CASE STUDIES IN INTERNATIONAL TRADE

CASE STUDIES IN INTERNATIONAL TRADE 555
toward slower growth in spending, and
encourage more innovation and technology.
In the first three years of the common
currency, that had not yet happened.
The principal beneficiaries of the common
European currency have been the peripheral
countries that posted the largest declines in
the deficit ratio and the rate of inflation.
• The Japanese economy set growth records
for the first 25 years after World War II, rising
about 10% per year. After that it settled
down to a somewhat less dramatic but still
highly respectable growth rate of 5% per year
through 1991. Since then, the overvalued
yen, coupled with continuing restrictions on
imports, has led to a growth rate of only 1%
per year. The overvalued yen, coupled with
the stock market decline and the weakened
conditions of many banks, also caused capital
spending to shift from Japan to overseas
markets.
• The east Asia ‘‘growth tigers’’ imitated the
early success of Japan, but starting in 1997,
devaluations of the currencies of Korea,
Thailand, Indonesia, and Malaysia by 50%
or more led to severe recessions the following
year, although those economies have
since bounced back. The devaluations were
caused by a combination of a slowdown in
the value of exports, due in part to declining
prices of semiconductors, a rate of inflation
higher than in the US, and excessive
borrowing abroad.
• In Latin America, economic reforms have
worked well in Chile, but that has not
yet been the case in Mexico, Brazil, and
Argentina, each of which has suffered a major
devaluation in the past decade. In each case
the devaluation was caused by the combination
of an overvalued currency, insufficient
emphasis on curbing government deficits, an
increasing trade deficit, and in the months
preceding the actual devaluation, a flight of
capital out of the country. NAFTA resulted in
a much bigger Mexican trade surplus with
the US, but in the first seven years it did
not boost the Mexican growth rate at all.
During the same period, when the US trade
deficit did increase sharply, its growth rate
also appreciated.
• In the future, countries that have large
government budget deficits and large trade
deficits probably will not be able to maintain
rapid growth rates indefinitely, and may
have to devalue their currency or use contractionary
fiscal and monetary policy to
reduce the growth in imports. Countries that
have recently devalued, or have recently
moved from a totalitarian region to capitalism,
are often considered superior places
for investment, but that is not likely to be
true unless those shifts are followed by bona
fide attempts to balance the public sector
and foreign trade sector over the business
cycle.