Dollar Still Too High to Aid Trade

Nearly two years have passed since the U.S. dollar began to decline in the foreign exchange markets, and yet our trade deficit has continued to grow. Not surprisingly, the passage of legislation to close this gap has emerged as the No. 1 item on Washington’s agenda.

Elected officials are feeling intense pressures from their constituents. For the last three years, the widening trade gap has prevented reasonably good growth in domestic spending from being translated into similar strength in output, as people purchased more and more foreign-made goods. The gross national product, adjusted for inflation, last year grew 1 percentage point less than it would have if the trade gap had merely stabilized. Both business failures and the jobless rate remained high.

It will be very tempting for the politicians to take a heavy-handed approach to trade, for they are seeking quick results. They want to slow imports while boosting exports, and they are prepared to use tariffs, quotas or surcharges to achieve these objectives.

In addition, you may expect to hear more about fair trade and reciprocity, as Washington seeks to prod others to either stop subsidizing their exporters, and/or open their markets to more of our exports.

Correcting our trade imbalances by legislation is fraught with risks. For one thing, while no one would maintain that we have free trade today, any omnibus trade bill would invite retaliation by others, leaving all of us worse off. For another, any generalized legislation would overlook the many reasons why our trade deficit remains large.

In my opinion, the No. 1 culprit is the continued strength of the dollar. The Manufacturers Hanover trade-weighted dollar, which is adjusted for inflation, has declined by only about 7% over the last two years. By contrast, the Federal Reserve’s measure is off more than 30%.

One of the reasons our index shows such strength is that it contains more currencies than the Fed’s--and the dollar hasn’t declined as much against the others as it has against the major units. But even where the dollar has fallen a lot, exporters from these countries are not raising their selling prices by as much as their currencies have gone up.

Question of Quality

Perceived differences in product quality also play an important role in the deficit issue. Right or wrong, many people think that foreign-made goods are better than ours--and they’re willing to pay more to get them.

In a number of instances, there is no comparable domestic product. Videocassette recorders are a good example: they’re all made in Japan. In other cases, we don’t make enough to satisfy our domestic demand, such as with oil.

Reacting to the initial rise in the value of the dollar--not to mention a more favorable labor climate--many U.S. companies have moved their operations offshore. To the extent they export, we’ve lost them, and when these goods are brought back here, they are recorded as increased imports.

The march of technology, by simplifying the production and assembly of a growing number of items, has enabled countries with the lowest labor costs to capture these markets. These tend to be the developing countries from the Pacific Basin and from Latin America with whom our bilateral trade deficits continue to grow.

The Commerce Department alleges that many U.S. companies don’t have much of an interest in exporting. They don’t want to take the time and trouble to learn the customs, laws and languages of other countries.

Let’s not forget the reaction of the developing countries to their debt burdens. In an effort to convert their own trade deficits to enough of a surplus for them to service their debts, most such nations have slashed imports and pushed exports--especially farm products.

Plight of U.S. Farmers

Unfortunately, we have borne the brunt of these maneuvers. For example, our trade surplus of $7 billion with Latin America in 1981 turned into a deficit of about $15 billion last year, while our farmers are suffering from the worst combination of falling prices and depressed land values since the 1930s.

These varied factors call for not one approach--but several different strategies to shrink our trade deficit.

To be sure, Washington should not abandon its theme of reciprocity. Free trade means fair trade; others should not give their domestic producers an unfair advantage by subsidizing their exports or restricting imports unless they are prepared to face the same thing here.

Then there is the value of the dollar. It would appear that the buck will have to fall further against the currencies where it has already declined substantially to force exporters from these countries to raise their selling prices enough to dampen U.S. demand. The dollar will also have to fall against the currencies where it has declined very little--or even risen.

Improving the quality of the goods we produce won’t be easy. It will require a commitment on the part of labor and management that is now seen in only a few industries.

We must also encourage investments from abroad. This way, we’ll be able to overcome the fact that we don’t produce certain items or that some of our companies have set up shop elsewhere.

Obviously, we should reduce our reliance on imported oil. A tax would seem to be the answer, and it would have the additional benefit of helping our domestic oil industry get back on its feet.

We can’t do anything about technological change, but we can concentrate on producing what we’re good at, using our natural advantages. This means greater emphasis on those products requiring advanced technology, substantial capital investments and highly skilled labor.

Washington needs to help industry restore its international competitiveness. Besides education and training, elected officials should consider changing the tax code so that savings and investment are encouraged--not discouraged as they are now.

Other countries need to grow faster; otherwise they won’t be able to import more from us, no matter what our exporters do. This is true also for the developing countries, whose debt burdens must be lightened enough to allow them to increase their imports from the United States.

Let’s not forget our other deficit--the red ink in Washington’s budget. It was responsible for pushing the dollar skyward by forcing interest rates up, thereby attracting foreign money here.

If we do manage to reduce our trade deficit without cutting our budget deficit by at least as much, we’ll wind up with more problems than we solve, because a lower trade deficit would shrink the amount of funds foreigners have to put into our financial markets. In turn, this would mean higher interest rates if the Federal Reserve doesn’t become accommodative, or more inflation if it does.