Economic Report of the President

concentrate on doing what it does relatively well, and by allowing increasedeconomies of scale. But greater specialization can leave thoseinvolved in the contracting sectors worse off, at least temporarily. Attemptsto prevent adjustment through trade barriers or subsidies,however, impose severe costs on unprotected sectors.Some sectoral reallocation of resources, then, is a normal consequenceof the increasing U.S. integration into the world economy.This is not the whole story, however. Some sectors of the U.S. economyare confronted by a problem that is not simply the result ofmarket forces. Broadly speaking, these sectors fall into two groups.In one group are sectors where firms or their workers, accustomed tohaving substantial market power, now find that they have pricedthemselves out of the world market. In the other group are sectorswhich are hurt by foreign protectionism or export subsidies.Market Power and CompetitivenessThe "problem" of diminished market power in some sectors actuallyderives from a desirable aspect of trade: the fact that trade increasescompetition. One of the major benefits of an increasinglyopen U.S. economy is that it reduces the problems of monopoly andmarket power, thus increasing efficiency and helping consumers. Butthe transition to more competitive markets can prove painful. Whenan industry accustomed to having domestic market power encountersinternational competition, it must accept a reduction in the premiumin prices and wages it previously commanded over other sectors ofthe economy. Both firms and workers may be reluctant to accept thisimplication of increased competition, and idle capacity and unemploymentmay result. Prices and wages in some U.S. heavy industriesare probably too high to be sustainable in an integrated world economy.Policies of Foreign GovernmentsA different problem is posed when foreign governments engage inprotective or export promotion measures that harm U.S. producers.U.S. trade negotiators have emphasized four particular areas of concern:1. Agriculture: Japan and the European Economic Community havehigh protective barriers against U.S. agricultural products. Further,the European Economic Community now engages in massive subsidizedexport of agricultural products to dispose of the surpluses createdby its price-support program. These measures depress worldprices of agricultural products, imposing substantial costs on U.S.producers in a sector where the United States holds a clear comparativeadvantage.59