ENGINE THAT COULD IS ALL OUT OF STEAM : Role as Leader of World Economy Shifts as U.S. Global Debt Grows

The United States was the world’s economic locomotive, went the popular wisdom. Its sturdy industrial engine would clatter and grind and tow the aspirations of other countries forward with it.

Foreign countries relied on the well-heeled American public to buy their products--in many cases, even more than they counted on their own consumers. Similarly, many U.S. manufacturers--content with the rich market in their own backyard--did not try very hard to sell abroad. But America paid a price: a growing loss of control over its economic destiny in the form of a foreign debt, which could exceed $500 billion by 1990.

This huge imbalance, which has threatened chaos in global financial markets, is now forcing a sweeping change in the role of the United States and other nations in the world economy. America is becoming more of a caboose--dependent on the economic vitality of others--and less of a locomotive. Instead of spending so much on consumer goods, analysts counsel, America’s wealth must be directed more toward manufacturing and investment.

And that creates new pressures for other nations to take on more of the responsibilities--and risks--of economic growth. “We’re facing an economic adjustment that I think exceeds anything we’ve experienced in 50 years,” Norman Robertson, chief economist at Mellon Bank in Pittsburgh, declared in an interview. “The economic roles in the world have to be reversed. When you think about it, it’s an absolutely enormous task.”

The changes are expected to come at uneven pace, and they heighten the near-term risks of recession throughout the world. But, already, economists point to early signs that an extraordinary transition has begun.

In a little-noticed shift, Japan has begun to rely more on its own consumers and less on foreign consumers for its economic growth, following years of astonishing export gains. The amount of goods Japan sells abroad actually has dropped for the last two years, its government statistics show. Imports are rising.

At the same time, the United States has conducted its own about-face: American consumers, whose record-breaking levels of buying propelled the world economy forward earlier in the decade, are slowing down. In their place, manufacturing has become the key driver of U.S. growth. This is because the lower-valued dollar has given American companies big advantages in pricing overseas; it also has hurt foreign firms’ ability to keep a lid on the prices they charge in this country. The Labor Department reported in January, for example, that import prices shot up 9.6% last year--an even higher 14.8% if oil is included.

But there is more involved here than a mere change in economic statistics: The growing importance of U.S. manufacturing exports means that prosperity in this country increasingly will rely on economic vitality--and policies--in other countries. If they do not buy enough goods made in America, this country will suffer.

Overseas, the changes have a different sort of meaning: As American consumers continue to hold back, other countries no longer can view the United States as a bottomless receptacle for their products.

The Reagan Administration’s decision to take away special trade privileges from South Korea, Singapore, Taiwan and Hong Kong is a clear signal from this country to those it has pulled along: “They have to provide little choo-choos of their own,” said Robert Z. Aliber, an economics professor at the University of Chicago. He added, “There never again will be a situation like the early 1980s, when we provided the momentum for the growth of the rest of the world.”

West Germany Fears Inflation

Yet if there is broad recognition that America’s days as lone locomotive have ended, there is far less agreement on just what other countries should do to compensate.

While a lower dollar has made things more difficult for Japanese exporters, many countries have not been affected as much. Other Asian nations with vibrant economies continue to shower America with low-cost products. Indeed, these countries have resisted currency value changes that would make their price tags less attractive to American consumers. They see little choice but to continue, because their own low-paid workers represent only a fledgling consumer market.

And West Germany, the world’s leading exporter, generally has resisted U.S. pleas to perk up its domestic economy, despite the fact that it suffers 9% unemployment. German officials harbor deep fears that the sorts of measures U.S. policy-makers prescribe for Europe--such as interest-rate cuts--could ignite inflation.

“We’re becoming the caboose and they’re (foreign countries) becoming the locomotive,” observed Lester C. Thurow, dean of the management school at the Massachusetts Institute of Technology. “The problem is that their locomotive isn’t moving very fast.”

Thurow and others cite several dangers of inaction. The huge U.S. foreign debt undermines the dollar and adds to global financial instability. The debt--which reflects both a transfer of wealth abroad, arising from the U.S. trade deficit, and also loans needed to pay the federal budget deficit--could approach $500 billion by the end of this year, according to Robertson of the Mellon Bank.

He added that foreign investors could easily become alarmed about the safety of their dollar-denominated investments. The scenario: An exodus of foreign investment--or even the threat of one--would force up U.S. interest rates. The consequence could easily be a chilling of business activity, leading to a serious global recession. “The pressure on Germany and Japan (to stimulate their economies) is the reality that these imbalances cannot be corrected by the United States alone,” Robertson said.

