Each succeeding month brings news that our trade deficit is damaging the American economy. In 1982 Americans bought $36 billion more from the rest of the world than the nation sold in foreign markets. The trade deficit then jumped to $61 billion in 1983 and $108 billion in 1984. It's only a matter of time before it hits a $150 billion annual rate.
These massive trade deficits are doing substantial damage to American firms that try to export or that must compete with imports from the rest of the world. Manufacturers have been particularly hard hit. Manufacturing imports are running at nearly twice their 1980 level, while manufacturing exports are basically unchanged. But industries as different from manufacturing as agriculture and timber are also suffering because of the deteriorating trade situation.
Congress has responded to the growing national anguish over trade in two quite different ways -- one good and one bad. The potentially useful response has been to bear down harder on the job of reducing the future budget deficits. Most of the increase in the trade deficit since 1980 has been caused by the rising dollar, which in turn has been the result of the huge budget deficit. The currently pro real interest rates in the United States and attract funds from the rest of the world. This has raised the dollar's real value in comparison to other currencies by more than 70 percent since 1980. And with American prices up 70 percent in comparison to our overseas competition, it's not surprising that our trade deficit has exploded.
The agreement recently reached between President Reagan and the Senate Republican leadership shows that the projected deficits can be reduced sharply in the year ahead if Congress is willing to face the politically difficult task of reducing spending in every major part of the budget. The Republican package would cut the projected 1988 deficit from $244 billion to $100 billion. More than one-third of the program cuts are in the defense budget. A wide range of domestic programs are temporarily frozen or phased out. Social Security cost-of-living increases are reduced in an ingenious plan that includes a minimum guaranteed increase and full protection against rising inflation. If this plan is enacted in anything like its current form, the result will be a significant decline in real interest rates, in the dollar and in our trade deficit.
The other more direct approach to limiting the trade deficit by an import surcharge is misguided and dangerous. The 20 percent tax on imports that has been proposed in Congress would immediately hurt American consumers and contribute to rising inflation. Moreover, a decreased demand for imports would reduce the demand for foreign currency and thereby actually cause the dollar to be strengthened further. As a result, American firms would find that they have an even harder time selling their products abroad. While American firms that compete with foreign products here at home would be able to raise their prices and profits, their gain would be more than offset by the losses experienced by American consumers and exporters.
The greater risk is that an American tariff could easily provoke retaliation by foreign governments and initiate a trade war that would cause world trade to shrivel. The last major trade war, precipitated by our 1930 Hawley-Smoot tariff, was a key source of the downward spiral of economic activity that became the Great Depression. The risk of repeating that experience is far too great to be ignored.
The president was right when he let the so- called voluntary restraints on Japanese autos come to an end. As a result, American consumers will pay lower prices not only for Japanese cars but for American cars as well. The Japanese announcement that their auto exports to the United States will be allowed to rise by 25 percent means that the price decline will be substantial. This decline in auto prices is a boon to American consumers. Congress seems to have forgotten this when it voted overwhelmingly to instruct the president to take steps to offset the increased trade deficit.
Moreover, Congress was wrong to assume that an increased import of Japanese cars will raise our total trade deficit. The increased sale of Japanese cars to the United States will raise the value of the yen and lower the value of the dollar. The more competitive dollar will make it easier for U.S. firms to export and will reduce the attractiveness of other foreign products in U.S. markets. Since our trade deficit is essentially a reflection of the capital inflow from the rest of the world, the increased sale of Japanese cars in the United States will change the composition of our trade deficit but will have very little effect on its total size.
Congress is reacting more out of anger and frustration than on the basis of economic logic. But the Japanese should understand that the true basis of this frustration is the sense that Japan as a government and as a people are being unfair in their support of policies that restrict American products from Japanese markets. If the international trading system is to continue to flourish and to bring benefits to consumers throughout the world, the Japanese must truly open their markets to foreign products.