Foreign Trade Gap Shapes Up as Next Battle for Administration, Congress

The Clinton administration is about to become embroiled in another big deficit battle with Congress--this time over the nation’s burgeoning foreign trade gap.

With the long-troublesome federal budget shortfall now theoretically erased, lawmakers are likely to take aim at the trade deficit, demanding the administration take bold action to reduce it.

Rep. Sherrod Brown (D-Ohio) already has branded the trade deficit “the biggest threat to continued economic growth in our country” and demanded that the administration take “swift action” to correct the imbalance.

There is no question that the United States is running a sizable trade deficit. The country imported $113.8 billion more than it exported in 1997, on the heels of a trade imbalance of $111 billion the previous year.

This year, skewed by the economic slump in Asia, the trade deficit is beginning to soar even higher. New figures published by the Commerce Department last week showed the trade deficit for January at $12 billion--up from $10.9 billion the previous month.

Cheryl R. Katz, economist for Merrill Lynch & Co., predicts that for 1998, the red ink could reach between $150 billion and $165 billion. The previous record was $153.4 billion, set in 1987.

If the nation runs a large trade deficit indefinitely, it could be a problem. Eventually, the dollar would lose value in the currency markets. The Federal Reserve would be forced to raise interest rates to help arrest the slide. The domestic economy would slump.

For the short-run, however, economists say the trade deficit poses no great problem and, if anything, is more a sign of America’s economic strength than of any kind of weakness.

Barry P. Bosworth, a Brookings Institution economist, says the out-sized trade deficit of 1997 reflected two major factors:

* The U.S. economy was growing far more rapidly than those of Europe, Japan or Latin America. While American consumers were on a buying binge, foreigners were holding down their purchases. Import-buying here surged, while export orders stayed flat.

* The high value of the dollar exacerbated the disparity. When the dollar is strong, imports are even cheaper for American consumers, while U.S. exports are all the more expensive for America’s customers overseas.

The impact of the Asian financial crisis is expected to take everything a step further. Indeed, analysts say the Asians’ only way back to prosperity is to export more, and the United States--which has the world’s strongest economy--is the most likely market. The plunge in the value of Asian currencies makes their countries’ goods a particular bargain here.

If the United States does not buy up more Asian goods, the region’s economic slump could worsen, heightening the impact on the U.S. economy. Accepting more Asian goods in the short run is a necessary insurance policy for the United States, policy-makers say.

That’s unlikely to dampen the harrumphing in Congress, however. Lawmakers are almost certain to make an issue of the rising trade deficit, using it as an excuse to block further free-trade moves.

Sen. Byron L. Dorgan (D-N.D.) has proposed establishing a commission to hammer out policies for reducing the trade deficit.

The difficulty, analysts say, is that there is no easy way to cut back the size of the trade deficit without hurting the U.S. economy in the process. Indeed, some argue there is no overriding need at the moment to reduce it at all.

Economists say the trade deficit results not from unfair trade practices by other countries, but from broad economic trends. During the 1980s, for example, the trade deficit grew primarily because the U.S. ran a huge domestic budget deficit and kept interest rates here high. Companies financed their investment by borrowing from abroad. The dollar’s value soared; imports rose sharply.

Even with the recent drop in the federal budget deficit, the U.S. economy has grown so rapidly that there hasn’t been enough money at home to finance investment. The money has come from abroad. Americans are buying imports with abandon.

Critics contend the influx of imports depresses U.S. wages, encourages manufacturing firms to move production facilities overseas and ultimately throws American workers out of jobs.

But economists say the statistics dispute such claims. Studies by the president’s Council of Economic Advisers show that less than 10% of the job-displacements in U.S. manufacturing industries during the worst of the 1980s was attributable to the impact of trade.

The Asian slump will help slow U.S. growth. But Alan Greenspan, chairman of the Federal Reserve Board, says that, too, may prove to be a blessing, as long as the effect is mild--and temporary.

Greenspan has been warning that the U.S. economy must slow soon to avoid overheating, or the Fed may have to raise interest rates to ward off renewed inflation. If the economy slows because of the Asian slump, a rate hike may be unnecessary.