Impact of the Tokyo Round and U.S. Macroeconomic Adjustments on North American Trade

Abstract

Because tariffs had been reduced significantly in previous GATT negotiations, the Tokyo Round reductions, as we shall see, were bound to have a comparatively small impact. This is all the more the case when the effects induced by the US macroeconomic imbalances of the 1980s are taken into consideration. To illustrate this, we have used the Michign model to calculate the sectoral trade and employment effects of two different types of macro scenarios. The first scenario involves an assumed autonomous change in US capital inflows equal to 1 percent of US gross domestic product (GDP). This is designed to mimic the effects of a US policy of monetary contraction, which by increasing the US rate of interest relative to foreign rates, would lead to a capital inflow, a matching trade deficit, and an appreciation of the dollar. The second scenario involves an assumed exogenous increase in US aggregate expenditure equal to 1 percent of GDP, accompanied by an equal capital inflow. This is intended to reflect a US fiscal expansion, which by increasing demand for all tradable and nontradable goods, requires a shift towards foreign tradable goods in order to equilibrate markets especially for nontradable goods. The resulting increase in US imports and the trade deficit will necessitate an appreciation of the dollar.