The Reagan administration yesterday told the auto, steel and other major industries that have been seeking protection against imports that the problems they tend to blame on Japan and Europe are largely of their own making. In the future, they must expect to "shrink," while other sectors grow.

In its Economic Report to Congress, the Council of Economic Advisers, headed by Martin S. Feldstein, said wages and prices in these industries "are probably too high to be sustainable in an integrated world economy."

The blunt warning to the hard-pressed "smokestack industries" was part of a forceful restatement by the Reagan administration yesterday of its commitment to "free trade"--combining the rejection of protectionism at home and a campaign for elimination of objectionable barriers in foreign markets.

A central theme of the CEA report was that "large U.S. trade deficits are not a result of unfair foreign competition" but rather a product of an overvalued dollar, caused by the huge American budget deficits that led to high interest rates.

"The main sources of the U.S. trade deficit are due to be found not in Paris or in Tokyo, but in Washington," the CEA report said, adding that whether the flood of red ink continues depends largely on whether federal budget deficits can be reduced.

The CEA report went to great lengths to demonstrate that the U.S. trade deficit--estimated to run about $75 billion this year, including $20 million to $25 billion with Japan alone--represents neither an American inability to compete, nor the result of Japanese restrictions on American imports, although such restrictions exist and "remain a major source of friction."

The enormous U.S. trade deficit has touched off a swelling demand for protection, especially from senators and congressmen from the Midwest, where heavy industries are in a deep recession.

In his own economic message, President Reagan gave an unqualified free trade pledge, citing the growing importance of international trade to the American economy. The president told Congress that protectionist measures would invite retaliation, damaging to workers, businesses and farmers.

In dealing with U.S. industries that were once dominant but have now lost market shares to imports, the CEA report said that neither workers nor the companies have been anxious to lower the premiums in prices or wages they once enjoyed over other sectors in the economy, and as a result, they now face idle capacity and unemployment.

To the extent that foreign competition has forced such industries "to contract," the report said, it should be considered "a normal consequence of the increasing U.S. integration into the world economy. . . The limitation of protection for these problem industries is a central goal of U.S. economic policy."

On the other hand, the report said that in some areas--notably agriculture, high technology, services and investment--Japan and the European countries have "high protective barriers," and the administration pledged an all-out fight against them.

The explanation for the Japanese surplus and the mirror-image American deficit in trade of manufactured goods, according to the report, is Japan's lack of natural resources which forces it to run up huge deficits in primary commodities, notably oil.

"Looking at Japanese-U.S. trade in isolation is misleading," the report says. "The Japanese surplus in trade with the United States is largely a response to the rise of OPEC."

But both the president and Feldstein warned that yesterday's restated American commitment to free trade does not mean that this country will ignore what the president called "trade-distorting practices" of foreign governments, especially interest subsidies to stimulate their exports.

To this end, the administration has asked Congress for a substantial boost in lending and insurance authority for the Export-Import Bank. At a press conference yesterday, Feldstein said that the administration would use whatever "strategic levers" are necessary to persuade other nations to follow free trade practices.