Economic Report of the President

to closer cooperation is to risk a cycle of trade retaliation that wouldleave all countries substantially worse off.Three specific challenges to open trade are taken up in the followingpages: the heightened pressures to use trade barriers to save domesticjobs, the increased use of direct and indirect subsidies to promoteexports, and the emerging reliance on market-sharing arrangementsto ease adjustment.PROTECTION AND EMPLOYMENTThe pressure to protect domestic sectors from import competitionis, to a large degree, a pressure to preserve jobs. Imports are seen assubstituting foreign for domestic employment and income abroad forincome at home. This pressure increases when economic growthslows and unemployment levels rise, since alternative employmentpossibilities are reduced.Job losses of course occur continually within an economy as somesectors contract. But meanwhile new jobs are being created in expandingsectors. International trade is but one of the pressuresbehind such shifts. Indeed; the evidence suggests quite strongly that,at least in the United States, changes in consumer demands and differentialproductivity gains from capital investment and technologicalchange have been far more important than increased imports in accountingfor relative employment declines in lagging sectors.But regardless of the source from which the pressures for adjustmentcome, intersectoral shifts in employment cannot be achievedwithout transition costs. The skills no longer needed in declining sectorsmay not match the skills required in growing sectors. The regionaldistribution of employment opportunities may shift, but workersmay not be in a position to move. And, even if workers who losejobs find new ones, their wages and job satisfaction may be lower ifspecialized skills acquired over many years are made obsolete. Themore rapid the pace of adjustment, furthermore, the greater thesetransition costs will be, since less of the adjustment can then be accomplishedthrough natural employee attrition and ongoing demographicshifts. Because of transition costs, governments are oftentempted to intervene in an attempt to slow the pace of adjustment.Such policies can perhaps be justified when the pressure for rapidadjustment is very strong or when it is thought that the pressure willsubsequently be reversed. The risk is, however, that government effortsto ease adjustment may have the effect of deferring or preventingit. Experience suggests that this has often been the case. Suchoutcomes are costly. Although transition costs are avoided for a time,productivity is impaired, inefficiency is increased, inflationary pres-209