Kennedy Bop Problem

Question 1:

What’s Kennedy’s U.S. balance of payment problem?

U.S. balance of payment problem faced by Kennedy is substantial BOP deficit that can be illustrated by drained gold reserves, less competitive American export products, and under attacked American dollar.

Where did the problems originate?

This BOP deficit was originated from early postwar period when America pursued a goal of establishing liberal trade system and expanding global economy. The emergency of European Economic Community (EEC), the structure of Bretton Woods System, and slow progress towards free trade create long-term problems for American balance of payments. Specifically, first, ECC, a custom union, made nations in the community trade more among themselves and less with USA, thus affecting American exports and BOP. In addition, it would encourage capital outflows from the United States by causing American firms to invest in Europe rather than export from the United States. Second, the United States held special obligation under the Bretton Woods System: its currency can be converted to gold and it allowed unrestricted capital flows. Unrestricted capital flow enhanced dollar’s international role and caused a net capital outflow of U.S. dollar since many foreign companies issued bonds in the U.S. market and American multinationals and banks provided funds for European and developing countries. Moreover, a declining demand for U.S. dollar posed pressure on gold reserve account and aggravated BOP problem. The dollar demand of European reduced because of formation of EEC and the restoration of convertibility among the Europeans. The persistent U.S. deficits were lowering confidence of foreign governments. Therefore, many of them began to exchange dollar for gold. Third, slow progress towards free trade affected American exports. None of 5 tariff-reducing negotiations realized much success. One reason could be attributed to the rule of principle supplier, which excluded a large...