Losing Ground

By Barbara Rudolph

The showdown pitted a lame-duck President looking to make a dramatic stand against a Congress determined to impose its will. As the Senate prepared to vote on the omnibus trade bill last week, President Reagan vowed to veto the package if the lawmakers did not remove a provision requiring that companies give workers 60 days' notice of plant closings. But the House had already passed the bill by a veto-proof 312 to 107, and the Senate was not about to back down. As the Senate's Democratic leaders struggled on Wednesday to line up votes and woo as many Republicans as possible to their side, the roll call was delayed several times. When the tally was finally taken at 5:11 p.m., the bill passed by 63 to 36, but that was three votes short of the two-thirds majority necessary to override a veto. For the moment, and perhaps for the rest of the year, Congress's drive to do something to reduce America's debilitating trade deficit was stalled.

The promised veto could give the Democrats a potent issue in the presidential election campaign because the trade gap, which hit a record $171.2 billion last year, has become the most serious threat to economic prosperity. The monthly trade deficit has declined from a peak of $17.6 billion in October, but recent figures have been going in the wrong direction. A report released last month showing that the deficit jumped from $12.4 billion in January to $13.8 billion in February sent the financial markets into a brief panic. Continued deterioration of the trade balance could lead to a further drop in the value of the dollar, a rise in inflation and interest rates and, ultimately, a recession.

Faced with those potential calamities, Congress has labored for months on the trade legislation. The main thrust of the bill is to require that the President act against countries that put up unfair trade barriers against American products. In the past, the White House could ignore findings by the International Trade Commission, a Government agency, that U.S. industries were being hurt by foreign competition. Under the terms of the trade bill, the President would have less latitude to disregard the commission's recommendations that these industries be given import relief. The bill would also require that the White House launch investigations of countries that maintain "numerous and pervasive" trade barriers and would authorize the President to retaliate against a broad range of exports from those nations.

Although Congress and the White House reached general agreement on most elements of the bill, they were at loggerheads over the plant-closing notification -- an extraneous issue. The Democrats embraced the provision as an important gesture of support for American workers. To the Administration it became a symbol of unwarranted Government interference in business.

At week's end both sides were still hoping to get a measure enacted. Said Senate Majority Leader Robert Byrd of West Virginia: "This bill isn't dead yet. I hope the President will rethink his position and come down on the side of the American people." But the White House was counting on Congress to resubmit a bill without the plant-closing measure, and there was no sign of a quick resolution to the conflict. Said Senator John Danforth, a Missouri Republican: "I believe that this bill is dead."

That would not upset the many economists who argue that the bill would invite retaliation from other countries. Says Tim O'Dell, senior international economist for Phillips & Drew, a London-based brokerage firm: "The trade bill is not going to help rid the U.S. of its trade deficit. If anything, it is likely to slow world trade and hurt the growth prospects of the U.S." Opponents point out that, besides containing sweeping general provisions, the trade package is loaded with protectionist measures designed to benefit specific U.S. industries or companies.

Most U.S. trading partners were relieved that the Senate did not appear to have enough votes to override a veto. In Japan, the most prominent target of the legislation, officials were delighted. Said Hajime Tamura, chief of Japan's Ministry of International Trade and Industry: "We would like to note our appreciation that more than one-third of the Senate voted against the bill."

Opponents of the trade package contend, and many of its advocates admit, that the bill does not strike at the heart of the trade problem. Simply put, the U.S. is running a huge trade deficit because its economy, plagued by an excess of public and private spending and a lack of saving, is consuming far more goods than its industry can produce. While American exports climbed by 11.5% last year, imports rose nearly as much, by 10.7%.

After last October's stock-market crash, consumers grew more cautious for a while, but now they are emptying their pocketbooks and stretching the limits of their credit cards once again. Though the real gross national product increased at a moderate 2.3% annual rate in the first quarter, consumer spending rose at a more robust 3.8% pace.

Much of the excess demand can be traced to the federal budget deficit, which is expected to rise from $150 billion in 1987 to $165 billion this year. By pumping up the economy, the deficit encourages spending on imports. At the same time, the federal red ink helps keep interest rates high, which discourages investment in the plants and equipment needed to produce American goods that could be exported or substituted for imports. Says Investment Banker Felix Rohatyn: "Whatever we do on trade is a sham, a complete waste of time, unless we begin to tackle the budget deficit."

