Foreign Trade Follies

October 13, 1952

One gathers from the report of Aug. 22 by Ambassador William H. Draper, Jr. that the European “dollar gap” is chiefly America’s fault. In this Draper reflects both European and American official opinion. The central economic problem, he thinks, is the “balance-of-pay-ments problem of Western Europe vis-à-vis the dollar area.” But the truth is that neither the “balance of payments problem,” the “dollar gap,” nor the “dollar shortage” would exist if it had not been created by unsound policies of European governments. The “problem,” the “gap,” and the “shortage” would all disappear overnight if those policies were changed.

What causes the so-called European dollar gap is the existence of monetary inflation in Europe combined with exchange control. The “unfavorable balance of payments” and the “dollar shortage” would vanish on the day the European governments stopped preventing their own citizens from buying, selling, or holding dollars or any other foreign currency in any amount they wanted and at any price they could agree upon. Europe’s so-called “cure”—exchange control—is the very disease that is choking it.

There seems to have been a tacit conspiracy among the bureaucrats of Europe and the United States in the last eight years that however we diagnose this disease, we must never call it by its real name—exchange control. And so we have been led from absurdity to absurdity. We have created, for example, the needless and futile institution called the European Payments Union, simply because European governments will not permit the only real solution—free exchange rates with full currency convertibility.

Even Draper now accepts the European myth that the balance-of-payments problem “has its roots in the huge excess of United States exports over its imports.” The explanation is completely upside down. To blame ourselves for an “excess of exports” is to blame ourselves for producing too much and for giving the excess away. It is to assume that it is somehow the duty of our citizens to buy European goods whether they want them or not. The problem is not our excess of exports; it is Europe’s excess of imports. The “balance-of-payments” problem would evaporate overnight if Europe allowed its own exporters to keep the dollars they earned or sell them for the best price they could get.

Free exchange rates would create an immense incentive, which they now lack, for European exporters. They would encourage American buyers, who could once more buy European goods at realistic prices. In the same way, either a higher dollar rate, or a halt in European inflation, would curb Europe’s present abnormal demand for American imports. If European production were freed from exchange controls, and once again rewarded in proportion to its efficiency, it would not only increase in total, but much more of it would flow into export channels.

Draper wants us to reduce our own tariffs still further, and to simplify our custom procedures. In this I would heartily concur. But as a barrier to foreign trade, our tariff today is of merely minor and academic importance compared with the insuperable barriers raised by European governments—the rigid import quotas, special licenses, bilateralism, exchange controls and prohibitions.

While European bureaucrats have complained more and more in recent years about the barrier of the American tariff, that barrier itself has been constantly declining. Data from the Department of Commerce show that last year tariff duties amounted to less than 6 cents for every dollar’s worth of imported goods. This compares with about 15 cents during the prewar years 1936–1940, and with 27 cents for every dollar’s worth of imported goods at the turn of the century in 1901–1905. The major immediate reason for reducing our tariffs still more at this time is not economic but political. It would remove the biggest excuse Europe still offers for failure to increase its exports. And it might shame European governments at last into abandoning exchange control.