The global economic tensions raise other concerns for America’s trading partners: Congress might impose barriers to imported products if those countries continue to sell this country far more than they buy in return. But with the weaker dollar pressuring import prices upward, it is more likely that foreign producers will have to look beyond America if they want to keep their factories humming.

Japan, it seems, has recognized this changing reality more than others. Last year, it launched a program of some $47 billion at current exchange rates to energize its economy through a combination of tax cuts and spending for housing, bridges and other projects. Aided by the yen, which is worth much more abroad than in the past, the Japanese have also begun to purchase more goods made outside their borders. And they have launched an ambitious campaign of building factories in South Korea, the United States, Mexico and other countries.

“These kinds of changes are really extraordinary for Japan, if they continue,” said Douglas R. Ostrom, an economist with the Japan Economic Institute, a research group financed by the Japanese Foreign Ministry. “Psychologically, this could be of tremendous impact, given Japan’s history of cultural and economic isolation.”

In 1986, for example, the actual volume of Japanese exports to other countries fell by 1.4%, while Japanese imports--mainly from Asia and Europe--jumped 13.3%, according to Japanese government figures. For the first nine months of last year, exports fell another 4%, as imports rose 6.9%.

Not that anyone expects such changes alone to eliminate the U.S. trade deficit with Japan, an imbalance last year of more than $50 billion. But, over time, the ripple effects could markedly change the way the world does business. Last year, for example, exports to Japan of steel, textiles, electronics and other manufactured goods by South Korea and some other Asian nations jumped by $5.7 billion, a whopping 57%.

Indeed, some analysts say the global changes amount to a mirror image of the early 1980s, when the dollar was flying high. At that time, Americans developed a new fondness for inexpensive, imported goods. At the same time, the dollar’s value saddled U.S. firms with severe disadvantages in pricing overseas.

Today’s situation provides a vivid contrast to past years. With a much lower-valued dollar, manufacturing is leading U.S. economic growth and consumers are cutting back. In Japan, meanwhile, the opposite trends are taking place. “The shifts we’ve seen are dramatic,” said Stephen S. Roach, a senior economist with the Morgan Stanley & Co. investment firm in New York. “Just as we went from a consumer-led to an export-led economy, they’ve gone from an export-led to a consumer-led economy.”

A quick glance at recent U.S. economic statistics highlights the readjustment. Exports in 1987 accounted for more than twice the amount of economic growth that consumer spending did--a stunning reversal of past trends. In the last three months of 1987, consumer spending plummeted at an annual rate of 3.8%, the sharpest downturn since the 1980 recession. Boosted by export demand, many U.S. factories are running at more than 90% of their capacity, rates not experienced in years.

And, although worries persist about the trade deficit, close examination of the figures shows that the actual amount of goods leaving the United States has increased since late 1986, while the amount of imports entering the country generally has been slowing.

“That tells you we’re no longer the locomotive for the rest of the world, and we haven’t been for the last year and a half,” said Lawrence B. Krause, a professor in the Graduate School of International Relations and Pacific Studies at UC San Diego. “We’re dependent on the rest of the world to be our locomotive. Probably half of our economic growth this year will depend on our exports rising.”

More Needs to Be Done

The news is not all heartening. Depending on what happens in other countries, the shift could prove slow and painful. Just as the weaker dollar has aided U.S. manufacturers, it has hurt their foreign competitors. If these setbacks lead to a slump in the other countries--as many fear--their demand for U.S. products will slow down. And, with U.S. consumers holding back, plunging demand for the nation’s manufactured goods would be extremely perilous for the economy.

These new concerns are why the American policy-makers have pressed West Germany to adopt growth-oriented policies for its vast but sluggish economy. “We can be encouraged by what is happening in Japan and the United Kingdom,” former Federal Reserve Chairman Paul A. Volcker recently told an audience of French business executives in Paris. But, in an obvious reference to West Germany, he added, “More remains to be done on this continent.”

For their own part, other countries scold the United States for tolerating a huge federal budget deficit, which sponges up money that otherwise would go to business investment. In addition, critics argue that if Americans saved more and paid higher taxes to cut the deficit, their import purchases would decline and the trade gap would narrow.

“The rest of the world can reasonably say: ‘What are you doing to correct the imbalances?” maintained Ralph C. Bryant, a senior fellow at the Brookings Institution in Washington. “We’ve been much better at lecturing the foreigners on what they ought to be doing than on doing what we need to do.”

The stakes in the international debate are high. Economists warn that the U.S. trade imbalance can be narrowed through the pain of a recession, in which imports come to a screeching halt, or--with more than a little luck--a new era of cooperation between the United States and its major trading partners. That, they say, is the challenge raised by the new shifts in the global economy. Said Bryant: “We really need joint moves by the U.S. and the rest of the world.”