The American trade deficit this year will be larger than any in the country's history, and by a dismaying margin. The September figures appeared yesterday, setting another record. How much of it is Japan's fault?
Five years ago the trade deficit with Japan was around $11 billion. This year it is climbing toward $50 billion, and the Congressional Record is full of bitter complaints about Japanese trading practices. It's true that Japan does things that it should not do, but Japanese trading practices have not changed over the past five years except (slowly) for the better. Take a look, instead, at the foreign exchange rates.
In mid-September, before the industrial countries joined forces to begin pushing the dollar down, it was selling for just over 240 yen. C. Fred Bergsten and William R. Cline of the Institute for International Economics have worked out figures that convey a couple of illuminating points. The equiribout 190 yen. Currently, with both governments working together to push it down, it's trading around 210 yen -- a little over half way down to the range that ought to be regarded as the target.
Bringing the dollar down to 190 yen would reduce the trade deficit with Japan by about $17 billion a year, Mr. Bergsten and Mr. Cline estimate. If Japan were to abolish every vestige of protectionism -- not only laws but all the national biases and informal linkages of Japanese business as well -- that might reduce the trade deficit by another $5 billion to $8 billion a year. That's a rather modest figure in comparison to the effects of currency misalignment.
Taken together, a better exchange rate plus trade liberalization could cut the present trade deficit in half, to about $25 billion a year. And that, the two economists argue, is just where it ought to be. Japan's trade with the United States will never be in balance because Japan imports mainly raw materials and fuel. It earns dollars in its American trade to pay for oil from the Persian Gulf; the Persian Gulf countries will spend those dollars mainly in Europe, and the Europeans will spend them here.
The key is to get the exchange rates back to the right level. The Japanese have helped by raising their interest rates, but the chief responsibility is this country's. It is the desperate pressure to finance the federal budget deficit that has pushed the dollar to its present level, and to get enduring improvement the United States is going to have to reduce its budget deficit substantially. Unfortunately, the outlook for any real improvement there is not promising. But if President Reagan and Congress can't manage to get their budget deficit under control, it is hardly fair -- or even rational -- to blame Japan for the consequences.