The Diving Dollar Is a Double-Edged Sword

Treasury Secretary James A. Baker III decided last week that the dollar has fallen enough against the Japanese yen.

Unfortunately, Baker may have come to that conclusion too late to avoid a renewal of the sort of economic trauma that the world saw in the energy-scarce 1970s.

In a toughly worded speech to the Japan Society in New York, Baker signaled to the government of Prime Minister Yasuhiro Nakasone that Japan “must accept the burdens, as well as the blessings, of being a great economic power.

And, above all, economic leadership means accepting global responsibilities despite the sometimes parochial concerns of national constituencies.”

No Retreat From Demands

What that translates into is that there will be no retreat from American demands that Tokyo open its doors to U.S. products.

But there was an admission that the United States no longer could keep pushing down its own currency as a quick way to halt Japan’s persistent trade surplus with America.

The moving force behind the Baker conversion was the surprising uptick in U.S. interest rates that has frightened the White House and foreign investors alike.

After arguing for at least six months that dollar devaluation was one of the few effective weapons in their arsenal, President Reagan’s economic aides are now trying to put the weapon back on the shelf. It appears that the weapon has two edges and is coming dangerously close to cutting those who wield it.

Consider what’s happened so far.

The Administration took the risk of touching off a catastrophic free-fall in our dollar’s value to bring some sort of correction to our ever-widening trade deficit.

Last week, however, there was evidence that the tactic is either not working at all or will work too late to do us any good. The Commerce Department reported that the U.S. merchandise trade deficit widened to $15.06 billion in February, an expansion of the $12.27-billion shortfall in January.

This was bad news on a number of fronts.

For six months or more, Baker and other Cabinet officials have predicted that the devaluation of our dollar would very soon make American exports so inexpensive that they would become attractive abroad.

The Reagan game plan was to have new orders for American goods lifting the U.S. economy over the expected slow period of April-June this year.

But Clayton K. Yeutter, the U.S. trade representative, told the Washington press corps at a briefing breakfast last week that the improvement may not really take effect until early 1988.

Yeutter is right when he points out that while the trade deficit for February was bad, the overall total masked a 13.6% rise in exports to $18.66 billion from January. That’s good.

Several Trade Deficits

But imports rose 17.5% to $33.72 billion. Worse, the single greatest contributor to that import total was our growing appetite for imported oil.

In February, the value of U.S. imports of OPEC and Mexican oil rose a whopping 32.1% from January to $3.36 billion.

Still worse, not only is this because the price of oil went up, but the actual import volume rose 18.5% to 197.3 million barrels.

What that means is that we were back to consuming 6.6 million barrels of imported oil a day, 1 million barrels more than a month earlier.

When we consumed 8 million barrels a day back in Jimmy Carter’s presidency, the dollar devalued itself to the point where the Treasury was forced to borrow money in Swiss francs and West German marks.

That was back in 1979, when the second OPEC price rise touched off a nasty little recession that contributed to Carter’s 1980 reelection loss.

It also touched off the Third World debt crisis that continues today. And, by boosting the price of energy, it has helped lead us to an economic world where every nation must sell its goods to others if only to hang onto jobs for its own citizens.

Against that background, consider another bit of bad trade news. America now runs a trade deficit with Western Europe, with the Organization of Petroleum Exporting Countries, with Mexico and with Canada--not just with Japan.

All the same, there is no argument that the Japanese should escape opening their markets to American products.

And the Nakasone government must agree to halt the standard corporate practice of unfairly pricing exports to the United States to gain a bigger market share here. That is simply prudent trade policy.

Nor is there any real secret about what else needs to be done. Our horrendous government spending overruns must be cured.

We need to stop counting on foreign investors to provide the investment money that we should be saving ourselves. And we must find a way to a world trade policy that promotes exports and is not some thinly disguised game of beggar-thy-neighbor.

We have run the risk of freezing world trade by robbing it of the one constant mechanism of settlement and exchange that all nations recognize--our dollar.

Such a paralysis will not help us, nor our industrial nation partners and certainly not the debt-ridden Third World, which must surely sell its way out of its bank loan load or repudiate the whole pile of paper for once and for all.

The dollar devaluation also has invited the renewal of 1970s-style inflation.

In the Beginning

And this may be the most depressing thought of all: So long as we continue to increase our consumption of foreign oil (and an $18-a-barrel price is predicted for May) regardless of the cost, then whatever benefit our dollar devaluation has provided will be more than wiped out by our profligacy with energy.

All of which leaves us where we came in at the beginning of the Reagan economic revolution seven years ago.

Until the President reconnects economic policy to reality, we will continue to drift back into that time-warp of trouble known as the 1970s.

Baker’s refusal to push the dollar down any more is a good first step. But it is not enough, especially when the marketplace may still have some dollar bashing to do on its own.