That Threatening Trade Gap

By Charles P. Alexander

The strong dollar lifts the price of U.S. exports while imports sail in

To economists, it is a phenomenon outside the realm of all historical experience. To American workers and businessmen, it is a malignant force that destroys jobs and profits. To Government policymakers, it is a vexing dilemma that stirs impassioned pleas for protectionism. Gargantuan and still growing, the U.S. trade deficit has raised grave fears about the future health and wealth of the American economy.

The Commerce Department reported last week that in May the U.S. paid $8.8 billion more for imported merchandise than it earned on exports. That was a better performance than the record $12.2 billion deficit in April, but the trade gap for the year is expected to reach an unprecedented $130 billion. That would nearly double the record $69.4 billion deficit of 1983. No other country has ever suffered such an enormous disparity between what it buys and sells abroad.

America's trade troubles mark a startling turnaround. For a century, between 1870 and 1970, the U.S. enjoyed a virtually uninterrupted string of trade surpluses. The 1970s brought deficits, but they could almost totally be blamed on high-priced oil imports from the Organization of Petroleum Exporting Countries. U.S. exports continued to expand, and as recently as 1980 the trade gap was an uncomfortable but tolerable $36.4 billion.

Why the sudden explosion of the deficit? Economists cite three main, related factors: high U.S. interest rates, the strong dollar and slow growth in foreign countries that are ordinarily big customers for U.S. exports.

During the past three years, American interest rates have been as much as 4 percentage points higher, after adjustment for inflation, than rates in many other industrial countries. Partly for that reason, foreigners have been converting large amounts of money into dollars for investment in the U.S. That has pushed the value of the dollar up more than 50% since 1980 against an average often major currencies. As a result, American exports have become more expensive abroad, while foreign imports have grown cheaper in the U.S. Says Richard Heckert, vice chairman of DuPont, the oil and chemical company: "Business that was profitable in the 1970s is often unprofitable in the '80s, and the only thing that has changed is the dollar."

Businessmen see no signs of relief.

U.S. banks last week raised the prime rate that they charge corporate customers from 12.5% to 13%. That helped boost the dollar to record highs against the British pound and the Canadian dollar. The U.S. currency also hit a peak for the year vs. the Japanese yen, and a seven-year high against the Swiss franc. Many economists expect further hikes in interest rates and a continued strong dollar.

Another reason the trade gap is bulging is that the U.S. has pulled out of the 1981-82 recession much faster than the rest of the world. The U.S. gross national product is expected to rise 6% this year, after adjustment for inflation, but Western Europe's will grow only 2.5%. As a result, the U.S. is sucking in imports at a prodigious pace, while Europe is too weak to buy a matching amount of American exports. The U.S. trade balance with Western Europe has flip-flopped from an $18.6 billion surplus in 1980 to a deficit that has been running at a rate of $17.6 billion this year.

The deterioration has also been drastic in trade with developing countries, many of which are still mired in recession. Such nations as Mexico and Brazil are so burdened by foreign debt and so short of cash that they have been forced to slash imports. Since 1980, the U.S. trade balance with Latin America has gone from a $4.7 billion surplus to a deficit that is piling up at a $21 billion clip this year.

Meanwhile, America's trade with its tough Asian competitors is increasingly one-sided. In four years the deficit with Japan has nearly tripled, to a $32.6 billion annual rate, while the gap with South Korea, Hong Kong, Taiwan and Singapore has quintupled, to a $20.8 billion pace.

Amid the general prosperity spawned by the U.S. recovery, the impact of the trade deficit is easy for many Americans to overlook. But the effects have been devastating for agriculture and other businesses that rely on exports and for industries like steel that face competition from imports. The toll must be measured not only by layoffs and plants closed but by job opportunities lost and factories never built. C. Fred Bergsten, director of the Institute for International Economics in Washington, estimates that the U.S. will have about 2.5 million fewer jobs by the end of 1984 than it would have had if its trade balance were not hemorrhaging.

Imports have captured 23.7% of the U.S. steel market, up from 15% in the 1970s. That is one major reason why American steel companies have lost more than $6 billion in the past two years. In the words of U.S. Steel Chairman David Roderick, the industry is "dissolving literally before our eyes." Since 1979, the steel companies have laid off 205,000 employees, or 45% of their work force. Though the industry is gradually rebounding from its recession trough, the Steelworkers union fears that at least 100,000 jobs have been lost forever.

The American dominance of world agricultural trade is starting to wither like corn in a summer drought. Since the late 1970s, the U.S. share of the international wheat market has shriveled from about 45% to 36%. In sales of coarse grains like corn, the American share has fallen from 71.8% to 60% since 1980. These declines stem in part from the strong dollar and the lingering effects of President Carter's grain embargo against the Soviet Union. That episode made foreign buyers nervous about relying on American exports.

