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Chronic trade deficit looms as big economic concern as '87 dawns

By RICHARD A. NENNEMAN / January 5, 1987



LAST year ended with a bang - the bang of a record November trade deficit of $19 billion. The deficit is already higher than the yearend figure for 1985. Estimates are that when December is reported, it will be in excess of $170 billion, about $25 billion more than in '85. There are some special reasons for the November bulge. Among them: a rush to get goods into this country before a small tax on all imports went into effect in December. Another reason: auto imports from Japan as dealers stocked up for what they expected would be a December rush to buy new cars and take advantage of the sales tax deduction.

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All the excuses aside, however, November cut a big hole in the position some economists had taken that the deficit had turned. That position was based on rather scanty evidence of an upturn in exports in the preceding two months.

The trade deficit will be one of the major items of substance to be debated in the new Congress, whenever the initial excitement over the continuing investigation of the Iran/contra scandal dies down. The directions a Democratic Congress may want to go for a solution are not yet certain. Retaliating against other nations is not likely to be very profitable. Even when we think we have grounds for retaliation, as in the steps taken against agricultural imports from Europe last week, the Europeans feel they have at least some right on their own side. So, if we retaliate, that could simply escalate.

Yet one can be extremely sympathetic to those members of Congress - especially if they represent districts where manufacturers have been hard hit by loss of export markets - who feel action has to be taken.

The direction of the trade balance early in '87 is also important for what it says about the overall economy. The US domestic economy is close to a standstill. There are few sectors that seem ready to give it a push: The consumer is fairly borrowed up; the federal government cannot be expansive when it is trying to bring down the deficit; housing is in neutral; and business capital spending is in a holding pattern or even trending downward. Factories are operating at less than 80 percent of capacity, a rate that does not normally generate major capital spending plans. Some manufacturing is moving ahead - especially in specialty fields. But many others are fighting to survive against external competition.

When one examines the sectors of demand for goods and services, the export balance becomes the only likely candidate for growth in 1987 (perhaps along with some inventory accumulation if enough businesses have a positive outlook for the year).

As an aside, much of the increase that is occurring in manufacturing is in specialty areas, where managers are able to define new market niches and run companies small enough for the bottom line to reflect a new strategy. Thomas J. Peters, co-author of ``In Search of Excellence,'' notes in an article in the current Stanford Magazine, ``It seems that the limits of mass marketing have been reached, with markets rapidly becoming first fragmented, then pulverized.''

This year does not feel like one in which a recession will occur. Too many conditions normally present when recessions start - such as high and rising interest rates - are absent. But the trade numbers should remind us that this is going to be another challenging year for most American businesses. It will also be challenging for Congress. For if it acts on the trade scene, it needs to avoid creating problems worse than the ones they are meant to resolve.