ANALYSIS / TRADE DEFICIT : New School of Thinking Finds Doomsday on Imports Unlikely
Remember the dire warnings that America’s spree of import-buying would bring on a “Day of Reckoning?” That the nation’s mounting foreign debt--needed to finance the lingering trade deficit--will end up mortgaging future generations of Americans?
Well, tear up the doom manual: The huge global imbalances--the United States’ deficit and the surpluses of West Germany and Japan--are beginning to shrink and may even disappear before very long, according to a new school of thinking that is beginning to catch Washington’s eye.
As if to underscore this growing belief, the Commerce Department reported Wednesday that the U.S. trade deficit narrowed dramatically in February to $6.4 billion, its best performance in six years.
Some economists now believe the trade deficit problem could fade in as little as two or three years. “It’s already under way,” says Jerry L. Jordan, a former member of the President’s Council of Economic Advisers and now at First Interstate Bancorp in Los Angeles.
Sharp Reversal
Indeed, new figures for Japan are breathtaking. By the fourth quarter of last year, Tokyo’s current account surplus--a measure that includes both trade and investment flows--had plunged to half its 1987 average of $84.5 billion and is still shrinking rapidly.
The Japanese turnaround reflects several factors: a sharp increase in imports over the past few years, made even costlier by the recent decline in the value of the yen; the increasing tendency of Japanese corporations to manufacture their products in overseas plants instead of in Japan, and burgeoning tourism by travel-starved Japanese.
West Germany’s surplus is also about to shrivel rapidly, these economists say, as Bonn channels its money into the rebuilding of East Germany and absorbs it into a reunified German state. What little may be left could quickly be invested elsewhere in Eastern Europe.
Meanwhile, Jordan and others predict, the United States’ current account deficit--again, encompassing both trade and investment flows--also will begin to shrink sharply within the next three or four years, as exports continue to rise, particularly in high-value items such as computers and aircraft.
“We’re very very competitive in those sorts of things, and that’s what people are going to need,” Jordan says. “Overall, you’re going to see the trade situation improve--and fast.”
If such optimism proves to be correct, it won’t be the first time that the economic doomsayers have wound up embarrassed about how deftly the economy has been able to right itself.
Paul Krugman, a Massachusetts Institute of Technology economist, points out that the economy is operating successfully today at a lower rate of growth, far higher inflation and slower gains in productivity than was thought possible just 25 years ago.
“American policy could continue more or less on its current course for many years without any crisis,” Krugman says.
Some Advise Caution
Not everyone is convinced that the trade imbalances--or the economic situation--will improve rapidly, as the optimists suggest.
C. Fred Bergsten, an analyst at the Institute for International Economics in Washington, stands by his earlier forecast that the U.S. trade and current account deficits will begin widening again in 1990 and 1991. “The situation basically hasn’t changed,” he says.
J. Paul Horne, Paris-based international economist for Smith Barney, Harris Upham Co. cautions that demands for rebuilding Eastern Europe and revitalizing the European market generally may draw investment away from the United States.
“It would put a rising floor under U.S. interest rates,” Horne says.
Finally, America’s own internal financial problems are threatening to throw a monkey wrench into the economic expansion here--a development that could rapidly degenerate into a full-fledged recession if the trade and current account imbalances persist.
Moreover, some industries--such as services and retailing--may be hard-pressed no matter what the situation. “It’s not going to be a plus for everyone,” Jordan asserts.
Even so, for now, at least, the numbers are turning out to be far less scary than predicted. By rights, the Day of Reckoning should have appeared by now. In fact, it may never come.
Mild winter weather, declining oil prices and a strong dollar help improve February trade balance. D1
