Economic Report of the President

threats of disruption, market-sharing arrangements may indeed bepreferred if the alternative is a resort to predatory behavior.There are serious risks, however, in following this course. First, thesubstitution of informal, ad hoc agreements for the more formalmechanisms of the GATT reduces the transparency of the tradingsystem. The "rules of the game" become more complex and less visibleto public scrutiny, and procedures for redress become uncertain.Second, such agreements may perpetuate themselves. In seeking toassure that adjustment is fairly distributed, they may in fact delay theneeded adjustments and perpetuate the excess capacities that gaverise to the problem in the first place. Finally, such arrangements, byrequiring balance among countries in the degree of adjustment,almost always guarantee that it is not the least efficient capacitywhich is eliminated.NEEDED RESPONSESPressures on all countries to use trade policies to promote shortertermgains for particular sectors, to ease the process of adjustment,or to protect jobs in sensitive areas will almost certainly remainacute. It is also quite certain that in some cases such pressures willnot be resisted. Indeed a simon-pure attitude is unwarranted on thepart of any country, and unrealistic when other countries also yield tosuch pressures. From a broader perspective, however, it is highly importantto keep restrictive trade policies within circumscribed limits.First, the achievement of both higher exports and lower imports isnot feasible—strictly so for the world as a whole, and to a very largeextent for individual countries. The only effective choice is one betweenslow trade growth or more rapid trade growth, and the historicalrecord makes clear that the latter is to be preferred. Second, it isimperative to aim for consistency in the formulation of policy. Theoverriding need in all countries is to reduce the current inflation, andalso to reduce the inflation-proneness of economies that havebecome more inflexible and less competitive. Trade policies that aimfor short-term protection intensify inflation directly by reducing competitivepressures, and they increase economic rigidities by shelteringexcessive wages, profits, and other incomes in particular sectors fromthe discipline of the market. Better integration of trade policy intooverall economic policy formulation is needed in all countries to providea clearer perspective on its real costs and benefits.213