Not So Bad
In an era of automated, computer-driven stock market transactions and of preoccupation with the short term in investment, there may be no rational explanation for the record stock market plunge on Wednesday, just as there may be none for the almost equal free fall eight days earlier, or the stunning loss again Thursday, the fifth largest on record. Nevertheless, the blame is being put on the August merchandise trade-deficit figures, which, to our way of thinking, only reinforces doubts about the validity of such analyses.
It is now said that the trade deficit did not decline as much as some had expected. That disappointment was then translated instantaneously into rocketing interest rates and declining stock prices as if some fundamental flaw in the American economy had just been discovered. As a matter of fact, there were some significantly reassuring elements behind the trade figures that count most in calculating the economic future, notably in the gains for exports of U.S. manufactured goods with the exception of commercial aircraft. And even with regard to the exception, aircraft, the prospects are favorable and the August trade figures merely reflected customary fluctuations in that trade.
There is validity to the argument that the declining value of the dollar has not been as helpful as most economists anticipated in reducing imports and increasing exports. But, slowly, slowly, evidence is accumulating that the changes in the dollar are beginning to have a fundamental impact on trade. When figures are adjusted for inflation, the trend is positive. The forecast for the year is a 16% decline in the deficit from last year’s record $146 billion.
Unfortunately, the political reaction to the figures may prove even more damaging than the trading overreaction on Wall Street. Three major pieces of trade legislation are pending, and advocates of extremism and protectionism have already seized on the new figures to support their proposals. That would be a reckless response.
Basically, the figures demonstrate that the United States can compete in world markets. They support the validity of President Reagan’s commitment to free trade and to the new round of General Agreement on Tariffs and Trade negotiations now under way. The figures show the dangers inherent in the heavily protectionist textile bill, and in the disruptive omnibus trade bills now being reconciled in Congress. But the figures also show the value of expediting the U.S.-Canada free-trade agreement that has just been negotiated by these, the largest trading partners in the world.
