Dollar slippage far short of boosting trade
The American appetite for Swatch watches, Toyotas, Laura Ashley dresses, and other such imports adds up.
This year the United States trade deficit is moving toward a record-breaking $150 billion, says economist C. Fred Bergsten. The deficit amounted to $63 billion in the first half, according to statistics released last week. And, according to Mr. Bergsten, the deficit could get even worse next year, reaching perhaps $175 billion.
To see any real improvement in the US trade balance, the dollar must weaken further. That's a common view among both economists and representatives of several industries.
For example, Fred Lamesch, president of the Institute for Imported Steel, says in regard to steel imports: ``The impact [of the weaker dollar] will be very minimal if the decline of the dollar is not more than it has been so far. Steel prices in the United States are still much higher than in the rest of the world.''
William Krist of the American Electronics Association in Washington similarly comments that the dollar ``has not come down enough to have significant trade effects yet.''
Fawn Anderson, vice-president for national affairs of the Footwear Trade Action Coalition, says the weaker dollar ``might have a little effect, but not much. Shoe imports have risen over the past 15 years despite what the dollar does.''
Bergsten, a former Treasury economist, regards the nearly 12 percent decline in the value of the dollar since late February as too small to have much effect on either the price level of imports, on trade volumes, or on competitive positions of most industries and nations.
Indeed, the 12 percent drop in the dollar puts it back merely to its 1984 average value. That compares with a rise in the value of the dollar by some 63 percent from mid-1980 to its peak in late January, according to International Monetary Fund figures.
A decade ago, the great lament of economists was the weak dollar. Today they complain that the superdollar has been a key factor in the slow economic growth of the nation during the past year and has damaged domestic manufacturing industries. In fact, imports are now running about 50 percent higher than exports.
Steel prices hint at the problem. American steelmakers' current list price for cold rolled sheet runs about $560 a ton; it is actually discounted to around $420 a ton. In Western Europe, the same product sells for around $300 a ton. And the ``world market'' price, offered in such places as Brazil and South Korea, is $240 a ton.
Mr. Lamesch reckons it would take at least another 20 percent drop in the price of steel before imports would slow. Even if steel had to be sold at a loss, he says, most exporting nations would try to ship enough to the US to meet their quotas. They would fear they might lose their position when and if quotas were renewed after their expiry in the fall of 1989.
Alan Murray, an economist with Citibank, is somewhat more optimistic about the trade deficit, saying the drop in the dollar should at least stop the penetration of the American market by imports. Citibank has been predicting a trade deficit of some $130 billion this year, and only ``modestly lower'' in 1986. The bank also expects the dollar to fall further this year. Since it takes 18 months to two years to feel the full effect of exchange values, Citibank forecasts ``a much bigger improvement in the tr ade gap'' in 1987.
Whichever prediction proves more accurate, the US will continue to build up external debts -- $150 billion this year, Bergsten says.
The basic reason for the continued strength of the dollar has been the inflow of tens of billions of dollars of foreign investment. Some of this money helps finance federal debt; part also goes into corporate bonds, certificates of deposit, or other financial paper. At some point, however, some foreign money could be removed, and the dollar would fall dramatically.
While Bergsten has been advocating ways to discourage the inflow of investment money, Eugene Milosh, president of the American Association of Exporters and Importers, says he would rather see measures to stimulate exports.
For the time being, many exporters to the US may absorb the impact of the weaker dollar by taking lower profits rather than by raising prices. Profits, says Ram Bhagavatula, another Citibank economist, can be sacrificed a lot easier than giving up hard-won market shares in the US by raising prices. That has the advantage for the US of restraining inflationary forces. It has the disadvantage of continuing the trade deficit.