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.The existence ofthe trend means that when Lawrence rejects the hypothesis of hysteresis, thisdoes not imply that the same value of the dollar would induce the same US tradebalance in 1990 as it did in 1980 (adjusting for any GDP growth differentials overthe period).It does say that the period of the strong dollar in the 1980s did notleave a permanent legacy of US trade weakness.Hysteresis in Wages.There is a broad literature suggesting that globalizationmay have contributed to the widening of the wage distribution in the United Statesover the past 20 years.1 There is economic theory and common sense behind theidea that as the United States increases its trade with countries with a large supplyof low-skill workers, this will lower the relative wages of low-skill workers in theUnited States.The difficult issue is in determining how important the trade effectsare.The main arguments suggesting that the effects are small are that the UnitedStates does most of its trade with Canada, Europe, and Japan, where wage levelsare similar to US levels, and that the tradable goods sector in the United Statesis small relative to the total US labor market; to what extent can a fairly small tail(box continues next page)PERSISTENT DOLLAR SWINGS AND THE U.S.ECONOMY 99Copyright 2003 Institute for International Economics | http://www.iie.com Box 5.1 (continued)wag a very large dog? An alternative explanation of wage trends is that there havebeen shifts in the relative domestic demand for labor of different types, perhapstied to shifts in technology.One recent study has traced a direct link not just fromgeneral trade expansion to the US wage distribution, but from dollar swings tothe wage distribution.Linda Goldberg and Joseph Tracy (2002) have analyzedCurrent Population Survey data and concluded that when the dollar rises, thisincreases the gap between low-skill and high-skill workers.But when the dollarfalls, the gap does not return to its former level.There is a kind of relative wagehysteresis suggested by their results.This study is carefully done and interesting, but also puzzling to the point thatthe overall results are hard to accept.The impact of an increase in the dollar, intheir analysis, produces a substantial increase in the wages of highly educatedworkers and a decline in the wages of workers with low educational levels.Andthis effect is true across all industries.It is not concentrated only in tradable goodsindustries, nor does it start in tradable goods industries and spread to the wholeeconomy.A decrease in the dollar does not reverse these effects.I find it hard tounderstand a sustainable labor market equilibrium in which dollar swings overtime would drive the variance of wages higher and higher.I note also that low-skill workers started to improve their wage position in the United States duringthe period 1995-2000, even though the dollar rose strongly.21.See, for example, Borjas, Freeman, and Katz (1997).2.See Council of Economic Advisers (2001) and Juhn, Murphy, and Topel (2002).Case Studies of Specific ManufacturingIndustriesSteelThere are two very different perspectives on the US steel industry.14 Oneview is that it is a viable productive industry in the process of structuralchange, where the main competitive threat to high-cost domestic compa-nies does not come from abroad but from more cost-efficient producersin the United States.The second view is that the US industry faces a direthreat from unfair competition overseas.Steel plants operate with highfixed costs and low marginal costs.Foreign governments have subsidizedthe construction of steel capacity, resulting in global overcapacity.Foreigncompanies thus have an economic incentive to dump steel on the USmarket at prices below the unsubsidized full average cost of production.The US industry is therefore in dire need of either a lower dollar ortrade protection, or both.Understanding these alternatives is essential tounderstanding how the dollar has affected this industry.14.See, for example, Crandall (2001) and Economic Strategy Institute (2001).100 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com The US steel industry emerged from World War II as the dominantindustry in the world, with massive scale and productivity advantagesover competitors elsewhere.Over time, the steel industries in such coun-tries as Germany, Japan, and Korea were built or rebuilt as these econo-mies invested heavily in developing their own steel capacity.The domi-nant technology for many years was the large integrated steel mill, whichstarts with iron ore, carries out the whole steel manufacturing process,and produces a large range of products.In the postwar period there havebeen technological advances in integrated steel mills, based on scale,design, and layout.The result is that newer integrated mills built aroundthe world are more productive and have lower marginal costs than theolder integrated mills in the United States.For example, the steel facilitiesof POSCO (Pohang Steel Company), the government-owned Korean inte-grated producer, are among the most productive in the world (Baily andZitzewitz 1998).Korea imported its steel technology from best-practiceequipment suppliers worldwide.Unlike industries such as autos ormachine tools, basic steel technology is not very hard to transfer fromdeveloped to developing countries, since much of it is embodied in thecapital goods.15As economies develop economically and industrialize, the domesticdemand for steel grows rapidly, which stimulates the growth of steelcapacity.As economies mature, however, demand growth slows or evenstops with the shift to services and to lighter products and newer materials.This pattern was intensified in Japan, which experienced strong growthin the demand for steel during its boom years in the 1980s and facedlabor shortages.The industry overinvested in capacity and in automationand then found itself with severe overcapacity and an uneconomic levelof capital intensity in the 1990s
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