Many economists think that the sharp decline of the dollar over the past 2 1/2 years will eventually reduce the trade deficit substantially by making imports more expensive and U.S. goods cheaper for foreign consumers. So far, though, the impact of the dollar's drop has been disappointing. One reason is that many foreign manufacturers have accepted lower profit margins rather than let their prices rise in proportion to the dollar's fall. Moreover, while the dollar has gone down by more than 40% against the Japanese yen and the West German mark, it has fallen much less against the currencies of South Korea and other newly industrializing countries of Asia, which account for an increasing share of exports to the U.S.

No matter how far the greenback falls, the U.S. economy does not have the industrial capacity to raise exports sharply and also meet much more of the demand by American consumers. Many U.S. companies are trying to remedy this situation by investing heavily in expansion, but much of the equipment they need comes from foreign suppliers. In fact, the U.S. now gets about 50% of its machine tools from abroad. Importing such capital goods will help build up America's industrial base, but in the short run, it will exacerbate the trade deficit.

A sobering problem is that some U.S. industries are virtually gone, with little hope of coming back. In consumer electronics, a dynamic field that represents a major source of imports, U.S. manufacturers have held on to only 18% of their home market. Among the new products that are made by no U.S. companies: camcorders and videocassette recorders.

While agreeing that a better balance between consumer demand and supply in the U.S. economy is crucial, many trade experts, along with nearly all politicians, think the Government should take specific actions to reduce imports and boost exports. Clyde Prestowitz, a former trade negotiator for the Reagan Administration, suggests that the U.S. can do a better job of stimulating American sales in foreign markets. It is fine, for example, that the U.S. is now pressuring Japan to accept more beef and citrus products. But the Government could focus more attention on ensuring fair trade in high-tech industries that have greater strategic importance to the U.S. economy.

In the case of semiconductors, Government action may have been too timid and tardy. In 1986 U.S. manufacturers complained that the Japanese were unfairly "dumping" computer memory chips -- exporting them at prices lower than production costs. As a result, Japan signed an agreement to stop the practice and open its market to American semiconductors. Last year the U.S. charged that Japan had not lived up to the agreement, and imposed higher tariffs against several of its products, including power tools and laptop computers. But by that time the Japanese had already come to dominate the American market for memory chips. U.S. manufacturers, meanwhile, have claimed only 10% of the Japanese semiconductor market. Says John Greenagel, spokesman for Advanced Micro Devices, an American chipmaker: "Japan has the fastest-growing electronics market in the world, and not being in it is just killing us."

Of course, neither trade negotiations nor the declining dollar will do much to reduce imports and raise exports unless U.S. companies are willing to go after foreign competitors aggressively. Too many firms have used the weak dollar to lift prices and fatten profits rather than increase market share. During 1986 and 1987 many California wineries raised their prices by as much as 40% as imports from Europe became more expensive.

The U.S. auto industry has healthier profit margins than it did a decade ago, partly because the Japanese agreed to limit car exports for several years. But now American automakers are losing market share to the South Koreans. Last year foreign carmakers captured 31% of U.S. sales, up from 28% in 1986. Ford, which racked up an industry-record profit of $1.6 billion in the first quarter, has increased its market share, but mostly at the expense of General Motors, whose share of U.S. sales has plummeted from 46% in 1984 to about 37.5% now. Two weeks ago, GM revealed that it is staging what amounts to an orderly retreat in the face of both domestic and foreign competitors. The company will cut back on capacity, which will make recovering its lost market share difficult.

That strategy by GM -- America's leading industrial company -- will bolster its profitability but do nothing to help the U.S. close the trade deficit. Nor will any trade bill Congress devises have much chance of success if U.S. companies lose their resolve to outhustle and outsell foreign competitors.

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CAPTION: How Five U.S. Industries Are Losing Their Home Market

Foreign competitors have made startling gains in many fields once dominated by American manufacturers. These graphs show how the percentage of the U.S. market held by American industries has declined since 1970. While steel producers are making at least a modest comeback, the figures show that U.S. consumer electronics is almost gone

DESCRIPTION: Percentage of United States market held by American manufacturers of steel, automobiles, machine tools, textiles and clothing, consumer electronics, 1970 to 1987.

With reporting by Richard Hornik/Washington and Frederick Ungeheuer/New York