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Paper presented for the Symposium in Honor of Isaiah Frank, held at the School of Advanced International Studies of the Johns Hopkins University in Washington, D.C. on October 21, 1988.
All data in this paper come from IMF sources, principally International Monetary Fund (1988b).
In a detailed analysis of prospects for the U.S. current account done at the beginning of 1988, Ralph Bryant concluded that an impressively large improvement in the constant price deficit was indeed in the pipeline for 1988-89 but that improvements would probably cease by 1990 if U.S. and foreign growth were similar and if the real exchange rate of the dollar remained at its end-1987 level. See Bryant (1988).
With regard to devaluation, this approach was first put most clearly in Black (1959) but the basic idea originated in Alexander (1952) where the key point was made that a devaluation can only improve the trade balance if it increases “real hoarding” (i.e., savings minus investment). The extension to import restrictions was first made in Nurkse (1956). Most recently, Lawrence and Litan (1987, pp. 296-8) have explicitly put the central point here with regard to the U.S. current account. See also Kaempfer and Willett (1986).
The effects of a uniform import surcharge (uniform tariff) imposed in the United States, with revenue not spent by the government, are analyzed in Klein, Pauly and Petersen (1987) using Project LINK, and in Dornbusch (1987) using the Data Resources, Inc. model. Naturally, the current account is shown to improve in these cases.
This was the central theme of Hemming and Corden (1958): given initial “internal balance,” import restrictions cannot improve the trade balance on their own, but they are required to accompany policies that reduce absorption in order to avoid a decline in real income. This was called the “real income” approach to the use of import restrictions. See also Nurkse (1956).
See Corden (1974, Chapter 7, especially pp. 179-81).
This is, of course, only one possible explanation of relative protectionist pressures and, more generally, of the “political economy of protection.” See Baldwin (1984) for a review, and also Bhagwati (1988). Takacs (1981) contains an empirical analysis of pressures for protection and of actual changes in protection in the United States as measured by escape clause actions, and this is further discussed in Feigenbaum, Ortiz and Willett (1985).
It should not be assumed that the increase in “protectionist pressures” as evidenced by the 1988 Trade Act and the “pressures” that preceded it, has brought about an equivalent actual increase in U.S. protectionism. In particular, the paper presented by Bela Balassa in this Symposium (“U.S. Trade Policy Towards Developing Countries”) suggests that the U.S. market is still very open to products from developing countries, more so than the markets of Japan and the European Community.
The “hard landing” possibility was popularized in Marris (1985).