Trade War—How It Affects You
AN AMERICAN missionary in Japan received $2,000 from his mother in November 1985 for a vacation trip back home the next summer. Had he exchanged the money right away, he would have received 400,000 yen, at the rate of 200 yen to a dollar. Instead, he decided to wait until he was ready to purchase his plane ticket in July 1986. By then the exchange rate was down to 160 yen to a dollar, making his money worth only 320,000 yen. He lost 80,000 yen (about $500, U.S.) just by holding his money for seven months. What would have been enough for airfare for him and his wife turned out to be far short.
International travelers are not the only ones affected by the shrinking of the U.S. dollar. If you have purchased any goods imported from Japan or Western Europe lately, you have probably felt the pinch too. Surveys show that imported cars, cameras, watches, even wines and cheeses, have gone up anywhere from 10 to 20 percent in price in the last year. A quality Japanese camera selling for $400 in October 1985, for example, sold for $450 in June 1986, a jump of 12.5 percent. “Additional exchange rate fluctuations will probably result in more price increases than we’ve seen from what’s happened so far,” says a U.S. financial analyst.
Higher consumer prices constitute but one side of the picture. Industries in Japan and West Germany are hard pressed by this economic turnabout. Even though the price of that same camera jumped from $400 to $450 in U.S. currency in a few months, it actually fell from 98,000 yen to 78,000 yen in Japanese currency. Thus, it was reported that one of the biggest electrical manufacturers in Japan loses $30 million each time the value of the dollar goes down one yen. The effect is similar in the auto, steel, textile, and other export-dependent trades.
To remain competitive the industrial giants resorted to heavy cost-cutting and reduced-profit margins. Smaller companies unable to bear the loss went bankrupt. The Mainichi Shimbun, Tokyo’s leading newspaper, reported that 292 firms went under between October 1985 and August 1986. As a result, Japanese workers last year received the smallest wage increase in 31 years—an average of 4.5 percent. And unemployment reached 2.9 percent of the work force, the highest since 1953. It is feared that the rate “may worsen to 7%-8%,” according to the chairman of the Japan Federation of Employers’ Associations.
Result of Trade Imbalance
But why did the dollar shrink? Simply put, it was due to trade war in the very competitive world of international business. Some nations manage to export more goods than they import, resulting in a trade surplus. Canada, for example, has an annual trade surplus of $18.6 billion, and Japan exported goods worth $82.7 billion more than the goods it imported in 1986.
On the other hand, countries like the United States now import far more goods than they export. It is easy to see what this situation does to a country’s economy. The resulting trade deficit creates serious unemployment problems and deals a blow to its economic stability.
Realizing that the economy of the world depends largely on the soundness of the U.S. economy, finance ministers and banking magnates of the five leading industrial nations met in September 1985 and agreed to depreciate the U.S. dollar against the major currencies of the world. The idea was that with the value of the dollar lower, goods from the United States would be cheaper and more competitive in other countries. This would boost U.S. exports. At home, demand for imported goods would decline, as these would now carry higher price tags. The net result, theoretically, would be to reduce the U.S. trade deficit.
Since the launching of the plan, the value of the U.S. dollar has fallen about 20 percent against the mark, the yen, the franc, and other major currencies. But has this turned the tide as far as the trade imbalance is concerned? “Despite the adjustments in exchange rates, the bilateral trade deficit will not be reduced this year,” said Malcolm Baldridge, U.S. secretary of commerce, in a speech to Japan’s business and government leaders last year.
Indeed, imported goods continue to be as attractive to U.S. consumers as ever. Reports show that about as many Japanese autos, for example, were imported by the United States in 1986 as in 1985. Since the price per auto went up, but the total number imported remained about the same, the net effect was that the dollar value of imports continued to go up rather than come down. The U.S. trade deficit jumped from a total of $118 billion in 1985 to a record $175 billion in 1986, about a third of this huge deficit being in trade with Japan!
What is happening in Japan and the United States is also happening in other places. The trade war affects all of us. What is its cause? What can be done about it? And is there a lasting solution?
[Picture on page 3]
Why did the cost of a quality Japanese camera increase from $400 to $450 in U.S. currency within a few months?