Economic Report of the President

Interest Rates and the U.S. Trade DeficitThe very high levels of real interest rates over the last several yearsare a principal cause of the sharp rise in the exchange value of thedollar relative to foreign currencies. This rise has reduced the abilityof American exporters to compete in foreign markets and increasedthe competitiveness of imports in the domestic market. Largely as aresult, the U.S. merchandise trade balance showed a substantial deficitin 1982.Our current trade deficit is a reminder of the importance of internationaltrade to the American economy. The export share of U.S.gross national product has more than doubled over the last threedecades. American workers, businesses, and farmers suffer when foreigngovernments prevent American products from entering theirmarkets, thus reducing U.S. export levels. While the United Statesmay be forced to respond to the trade distorting practices of foreigngovernments through the use of strategic measures, such practices donot warrant indiscriminate protectionist actions, such as domesticcontent rules for automobiles sold in the United States. Widespreadprotectionist policies would hurt American consumers by raisingprices of the products they buy, and by removing some of the pressuresfor cost control and quality improvement that result from internationalcompetition. Moreover, protectionism at home could hurtthe workers, farmers, and firms in the United States that producegoods and services for export, since it would almost inevitably leadto increased protectionism by governments abroad. I am committedto a policy of preventing the enactment of protectionist measures inthe United States, and I will continue working to persuade the othernations of the world to eliminate trade distorting practices thatthreaten the viability of the international trading system upon whichworld prosperity depends.Trade in goods and services is only one aspect of our economicrelations with the rest of the world. The international flow of capitalinto the United States and from the United States to other countriesis also of great importance. The United States should play a primaryrole in preserving the vitality of the international capital market.Severe strains on that market developed in 1982 as several nationsfound it difficult to service their overseas debt obligations. In 1982,the Federal Government worked closely with debtor and creditor nationsand the major international lending agencies to prevent a disruptionin the functioning of world capital markets. Now, with the cooperationof a wide variety of creditors, countries with especiallysevere debt-servicing difficulties are establishing economic and financialprograms that will permit them to meet their international obligations.