Tension Grows Among Allies on Trade Gap

Richard R. Burt, the U.S. ambassador to West Germany, paid a call early last month on Karl Otto Poehl, head of Germany’s fiercely independent central bank, and asked that the Bundesbank cut its key interest rate.

Poehl, astonished by Burt’s blunt request, later remarked that Germany’s own chancellor would be shown the door if he made such a suggestion. Burt’s clumsy approach served only to harden resistance to U.S. efforts at persuading Germany to pump up its economy and buy more American goods.

So much for international economic cooperation. The Reagan Administration, after organizing an effort among international monetary officials at New York’s Plaza Hotel a year ago to weaken the overvalued dollar so that American goods would cost less abroad, has been pressing hard in recent months for further European and Japanese help to narrow America’s gaping trade deficit.

Veneer of Cooperation

Instead of growing, however, the veneer of economic cooperation between the United States and its main trading partners already shows signs of wearing away. And now, since finance ministers and central bankers of the five major Western economic powers were unable to settle their differences in high-level meetings last weekend, other nations are openly resisting U.S. efforts to drive the dollar still lower.

In place of the soothing rhetoric and innovative agreements that seemed briefly to ease tensions between the United States and its crucial trading partners, observed Rimmer de Vries, chief international economist at New York’s Morgan Guaranty Trust, “it’s now open warfare.”

The situation risks bringing about a slowdown in worldwide economic growth, which could lead to a loss of jobs both here and abroad. Unless the European and Japanese economies pick up, thus helping to reduce the American trade deficit, U.S. officials fear that political pressures here will push the major industrial countries into go-it-alone protectionist measures.

Yet there is finally some evidence that last year’s Plaza Agreement on weakening the dollar is beginning to pay off in a long-awaited narrowing of the U.S. trade gap. This suggests that top economic officials may be erupting into discord just as many of their differences are about to be eased.

Projected Deficit Smaller

Just last week, the Commerce Department reported that the estimated U.S. trade deficit took its biggest one-month plunge ever, from $18 billion in July to $13.3 billion in August. Although it would be premature to declare victory on the basis of one month’s statistics, other evidence also points to the beginning of a turnaround in U.S. trade.

Computer makers, for instance, are reporting strong gains abroad as the declining U.S. dollar allows them to slash prices and undercut foreign competition. Tandem Computers, Hewlett-Packard, Prime Computer and Digital Equipment--all manufacturers of powerful minicomputers--saw their sales in Europe increase by as much as 50% in the first half of 1986.

Caterpillar Inc., the construction equipment maker, now says it is making major inroads against its chief Japanese competitor, Komatsu, which had taken key markets from Caterpillar when the yen was weak.

Perhaps most surprising, Chrysler announced last month that it would become the first U.S. auto maker in decades to send cars overseas. It will sell its popular mini-vans in four European nations. “At 240 yen to the dollar we were doomed,” said Robert Lutz, Chrysler executive vice president, “but at 150 yen we have a shot. I see real potential in the European market.”

Exchange Rates Are Key

These positive signs, however, need to be backed up by currency markets stable enough to assure major multinational firms that they won’t be whipsawed as radical changes in exchange rates undermine their long-term investments. “As long as the dispute continues,” said Robert Hormats, a vice president at the Goldman Sachs investment house, “the (currency) markets are likely to be in turmoil.”

Even though finance officials proclaimed an uneasy truce during last week’s annual meeting of the International Monetary Fund and the World Bank, the dispute over currency values and trade measures is clearly not going away.

“The public mudslinging may be fading,” said C. Fred Bergsten, head of the Institute for International Economics, “but they are still at loggerheads.”

Germany and Japan refuse to reduce interest rates or otherwise stimulate their economies simply to provide relief to U.S. industries competing with a flood of imports. And, in the face of Reagan Administration suggestions that it might move aggressively to push the dollar low enough to make U.S. goods even cheaper than foreign products, European economic officials increasingly are digging in their heels, in the belief that the dollar has fallen far enough. They intervened in the currency markets last week to shore up the dollar, an effort to assure that their goods remain competitive.

Treasury Secretary James A. Baker III tried to put the best light on his inability to persuade the allies to follow American economic prescriptions:

“Of course, it would be fortunate if such reviews could result in immediate agreement, but often they won’t,” Baker told delegates to the IMF-World Bank meeting. “Indeed, the fact that we are forthrightly discussing some of our most sensitive economic policies almost ensures that, at times, we will differ.”

He added, however, “The process can and will work.”

Paradoxically, there may be some benefit from the collapse of a facade of unending economic cooperation. Top finance ministers and central bankers now have much more freedom to discuss and disagree without building up expectations that every economic meeting will achieve a breakthrough.

“It’s too bad this sideshow over interest rates got out of hand,” said Robert Solomon, an international financial specialist at the Brookings Institution and a former Federal Reserve Board official. “The problem is that international policy coordination is bound to be a slow process, but everybody expects instant results.”

Federal Deficit Criticized

While most of the discussion over the past week centered on what Japan and Germany could do to strengthen their economies, there was also a fair amount of criticism of U.S. economic flaws.

Japanese Finance Minister Kiichi Miyazawa repeatedly expressed concern over the U.S. budget deficit, which diverts billions of dollars from productive use around the world. He and European officials also said that American industry and American products must become more competitive, by lowering production costs and improving quality, before the U.S. trade deficit will fall substantially.

Behind the public statements and private discussions was an awareness of what could happen if efforts at international cooperation fail to resolve pressing trade issues.

“If we do not,” Baker warned, “I would fear for the future, in view of the haunting specters of protectionism and isolationism.”

Dormant in Congress at the moment are dozens of measures that are expected to be revived next year by lawmakers who are convinced that the Administration is not doing enough to close the trade gap.

German Growth Cited

U.S. officials, meanwhile, are clearly more upset over what they see as German heel-dragging than they are over Japan’s response.

“(Japanese) action indicates they know there’s a problem and they have to contribute to their domestic growth,” a senior Administration official told reporters last week. “In Germany, we are concerned about the sustainability of their growth. . . . They have not been as responsive as we would like.”

But the Reagan Administration, although determined to keep the pressure on Germany, backed away from bringing the transatlantic dispute to a fast showdown.

Baker, bowing at least temporarily to the reluctance in Germany to stimulate the domestic economy because of age-old wariness of inflation, and to Japan’s concerns about expanding its already large budget deficit, privately expressed willingness to settle for modest joint proclamations and to postpone further demands until early next year.

“Germany and Japan just aren’t prepared to give much right now,” said Bergsten. “When they cover all the receivers deep,” he said, “it’s smart to take the short pass.”