Rumbles over a Wider Gap

Passions are quickly stirred by economic issues like inflation and unemployment, but few people fret over the nation's balance of trade. Yet so far this year, imports into the U.S. have outrun exports so much as to create a monumental trade deficit. Last week the Government reported that the deficit in May, $1.2 billion, was the smallest of the year, largely because of lower imports of oil and coffee and a boost in exports of machinery. Even so, during the first five months of 1977 imports raced $9.8 billion ahead of exports. Estimates put the deficit for the entire year as high as $25 billion, v. $6 billion in 1976. The figures have set off a debate within the Carter Administration about just how serious the situation really is.

Although no one considers such a mammoth trade gap desirable, the Treasury Department contends that it is no cause for alarm and even has a favorable side: it helps the economies of other nations. In opposition, the Commerce Department, some congressional leaders and bankers are deeply worried that the deficit signals a loss of U.S. competitive muscle in world markets. Wisconsin Democrat Henry Reuss, chairman of the House Banking Committee, goes so far as to accuse the Treasury of "singing a happy song while the ship is sinking."

In the Treasury's view, a prime reason for the deficit is that the U.S. economy is expanding faster than those of Western Europe, Canada, Japan, Mexico, Brazil and other countries that are large markets for U.S. exports. This condition has held down purchases of American goods while spurring U.S. demand for imports, notably oil. The nation's foreign oil bill this year is estimated to be $40 billion, about a third of all imports. It is these inevitably rising oil imports, according to Treasury Secretary W. Michael Blumenthal, that are causing the widening trade gap.

Treasury officials also contend that by piling up deficits the U.S. is providing stimulus for international trade and helping to reinvigorate the still sluggish world economy. The deficits, say Treasury experts, do not pose an immediate monetary threat to the U.S. because foreigners view the U.S. as a basically healthy economy and are willing to hold dollars. Indeed, much of the money spent on imports finds its way back to the U.S. in investments. Even so, Blumenthal agrees that the U.S. cannot fuel the world economy alone. The Administration has been calling on Germany, Japan, Switzerland and other relatively prosperous countries either to revalue their currencies or to expand their economies to take in more imports. So far, Germany, with a trade surplus last year of $14 billion, has refused to budge for fear of igniting inflation. Japan, with a surplus of $10 billion, has been moving only reluctantly to revalue; last week the yen sold at a 44-month high of 266.5 to the dollar.

Blumenthal adamantly denies that the U.S. is reverting to the 1960s policy of "benign neglect" of dollar outflows. Last week he called for more vigorous Government support of American exporters through loans and improved marketing information. In addition, say Treasury officials, the U.S. is trying to cut its foreign oil bill in two ways: 1) by seeking to impose an oil-conserving energy program, which is now before Congress, and 2) by quickening the flow of crude through the recently opened Alaska pipeline.

Costly Deficits. Yet the critics are not satisfied that the Treasury views the trade imbalances seriously. Assistant Secretary of Commerce Frank Weil argues that deficits are costing Americans sales and jobs--and that oil imports are not the only cause of trouble. Another problem, says Weil, is that the share of world trade held by American manufactured goods has fallen from a peak of 21.2% in 1975 to 20.3% last year. He notes that only 25,000 of the nation's 300,000 manufacturing companies are in the export business--and a mere 250 account for about 85% of all U.S. exports.

Representative Reuss has another worry. Says he: "The real danger is that if we go on with $24 billion trade deficits, it will ultimately be interpreted abroad as a decline in the U.S. world competitive position." That in turn could lead foreigners, notably Arab oil producers, to dump their huge holdings of U.S. currency. Likely results: a dangerous decline in the dollar's value, a disruption of money markets and a drop in world trade.

Last month the Basel-based Bank for International Settlements, which serves major central banks, warned that continued giant U.S. deficits would pump altogether too much money into the world monetary system and lead to a new round of devastating inflation.

Specifically, Alexandre Lamfalussy, the bank's chief economist, fears that the deficits will eventually weaken the dollar, giving the oil-producing countries an excuse to raise prices more than they otherwise would. Rimmer de Vries, economist at the Morgan Guaranty Trust Co., is concerned about U.S. efforts to prod Germany and Japan into a major revaluation of their currencies. Says de Vries: "If the main problem is too high a level of U.S. oil imports, the solution should be to cut that level. We can't solve the energy imbalance by having Japan revalue. It's illogical."

The mounting criticism of the trade deficit is putting the Administration in a difficult bind. If Blumenthal and others cannot persuade Germany and Japan to share some of the burden with the U.S. by accepting more imports, President Carter may have to narrow the trade gap by accepting a less expansionary economic policy for the U.S.

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