variations on these themes.
These types o f
trade-distorting measures can lead to great costs
international stage, where protectionism guarantees more protectionism.
from both internal and an external dynamics.
on the
This arises
Internally, our political process is such
that when the pet industry o f one congressman is protected, industries with political
clout in other areas begin clamoring for similar preferential treatment.
The great
disaster o f the Smoot-Hawley tariff in 1933 came about as vested interests were added
to the list in just this way until in general tariffs ended up at over 50 percent ad
valorem.
The relative inflexibility o f achieving protection through legislation also
presents a problem. Even if the country changes its mind, it is very difficult to get a law
o ff the books—once it's passed, we're stuck with it for a while.
Externally, protectionist measures are almost assured o f evoking retaliation. In the
recent confrontation between the United States and Canada over softwood lumber we
saw very specific examples o f this process.
Were we to slap a duty on their wood, the
Canadians were prepared to tax feed corn accordingly. Again in attempting to help one
industry, another type o f producer entirely removed from the original dispute is
threatened. The Smoot-Hawley tariff helped tip the world toward just such a spiral o f
tit-for-ta t maneuvers, and the end result was the collapse o f world trade and a lengthy
depression. Do we really want to retrace that unhappy course? I firmly believe we have
com e too far toward internationalization to fail to learn from our past mistakes.
Policy Recommendations
We have seen, then, that arguments for the benefits o f protectionism wear thin
when viewed from an overall econom ic perspective. Protectionism cannot save jobs; it
costs jobs in non-protected industries and prevents creation o f new jobs by robbing
resources from
potential start-up industries.
Protectionism is expensive to the
consumer, and, perhaps worst o f all, spreads like a communicable disease through the
international business community. For these reasons we dare not consider protectionist
barriers as viable instruments o f international econom ic policy.
Instead, policymakers
need to do precisely the opposite and push to diminish trade barriers further in concert
with our trading partners.
It is critical for us to continue expanding our vision to include all the opportunities
held out by the evolving international order rather than to ova*react to the short-term
imbalances.
Since the end o f World War n it has been the strategy o f our country to
encourage free trade as the sound econom ic basis for higher living standards in the rest
o f the world and here at home. That farsighted strategy has borne fruit in forty years o f
relative peace that is in no small way related to a worldwide standard o f living that is
much higher than anyone would have predicted at the end o f the Second World War. The
spirit o f cooperation rather than confrontation should continue to inform our relations
not only with former enemies but also with the newly industrialized countries.
That does not mean we should forbear from calling on Taiwan and Japan, for
example, two nations with extraordinarily high trade surpluses and substantial import
barriers, to lower the protective walls which make it impossible for many o f our goods
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and services to penetrate their markets.
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Nor should we refrain from pressing in the
upcoming round o f GATT talks for the general agreement to be extended to cover service
industries like insurance, hospital management, and data processing—potentially some o f
our most profitable exports.
With direction from GATT and continued pressure on our
part, intellectual properties also could be better protected so that, along with earnings
from our books and musical compositions, American research and development efforts—
an extremely valuable and undercompensated export—might be returned to us together
with the inflow o f products they inspire.
through
the
skillful
dialogue
of
However these pressures should be exerted
negotiations,
not
through
the
monologue
of
protectionism. I believe that through persuasion our trading partners will assume more
o f their own responsibility for keeping the exchange o f goods and services, together with
labor and capital, as unrestricted as possible and remove at least some o f the pressure
from us.
Aside from direct steps to open markets, foreign governments could adjust their
domestic econom ic policies. In particular, other advanced industrial economies need to
rely less on exports and more on domestic demand.
Japan and West Germany could
stimulate their economies by accelerating tax cuts and implementing a generally more
expansive fiscal policy.
Not only would fiscal stimulus relieve the high levels o f
unemployment now prevailing there, but it would also make more money available for
consumption o f both imported and domestically manufactured goods.
If I have been somewhat critical o f Japan and Germany for dragging their feet on
easing fiscal policy, I must also emphasize that we have been far too slow ourselves in
correcting the intemperate fiscal policy that has contributed in no small measure to the
very problems the protectionists purport to address. Government borrowing to finance
the deficits o f the early eighties pressed beyond the ability o f American citizens, with
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their relatively low rate o f savings, to carry the debt. This pushed interest rates to a
level that made government securities attractive to foreign investors. The subsequent
scram ble for dollars to buy our dollar-denominated assets eventually made our currency
so expensive relative to others that our goods lost price com petitiveness on foreign
markets.
In order to maintain the momentum I see building toward a turnaround in
international trade, we in the United States need to sustain the attack on federal budget
d eficits.
Other government efforts that would help the econom y adapt to com petition rather
than avoid it could be aimed at education. From our elem entary and high schools to our
colleges and on into the business community, Americans must acquire the fam iliarity
with international conditions that translates into greater sensitivity to foreign markets.
We must find ways to sell as aggressively in outside markets as we do at home, and this
means becom ing more fam iliar with other cultures, learning to speak the languages o f
foreign purchasers, and interpreting their unspoken signals. With Americans* experience
in the psychology o f marketing, it should be obvious that the product's appeal to overseas
consumers is conditioned by subtleties o f loca l taste and custom .
Yet we persist in
remaining international illiterates, paying much less attention to understanding foreign
cultures than foreigners pay to investigating ours.
It may be that the loss o f our
com petitive edge that so many mention is due more to our failure to understand others
than it is to inefficient production and lack o f quality. Finally, legislative bodies could
best show their concern for workers who have lost jobs in noncom petitive industries by
directing funds toward retraining them.
Those parts o f the Administration's trade bill
that called for programs to assist dislocated workers, including farm ers, a ffected by
imports or poor market conditions abroad and a proposed job-training program to help
disadvantaged youths were moves in the right direction.
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Conclusion
In conclusion, I think that the protectionist sentiment abroad in America today
reflects a crisis in confidence and not a crisis in trade. Do we really believe that after
leading the world's postwar recovery through its ingenuity and adaptablilty, the American
business community, if unaided by protection from its government, will collapse rather
than fa ce the challenge o f com petition? Com petition is the essence o f the free market
and o f our system o f government.
something we Americans do welL
It is probably our favorite leisure pastime—it is
Let us not fear that we will fail in this moment's
challenge any more than we have in the past. Econom ic forces, especially the exchange
rate realignment, are already at work to level the playing field o f international trade.
It's tim e for us to take the field and do what we do best: size up the opposition, devise a
strategy, and com e out ahead.
@FedFRASER