Back in Brussels for consultations last month, Fernand Spaak, the Common Market's ambassador to the United States, was startled to find that the taxi he'd hailed was-of all things-an American Chevette. But of course , the driver told him, the General Motors export was attractively priced and economical as well. And, Spaak notes with mock alarm, other Europeans are buying U.S. cars, too.
The dumpy little Chevette may not capture continental hearls the way the Volkswagen beetle charmed Americans in the 1960s, but Spaak's wry concern isn't totally unfounded. The past year's sharp devaluation of the dollar has made American exports far more competitive than they were only a few months ago-and imports here far more expensive-dempening demand for foreign-made goods.
As a result, despite the bloated foreign trade statistics in recent months, many analysts are predicting we may be heading into a trunaround in the sagging U.S. trade posture-with hopes of trimming the deficit, likely to come in at just under $30 billion this year, could fall to less than $15 billion next year.
And some forecast that the closely watched U.S. "current account"-a more comprehensive measure that includes services, tourism, investment earnings and military sales as well-probably will approach flat-out balance next year, with the possibility of a small surplus. This year's current account will run up a deficit of about $17 billion.
The appearance of Chevette taxis in Brussels is something of a minor indicator. Although the volume isn't enormous, GM reports the number of U.S. passenger cars it sells in Europe has doubled this year to 30,000 vehicles, with even sharper gains expected in 1979. The Camaro is a smash hit in West Germany and Switzerland. And GM is preparing to introduce other models.
GM's total overseas sales of U.S.-built cars have risen to 240,000 cars from 180,000 in 1978. The company has just completed a gigantic new distribution center in Antwerp, and company officials say they're planning to expand marketing in several overseas areas. Other U.S. auto makers report similar gains. With Canadian business excluded, U.S. auto exports are up a robust 19 percent.
But the revival isn't limited to autos. The latest government figures show sharp gains in exports in a variety of industries and products. Machinery exports have climbed 13 percent over the year. And overseas shipments of drilling equipment are up 22 percent. "It's pretty much across the board," says a Treasury analyst who tracks trade developments closely.
The phenomenon stems basically from two key developments:
The past year's sharp decline in the dollar has made U.S. goods more competitive in major world markets (particularly West Germany and Japan) and foreign imports more expensive here, steadily chipping away at the huge U.S. trade deficit. Although the dollar rebounded sharply after last month's rescue move, it's still 10 percent below a year ago-a sizable falloff.
The U.S. and other major industrial economies have traded places on the economic growth ladder-with this country heading into an economic slowdown while the pace in Europe and Japan is beginning to pick up. The shift will dampen demand here for foreign-made imports and simultaneously increase the market abroad for U.S. goods. And the tempation for foreigners to dump goods at cut prices will wane.
In fact, both the trade and current account balances have been improving gradually since early spring. The monthly foreign trade deficit, for example, has narrowed from its peak of $4.5 billion in February to $1.9 billion in September. The deficit widened in October to $2.1 billion, but the composition of the figures showed the improvement was continuing.
The development is important because any major strengthening of the trade and current account balances is bound to bolster the dollar, easing some of the inflation pressure that emerged during the past year's slide. (The more sharply the dollar declines, the more rapidly import prices rise, heightening inflation here. The worse inflation is, the more the dollar declines.)
Actually, the system now is performing exactly the way it's designed to-with weights and counter-weights. The worsening of the U.S. trade deficit sent the dollar declining. The slump is to make exports more competitive and raise prices of imports-altering basic trade patterns. And that, in turn, is supposed to reduce the deficit-and the current account problem, as well.
What surprised analysts was the length of time it took for the impact of the dollar slide to take effect. Normally the process results in what economists call a "J-curve." Because of the lag between the increase in import prices and the reversal of trade patterns, the trade deficit often gets worse before it begins to improve.
This time the J-curve lasted far longer than expected, prompting some economists to suspect the worst and the exchange markets to lose perspective on the dollar. (The decline in the dollar began early in 1976, but the impact didn't really begin to show up until just this fall-apparently heightened by the sharp dollar plunge that began in January.)
Analysts still aren't sure why it took so long for the turnaround to begin-except possibly because of the Fordera recession. The suggestion there is that most other countries recovered so slowly from the 1974-75 slump that there weren't enough buyers for U.S. goods when the dollar finally began falling.
In truth, the underlying improvement in the U.S. trade deficit has been shrouded by rising import prices. Trade experts estimate that about twothirds of the $18 billion increase in imports this year represents price increases stemming from the dollar decline. The actual volume of imports has fallen. Were it not for the dollar's plunge, the trade deficit would have shrunk.
To be sure, the outlook could be clouded some by a sharper-than-expected increase in oil import prices, a subject under discussion this weekend at a meeting of the Organization of Petroleum Exporting Countries. And a collapse of oil production in politically torn Iran also could alter the trade picture somewhat.
But most analysts still expect the oilprice rise will be moderate-say, in the 6 percent range or so. And even that is likely to be spread gradually over several quarters of next year rather than coming all at once in January. And domestically, most economists still are forecasting only a mild slump at best-not a 1974-75-style recession.
As a result, trade-watchers both in and out of government are predicting a sizable improvement in the trade deficit for 1979 and beyond-the first bit of cheery news on the international front since the$11 billion trade surplus the U.S. ran in 1975. The result may not be all that heartening to the EEC's Spaak. But to to U.S. officicals-and exporters like GM-it's bound to be a welcome change.