The dollar has been coming down since September 1985. As a result, America's trade deficit is stabilizing, but it is not yet falling. Of course it was right to bring the dollar down; even efficient American manufacturers had little chance to compete when it was so grossly overvalued. But there are other important things that need to be done to ensure that a more reasonably priced dollar solves our trade deficit problem.
Ironically, a "stand pat and wait for the dollar to work" position is being taken by some of America's best known liberal economists as well as the Reagan administration. This is better than talking the dollar up, which is what President Reagan was doing until his administration made a 180-degree turn in September 1985. It may even be better than pushing the dollar lower at this point and risking recessions overseas and upward price pressures at home. But despite its admission that 1987 will see a seventh record-breaking year for the U.S. trade deficit, the administration is offering no policies other than a lower dollar to deal with the deficit problem. That is a risky policy for the country.
Standing pat on the dollar is not enough, and a look behind the figures in the U.S. trade deficit tells why. The numbers show several important American industries becoming increasingly uncompetitive even when the dollar was weak in the late 1970s. A weak dollar alone will not turn them around. Take, for example, automobiles, with well over 2 million imports in 1979. Or energy, with imports of about 2 billion barrels of oil per year in 1980, when oil prices were around $30 per barrel. Steel was a third, protected by voluntary quotas for years, and sick the whole time. Electric appliances were a fourth, with U.S. firms giving up foreign markets through the 1960s and '70s.
The Reagan administration has never had the will or the inclination to push these specific sectors of the U.S. economy to get their own houses in order. On the contrary, when several industries with longstanding competitive deficiencies have pressed for protection against imports, the administration has violated its own free-trade principles to give it to them. The auto industry got voluntary restraint agreements with Japan in 1981 that are in effect to this day. The carbon steel industry competes with the help of a score of bilateral restraint agreements announced just before the election in 1984. The oil industry is threatening to petition for import relief any day now, although no plausible level of relief will have a significant effect on imports. But the administration has no plan other than a weaker dollar to encourage these industries to be more competitive in world markets.
For specifics, look at automobiles, far and away our largest trade deficit item. In 1986 the United States imported almost $60 billion more than it exported in autos, trucks and auto parts. Many of these imports come not from low-wage countries, but from high-wage ones such as Germany and Sweden. And imports from Japan are fueled more by their quality than by their cost.
The U.S. auto industry does not lack profits to invest. Certainly, it would be sensible to ask this industry to pull up its socks and do what the Germans and the Swedes do -- not only compete with the Japanese and win back market share at home but export in large volume. Why not a goal to reduce the trade deficit in autos by $20 billion over the next five years? It is astounding that no one in this administration or outside it has suggested that the recent labor-management negotiations in this industry ought to have been focused on this issue.
And what about steel? The trade deficit in steel is about $10 billion per year. It is an industry with too much capacity in many countries, but in the United States, profits are better thanks to the weaker dollar. The industry, however, is doing better by holding prices up and even raising them, not by setting a goal for itself of reducing imports. And this is not the worst of its sins. An International Trade Commission study of the president's carbon steel import restraints figured that the resulting higher steel prices would cost other U.S. industries more than $15 billion in lost exports during the five-year life of the government protection plan.
Dealing with the $40 billion to $50 billion annual trade deficit in the energy industry is a different question. Here the United States is a high-cost producer, and there may not be any way of lowering costs drastically. But better energy policies could cut the import bill by substituting domestic natural gas, which has been in surplus for five years, for foreign oil. What stops us from doing this is our inability to move to deregulate gas pipelines.
U.S. oil imports might be cut still more if the country had the guts to adopt some of the programs several European countries use to encourage conservation. There could be more burning of coal in the kind of modern facilities other countries insist on. Significantly higher gasoline taxes would encourage the development of even more efficient cars. Tougher construction standards for homes, offices and factories would reduce fuel imports further. Would this cost us competitively or drive down our living standards? Again, not if Germany and Sweden are examples.
The point is that while we wait for the lower dollar to improve the U.S. balance of payments, other things need to be done as well -- and quickly. The high-cost sectors of the U.S. economy, which are running big trade deficits, need to be pushed by any U.S. administration to set targets for reducing their drag on the economy. These problem areas have escaped criticism too long while the administration and others have looked myopically at such things as the value of the dollar.
The question is not what the government can do to further protect these industries at home. The fallen dollar gets them back to even. The question is what it can do to push these industries to pull their own weight in the world market. Paula Stern, a senior associate at the Carnegie Endowment for International Peace, chaired the U.S. International Trade Commission from 1984 to 1986. Paul A. London is an economic consultant.