Economic Report of the President

CHAPTER 3The United States in the WorldEconomy: Strains on the SystemDURING THE 1970s the world's market economies became moreintegrated with each other than ever before. Exports and imports asa share of gross national product (GNP) reached record levels formost industrial countries, while international lending and direct foreigninvestment grew even faster than world trade. This closer linkageof economies was mutually beneficial. It allowed producers ineach country to take greater advantage of their country's special resourcesand knowledge, and to take advantage of economies of scale.At the same time, it allowed each country to consume a wider varietyof products, at lower costs, than it could produce itself.Underlying the growth in world trade and investment was a progressivereduction of barriers to trade. The postwar period wasmarked by a series of agreements to liberalize trade: both multilateral,like the Kennedy Round, and bilateral, like the Canada-U.S. autopact.In spite of its huge benefits, however, this liberalized tradingsystem is now in serious danger. Within the United States, demandsfor protection against imports and for export subsidies have grownas a combination of structural changes, sectoral problems, and shortrunmacroeconomic developments has led to a perception that weare becoming uncompetitive in world markets. In Europe, a growingstructural unemployment problem, aggravated by the recession, hasincreased protectionist pressures. In the developing countries a financialcrisis threatens the integration of capital markets and is pushingmany countries back toward the exchange controls and import restrictionsthey had begun to dismantle.These problems must not be allowed to disrupt world trade. If thesystem comes apart—if the world's nations allow themselves to becaught up in a spiral of retaliatory trade restrictions—a long timemay pass before the pieces are put back together.This chapter reviews the strains on the international economicsystem and the policies by which the United States is attempting toovercome them. It is divided into four sections. The first section discusseslong-term changes in U.S. competitiveness. The correction of51