Particularly ominous is the erosion of industries that produce capital goods, the driving force of economic expansion. Exports of construction equipment dropped 63% between 1981 and 1983, and shipments of machine tools went down 60%. At the same time, imports from such countries as Japan and Taiwan have absorbed 36% of the U.S. machine-tool market. "The domestic tool industry as we know it has one foot in the grave," says Jeremiah Toomey, president of the Wade Machine Tool Co. in Waltham, Mass. Toomey's firm, which was founded in the 1880s and once had Henry Ford as a customer, may soon go out of business. Since 1981, the number of companies in the machine-tool industry has dwindled from about 725 to 500.

The U.S. is even losing its supremacy in high-technology goods. Its trade surplus for these products, including computers and telecommunications gear, has dropped from $25.5 billion in 1980 to $17 billion last year. Spectra-Physics, a San Jose, Calif.-based manufacturer of laser equipment, says that its share of the world market for some products has fallen from 75% to 50% in only three years.

Pressure from foreign competitors is prompting American companies to move part of their production overseas, where labor costs are often much lower than in the U.S. Many electronics firms, including Atari and Apple Computer, have set up circuit-board assembly lines in Asia. General Motors' Delco electronics division has built plants in Singapore and Mexico. Such moves stir bitter resentment among American workers. Says Edward Sesma, 33, who is being laid off this week from his job as a forklift driver at a San Diego tuna cannery: "You only have to look a few miles across the border to Mexico to notice all the companies setting up shop there to take advantage of cheap costs. It's terrible."

Labor unions and companies are besieging the Government with demands for protection from imports. Not content with the voluntary quotas that Japan has placed on car exports, the United Auto Workers union is pressing Congress for a law that would decree that most autos sold in the U.S. must be built primarily with American parts and labor. This so-called domestic-content legislation has passed the House of Representatives twice but faces opposition in the Republican-controlled Senate. Last month the steel and copper industries won judgments from the U.S. International Trade Commission that they had been seriously injured by imports. Within a few weeks, the commission will give its report to the Reagan Administration.

The steel and copper complaints were timed so that the President would have to decide what to do in the heat of an election campaign. Though Ronald Reagan claims to be a free trader at heart, he has supported quotas and other restraints on imports of autos, textiles, sugar, motorcycles and steel. Administration officials argue that these actions were political concessions necessary to prevent Congress from imposing even tighter restrictions on imports.

Virtually all economists agree that protectionism is counterproductive and dangerous to the long-term health of the U.S. economy. Import restraints cut down the range of products available to American consumers and boost prices. If fewer Japanese cars or videotape recorders are allowed into the U.S. because of import restrictions, the prices of those available will be driven up by the law of supply and demand. Protectionism also frees American industry from the discipline of having to become more efficient, and import curbs invite retaliation against U.S. exports. Says Sidney Jones, Under Secretary of Commerce for Economic Affairs: "It strikes me as a very serious issue if the premier economy of the world sets a protectionist example. Then other nations have an excuse to become more protectionist also." Moreover, the U.S. can hardly expect Latin American countries to pay off their debts if it builds barriers to keep out their exports.

Perhaps the most serious problem with import restrictions is that they treat the symptoms of America's economic ills without getting at the cause: high interest rates. The best thing the Government could do for U.S. industry would be to slash the federal budget deficit, which threatens to top $200 billion. That would reduce upward pressure on interest rates and allow the value of the dollar to drift down to a more moderate level. Congress last week passed legislation to cut the deficit by $63 billion over three years, but that is only a feeble first step toward easing the budget crisis.

American consumers will be best served if U.S. industry can learn to live with a robust dollar and the new reality of international competition. Too many companies became complacent in the 1950s and 1960s, when the U.S. had a big lead in technology and foreign competitors were still rebuilding their economies in the aftermath of World War II. Observes Robert Gough, a senior economist with Data Resources, a consulting firm: "The domestic market was so rich that the U.S. was not as aggressive in developing foreign markets as other countries." Many industries, including autos and steel, let factories become outmoded. Companies also granted wage hikes to workers that outstripped productivity growth.

Evidence is mounting that foreign competition is forcing U.S. industry to change its bad habits. According to the Commerce Department, businesses plan to spend a record $309 billion this year for new plants and equipment, a 14.8% increase over 1983. "We seem to be in the midst of an investment boom," says Michael Levy, director of economic policy research at the Conference Board, a business supported think tank in New York City. In addition, manufacturing companies held wage and benefit increases last year to an average of 5.4%. Since worker productivity jumped 6.2%, U.S. industry managed its first reduction in labor costs in nearly two decades. Says U.S. Trade Representative William Brock: "We have taken this time of agony to really clean our house. Business and labor have done an incredibly good job of tightening belts and getting efficiency back into the workplace."

No amount of protectionism can turn back the clock to the halcyon days of the 1960s. "It's a global economy now, and everybody's in it," says Commerce Secretary Malcolm Baldrige. "There is no way we can duck or avoid it." But if the Government fosters the right economic climate by cutting the federal deficit and reducing interest rates, U.S. industry has an excellent chance of meeting the challenge from overseas.

-- By Charles P. Alexander

-- Reported by Bernard Baumohl/New York and Gisela Bolte/ Washington

With reporting by Bernard Baumohl, Gisela Bolte