ABSTRACT
Recent years have seen the US trade deficit rise to unprecedented levels, generating a great deal of concern about the state of the US economy. Much of the response has been based on a profound misunderstanding of the true causes of the trade deficit, namely the disparity between savings and investment rates and the large fiscal deficit. It is not, however, the first time a burgeoning trade deficit has caused political angst. In the 1980s too a large trade deficit emerged, and the period holds interesting parallels to what is happening today. In both cases tackling the underlying causes of the deficit has been effectively politically blocked, leading to a shifting of the blame to other countries. The response of the Reagan administration in the 1980s was twofold: one bilateral, the second multilateral. Bilaterally, the deficit was used to extract concessions from individual countries, particularly Japan, that were claimed to be pursuing ‘unfair’ trade practices. Multilaterally, it was used to push for the launch of a new Round of trade negotiations in the GATT. This Round, the Uruguay Round, was framed in a certain way by the trade deficit in that other countries were placed in a position of having to deal with the US in the GATT to escape more protectionist policies from a belligerent Congress, tempering what other countries felt they could demand from the US. It also meant that the US had little to give away by way of concessions. The outcome was consequently one-sided, imposing large costs on developing countries, much of which were of direct benefit to industrialised countries, while giving them little in return.
