Treasury Secretary James A. Baker III predicted yesterday that the U.S. trade deficit will drop sharply this year to about $125 billion from $148.5 billion in 1985, reflecting the effects of the declining dollar and an $18 billion annual reduction in the cost of oil imports.
In two speeches to the Organization for Economic Cooperation and Development at a meeting in Paris, Baker said the trade deficit will decline further in 1987 to less than $100 billion, but warned that this level still will be too high to be politically sustainable.
Baker's estimates of a shrinking trade deficit -- and of a decline in the parallel current account deficit, which includes services as well as trade -- were by far the most optimistic made so far by Reagan administration officials.
Baker pointed out that the $125 billion projection is $20 billion below the estimate for 1986 made last fall, almost all of it reflecting the unexpected dividend stemming from the rapid collapse of oil prices.
The drop in oil prices from about $30 a barrel last November to the $10 range today, offers "a golden opportunity to strengthen growth" in the industrial nations, especially because the trend coincides with independent signs of European recovery, Baker said.
Cheaper oil should boost European growth rates by one full percentage point, and lower inflation rates by up to two points, he said, adding that "Germany and Japan could experience zero, or even negative, inflation rates."
He predicted that real U.S. economic growth from the fourth quarter of 1985 to this year's fourth quarter would be 4 percent, and scoffed at expressions of concern that a prospective reduction in the U.S. budget deficit "will be bad for the global economy, since it would cause a slowdown in U.S. growth."
On the contrary, he said, the 4 percent growth estimate for the U.S. factors in the effect of the Gramm-Rudman-Hollings deficit reduction law: "The favorable factors I have cited, notably lower oil prices and substantial interest rate declines, will mean that the private sector quickly takes up any slack due to deficit reduction."
Once again, Baker called on the European countries to remove "structural" barriers to growth such as high minimum wages, "excessively generous unemployment and welfare benefits which undermine incentives to work" and high marginal tax rates that discourage private enterprise.
He acknowledged that the recent rapid rise of the Japanese yen would slow economic growth there, and said it therefore is important that the Japanese government take offsetting actions to boost domestic demand and investment.
Baker warned that the trade-deficit benefits expected for the United States from the drop in the overvalued dollar would have run their course by the end of next year, and that further improvement would depend on faster economic growth in Europe and Japan.
"I must tell you frankly that protectionism in the United States is not dead," Baker added. He warned that if substantial improvements in the U.S. trade and current account deficits beyond what he projected for 1986 and 1987 cannot be expected, pressures will mount again in Congress for restrictive or punitive legislation.
"And I might add that our efforts to hold the line are not helped when the Common Market imposes GATT-illegal restrictions to limit our agricultural sales to Portugal," he said. GATT is the General Agreement on Tariffs and Trade, the system that regulates international commerce.
Baker also took up the dispute on farm issues at a breakfast session of the Anglo-American Press Association. He told the journalists that if the quarrel on agricultural subsidies isn't settled, it "could erupt into some form of open warfare."
At the formal ministerial session, Baker called on other major countries to close the "growth gap" between the level of economic activity in the United States and that in Europe and Japan.
"Recently, we have been hearing increasing optimism about the growth outlook for other OECD countries," Baker said.
"But the projected [growth] improvements to date do little more than keep pace with the U.S. outlook for 1986 and 1987. And substantial external imbalances will persist -- particularly in Japan and Germany. For adjustment to be sustained, we need stronger European and Japanese growth to help reduce trade and current account imbalances further."
On Third World debt issues, Baker repeated recent assurances that the "debt initiative" he had offered last October in Seoul had led to "optimism that the problems of debtor countries are manageable."