Tackling a Trade Deficit: the Importance of Import

Carl Friederich von Weizsaecker, the physicist and philosopher, speaks of the “political fallacy,” or the conviction that if your opponent’s positions are demonstrably wrong, yours must be right. In a more refined version, the fallacy holds that if a government program is a failure, there must exist an alternative that will succeed.

The debate among political hopefuls and economists over America’s $175-billion-plus trade deficit illustrates the fallacy in operation. Programs and recommendations abound. It is easy to point out the flaws in each; but no one admits that there might not be any ready solution at all.

It’s important to understand how the trade deficit came to be. Despite all the ink spilled--rightly--over the loss of American competitiveness, the trade deficit is not primarily an exporting problem. There is no question that America lost markets in the 1980s. Had we been able to maintain export growth at the same rate as in the late 1970s, for example, we would have exported $35 billion more in 1987. Better export performance would have helped but would still have made only a small dent in the overall problem.

The biggest drop in export, however, came in trade with Latin America, which had little to do with “competitiveness.” So long as American banks were supplying consumption capital to countries like Brazil, Mexico and Argentina, they were strong markets for American commodities and manufactured goods. But we cut off lending around 1980--and told those countries to earn their way out of their deficits by exporting more and importing less. Naturally, when Brazil, in particular, tried to follow our advice we threatened trade sanctions. Our Latin American friends may be excused if they sometimes show symptoms of economic neurosis.

A glance at the other side of the trade ledger makes it obvious that the U.S. trade deficit is primarily an import phenomenon. If the United States had merely maintained its share of world manufactured imports between 1980 and 1987, the trade deficit would have been $100 billion lower. The deficit, in short, is not caused primarily by other countries’ refusal to buy American goods, but by the American enthusiasm for buying foreign goods.

Looking more closely, imports from Japan dominate the statistics. The Japanese enjoyed a $68 billion manufacturing trade surplus with the United States in 1986, accounting for more than half of our manufacturing goods deficit. West Germany had a surplus of less than $17 billion, somewhat smaller, interestingly enough, than Taiwan’s.

Most of Japan’s surplus is accounted for by motor vehicles and vehicle parts. The U.S. motor vehicle trade deficit, in fact, more than $50 billion in 1986 is, along with oil, one of the dominant elements in world trade flows. Consumer electronics and apparel items, each less than a third as large as motor vehicle imports, are far back in second place.

Understanding the sources of the deficit puts some of the more frequently touted solutions into perspective. There have been many suggestions--recently from Fortune magazine, for example--that we might balance our deficit in manufactured goods with exports of services, exporting America’s leadership in the information and communication revolution. But our total services exports in 1986 were less than $50 billion, and our services surplus was less than $3 billion--not much hope there of offsetting a $100-billion-plus manufacturing deficit.

Agricultural and raw materials tell the same story. Our recent agricultural surpluses have been in the $3-billion-$5-billion range. Because of steady increases in agricultural productivity throughout the world, we will be hard-pressed to maintain even that level of surplus. India, for example, is now a food exporter; and if the Soviet Union permits its farmers the modicum of entrepreneurial freedom Mikhail S. Gorbachev promises, Soviet food imports should drop rapidly. At the same time we have enjoyed a $40-billion improvement on our fuel import account since 1980 as a result of the long decline in oil prices. Only the most starry-eyed optimist could expect such a trend to continue indefinitely.

Solving the problem with quotas, as one presidential aspirant, Rep. Richard A. Gephardt (D-Mo.), insists, looks similarly hopeless. Slapping quotas against Japanese cars has so far only made matters worse. The Japanese “voluntarily” agreed to limit automotive exports, but to make up for lost volume, shifted production to higher-priced models--once the preserve of Detroit--where profit margins are higher. More important, consumers have shown they will pay a premium for the perceived Japanese edge in quality.

The rise of the supranational corporation undermines the whole concept of national trade quotas. How can a patriotic American buyer, after all, know that a Ford Festiva is made in Korea? Or how much of a Chrysler car is imported from Mitsubishi, Chrysler’s Asian partner? About a third of Taiwan’s trade surplus with the United States is accounted for by American corporations making things offshore for export back to the United States. When the United States threatened trade sanctions against Toshiba for selling classified technology, its American high-tech partners, like IBM, reacted with undisguised alarm. They depended on Toshiba for too many essential parts.

Some import industries, like VCRs and compact disc players, simply don’t exist in the United States; virtually no color television sets are manufactured in America. Quotas in these industries would not help much. American manufacturers have also been very cautious about expanding plant capacities in recent years. The American chemical industry is currently passing out large export opportunities because it doesn’t have room for extra production, however profitable it may be.

The expectation that a falling dollar will cure the trade deficit seems similarly misplaced. Export performance is clearly improving as the dollar falls, but so far only marginally--the rising cost of imports has virtually matched the export improvement. The dollar, in any case, has actually risen against most of our Latin American trading partners, like Mexico.

The hope of some economists, such as Martin Feldstein, that the trade flows will balance if the dollar falls far enough--say to 90 yen--are simply unrealistic. If the dollar falls that far, trade disruptions could be so severe as to make American trade problems even worse. What if foreign oil producers, for instance, began pricing their oil in yen, or marks? A move along those lines was afoot when President Jimmy Carter and Treasury Secretary W. Michael Blumenthal, attempted to “talk down” the dollar in the late 1970s.

If service or agricultural exports, quotas or a falling dollar won’t do the trick, what will? Perhaps a massive American recession will squelch our importing habits, just as the 1981-82 recession squeezed out inflation. Or perhaps the move of Japanese and other foreign manufacturers to this country will simply mask the fact that American firms have lost the battle for their home markets. Or perhaps, Von Weizsaecker might say, you just can’t get there from here.