IN SPITE OF THE gloomy trend in American exports and imports this fall it still seems likely that this country's enormous trade deficit will shrink next year. The figures for October were unexpectedly bad: imports set a new record and exports actually declined. This year's exports will fall more than $30 billion short of balancing the goods and materials that the United States buys abroad. But events seem likely to push toward better performance next year. Certainly this country has an urgent interest in getting that deficit down.
When a foreign-trade deficit is both large and persistent, it begins to have serious consequences for the way things work at home. The trade deficit pushes down the exchange rate of the dollar, which in turn contributes to inflation.At the same time, a large deficit acts as a brake on the growth of the American economy. Because it takes purchasing power out of the country, its effect is the opposite of a federal budget deficit's. That, in fact, is one of the reasons for the very large budget deficits of the past couple of years. The administration has been using federal spending to offset the effects, on jobs and prosperity, of exports that fall far short of paying for the country's imports.
Why expect that deficit to decline in the months ahead? One reason is that the current economic expansion in the United States is slackening off, possibly with a recession ahead. Meanwhile, West Germany seems to be moving into a modest boom. That will cut both the American trade deficit and the German surplus.
The fall of the U.S. dollar makes American goods cheaper abroad. That helps expands exports. Unfortunately, the impact has been neither as rapid nor as widespread as most people had expected. It turns out that a country cannot rely on small changes in currency values to keep its international accounts automatically balanced. That has been one of the surprises in the past five years' experience with floating exchange rates. The explanation for it can be seen in the way people buy automobiles. If a foreign car meets a certain taste, and its maker has earned a reputation for reliability, it sales will hold up fairly well even if a falling dollar makes that car more expensive. Some customers will turn elsewhere, but not all of them and not immediately. The same thing happens in all kinds of machinery and manufactured goods.
In any forecasts of U.S. foreign trade, there are two big question marks. One-fifth of American exports are agricultural products, and their sales depend heavily on weather and harvests abroad. They also depend on the decisions by the rulers of the two big communist countries regarding the standards of nutrition for their people. More meat and bread for Russian and Chinese tables means higher prices for American corn and wheat - and a further reduction in the U.S. trade deficit. On the other side of the ledger, this country's biggest import is, of course, oil. OPEC is about to raise its prices, and higher prices will widen the deficit.
That is the paradox of interdependence. High and rising volumes of foreign trade and investment make people richer around the world. But the process costs every government a degree of influence over money, prices and jobs in its own country. Governments promise their citizens both prosperity and stability, and then discover both of them threatened by international trends that no government can control.
There are two kinds of response. One is protectionism. It's wrong in principle and costly in practice. The other possibility is the rapid development of international trading rules and worldwide financial institutions strong enough to stabilize the flows of goods and money within tolerable limits. If the present forecasts are correct, and the U.S. trade deficit is now diminishing, the United States will shortly be relieved of a dangerous and distracting kind of economic pressure. But that relief will be only temporary, unless this country and its partners make progress toward international systems that can guide and contain the next turn of the cycle.