Trade and Debt: The Vital Linkage

The international financial community can assess its management of the international debt "crisis" of 1982-83 with a certain sense of satisfaction. Creative ad hoc solutions to individual countries' problems kept adequate credit flowing. Unpredecented cooperation among the International Monetary Fund (IMF), central banks, and private lenders restored confidence and prevented the "crisis" from playing out to a tragic conclusion-massive defaults, the freezing of new credit, bank failures, and perhaps ultimately a worldwide depression.

Nevertheless, many of us in international trade view the current situation with lingering misgivings. For the moment, the most critical stage of the crisis appears to have passed, although any fluctuations in interest rates would have a dramatic effect on debt levels. The enduring effects of the international debt situation on trade are apparent, and some of the most serious may not yet be fully felt.

The short-term effects are seen most directly in trade flows. Debtor countries were forced to cut back drastically on imports within a very short time; exporters in industrialized nations felt the impact almost immediately. To maintain these exports and to enable high-debt economies to purchase imports, it is necessary for industrialized countries to continue to provide export credits. The United States already has made efforts to extend export credit guarantees and insurance through the Export-Import Bank. However, it will be necessary to expand such efforts on a multilateral basis to avoid interruptions in commercial transactions and economic activity in high-debt countries.

However, the long-term effects of the international debt situation will be more difficult to resolve. For example, the need for high-debt countries to increase exports, while curtailing nonessential imports, creates strain in the international trading system. Industrialized countries, which feel they are losing export markets while being forced to absorb more imports, fall prey to calls for increased protectionism. Avoiding the temptation to resort to protectionism requires a concerted effort by all industrialized countries.

Likewise, high-debt countries need to continue to make sacrifices in domestic policy choices. They postpone taking necessary economic adjustment measures for fear of the social or political consequences, and in the process they only prolong conditions of poor growth and inefficient economic performance.