Question

In June 1995 Clyde Prestowitz (Trading Places) of the Economic Strategy Institute made the following statement to a Senate subcommittee: “Trade deficits of the size America is presently running with Japan and the rest of the world matter decisively to American prosperity. By limiting the exports of highly competitive American companies, the foreign barriers in large measure responsible for these deficits hold down investment in the export industry.” Use the long run model of a small open economy. Comment on what you find accurate and inaccurate about this statement.

Answer 1

According to the statement “Trade deficits of the size of America is presently running with Japan and the rest of the world matter decisively to American prosperity. By limiting the exports of highly competitive American companies, the foreign barriers in large measure responsible for these deficits hold down investment in the export industry.”, it meant that the exporting nations to whom the highly efficient and big American companies were exporting the products, those countries have put up a limitation on the total export from America or a trade barrier in the external country has been imposed. This trade barrier has resulted in to the trade deficit of America rising sky high. However, according to the long run model of small open economy, the trade barriers or any type of trade decisions taken by the small open economies do not hurt a large economically developed nation in the longer run. In the short run, it might be possible that the large economy may incur some pushbacks, however, in the longer run, the large economy restrains from the pushbacks and regenerates its lost financial gains. Therefore, this statement that the export barriers of the smaller countries had resulted in to the trade deficit of America rising so high, was highly rejected by many economists.