Crashing Dollar Signals Time for a Counterpunch

Do Americans pay a price for the falling U.S. dollar, which all but collapsed last week, beyond the obvious one of costlier vacations overseas?

And does the chronic trade deficit, which worsened again last week, exact a serious cost on the U.S. economy, ultimately reducing American living standards?

The answer is yes on both questions, although you wouldn’t know that from most expert and official reactions last week. President Clinton protested gamely that the U.S. economy is stronger than it has been in decades, and therefore the dollar’s weakness was mistaken. “In the end, the markets will have to respond to the economic realities,” the President said.

Clinton was right on fundamentals but wrong on markets. The U.S. economy is solid and American industry is highly competitive thanks to many virtuous years of lean diets and tough workouts.

His mistake was in saying the world would reward such virtue. Mae West knew better: “Goodness has nothing to do with it,” the roguish actress might have said about foreign trade and economic relations among nations.

Nothing happens without effort in those relations. The U.S. dollar has been falling against other currencies for almost a decade now, making U.S. goods cheaper on international markets. Yet the balance of trade and international payments continues in deficit as it has since 1977.

Those chronic deficits, totaling more than $1 trillion over 16 years, impose a penalty on the U.S. economy. They force the United States to borrow, at home and abroad, to finance annual deficits, and that forces interest rates higher and curbs the potential for U.S. jobs, incomes and living standards.

That’s the backdrop to the situation we find ourselves in today, which is filled with paradox and foreboding. On the one hand, recent high-level visitors to Japan and Asia find disrespect for the Clinton Administration mounting to a misguided contempt for the United States itself. That’s one reason the dollar is weak.

Yet these same visitors found admiration for U.S. industry’s competitive strength and vision to be widespread, as if confirming Clinton’s boasts about it last week.

The message, therefore, is that the U.S. government needs firm, knowledgeable policies toward Japan and Asia but is fortunate that U.S. industry gives it a strong hand.

A few examples of trade realities will put us in the picture and give an idea of what’s needed.

Most Americans will be surprised to learn that in Japan today, the realization has dawned that Japanese industry is trailing in the all-important information industries of computers and telecommunications.

Business leaders and government ministries acknowledge that American development of personal computers and software, cable television, CD-ROMS, the Internet and so on is the way to build the information highway.

The wake-up call for Japanese industry was the growing U.S. ability to combine computers with video, which made Japan’s high-definition television obsolete. Now Japan’s government plans massive investments in fiber-optic cables to create an information highway by 2010.

So will we see surging exports of U.S. computers and telecommunications equipment to Japan? No.

Or will Japan open its economy and allow U.S. telecommunications companies to invest in and take advantage of a growing market in the world’s second-largest economy? No.

Instead, Japan’s government is trying to turn back the clock to the postwar era of government planning and targeted industries. The Ministry of Post and Telecommunications plans to organize its Big Three telephone suppliers, Fujitsu, NEC and Hitachi, in efforts to produce advanced telecommunications products for the home market and export. The Ministry of International Trade and Industry has its own plans for what it calls “visual information technology.” U.S. and other foreign competitors need not apply.

What should be the U.S. response? Calm judgment and sharp elbows. First of all, realize that the old Japanese model of government-guided industry probably won’t work. Decades of government guidance haven’t given Japan a competitive computer industry. Japan’s banks are ruled and guided by the powerful Ministry of Finance, but that didn’t prevent them from making more than $200 billion in bad loans, notes Eugene Dattel, author of “The Sun That Never Rose,” a new book on Japan’s financial system.

Use sharp elbows. As it happens, Fujitsu, Hitachi and NEC are all bidding for inclusion in information highway projects in the United States. “A word from Undersecretary of Commerce Jeff Garten demanding reciprocity in Japan if those companies are to get business here could do wonders,” says a U.S. expert on Japan.

What is called for from Washington is a serious, knowledgeable policy on trade.

A critical period is coming up in the automobile industry as a new labeling law tightens definitions of just how many U.S. auto parts Japanese manufacturers are buying here. U.S. sources say the new definitions will reveal that Toyota, Honda and Nissan buy about half their parts from U.S. suppliers, but resolutely import all high-value parts such as transmissions from suppliers back in Japan.

If true, the Japanese manufacturers should be called on that. Buying more sophisticated parts in the United States would create better jobs for Americans and help correct the trade deficit with Japan, two-thirds of which is in automobiles and parts.

On the other hand, if Japan opened up its vast economy--two-thirds the size of the U.S. economy--the result would be better jobs and a better life for the majority of Japan’s people.

Don’t expect miracles. “Japan regards trade differently from the United States,” writes Glen Fukushima, a former U.S. trade representative who is now in private business in Tokyo. “Competitiveness is not only a matter of price and quality, but of a host of other factors, very much including what is seen as best for Japan.”

But so what? If Japan’s policy works to the disadvantage of the United States, the Clinton Administration has a responsibility to insist on U.S. interests. Unfortunately, the Administration, from the President himself down to trade negotiator Mickey Kantor, is seen in Asia today as ignorant and weak.

“Japanese friends of the United States say firm action, on trade or other matters, is needed to restore respect and confidence,” reports a recent visitor to Tokyo.

Clearly, the times are demanding change. Last week’s careening dollar said the years of deficits and drift cannot go on; it was our wake-up call.