The trade gap. Living beyond its means, US looks for ways to balance what it buys with what it sells
Reading, Pa. — THE Perry Ellis ``America collection'' is made in Hong Kong; Totes keeps the rain off with umbrellas made in Taiwan; J.G. Hook tailors corduroy suits in South Korea; Harve Bernard's racks are full of winter coats from Yugoslavia; Crazy Horse is selling knit shirts made in Macao, Thailand, and Brazil; and Corning is marketing teakettles produced in Taiwan. Reading, Pa., ``the outlet capital,'' is where the trade gap becomes reality. In an ironic twist, acres of imports are sold in former mills converted into boutiques. Charter buses from as far as Massachusetts and Virginia haul consumers eager to snap up the low-priced goods.
Such buying is swelling the United States merchandise trade deficit, which this year could hit a record $171 billion. Next year, experts are expecting the trade gap to narrow somewhat, reflecting the lower-valued dollar. Should the recent stock market plunge result in less consumer and business spending, the gap will close more quickly. If not, it will remain high.
This gap between our imports and exports ``means we are spending more than we are producing,'' says Michael Aho, a trade specialist at the Council on Foreign Relations. It is not a good sign, indicating the US is living beyond its means. Mr. Aho compares it to a shopper who has gone on a massive, long-term buying spree. ``Sooner or later you have to pay it back,'' he says.
For example, when a consumer buys an automobile made in Japan, the Japanese car company gets paid in dollars. To get yen to pay its workers, it sells those dollars to the Bank of Japan, which in turn invests them in US Treasury bills.
Because of its spendthrift ways, the US has become the world's largest debtor, owing well over $350 billion. This is larger than the combined debt of Mexico, Brazil, and Argentina.
To meet the interest bill in the 1990s, the US will have to reverse its trade balance. Just to service the debt, it will need to show a surplus of $40 billion to $60 billion a year. ``This means in effect we will spend less than we earn,'' Aho says.
Because there has never been a trade deficit this size, it is difficult to learn from history what it means. Economist Georges Rocourt of Mercantile-Safe Deposit & Trust Company in Baltimore compares the US to Britain in 1966 when it too was running large trade imbalances. In October 1967, the government stopped defending the value of the pound. Prices of imports rose as the value of the pound fell from $2.78 to $2.66.
``A devaluation implies a lower standard of living,'' Mr. Rocourt says. But the strategy ultimately worked for Britain. Within three years, it had a trade surplus. (Today the value of the pound is $1.78 and Britain's trade deficit is small.)
THERE are some options that could make the belt tightening less painful. Experts say these include:
Continuing efforts to reduce the federal budget deficit. Dependence on foreign lenders keeps interest rates high. It also means that those foreign lenders do not spend their dollars on new US tractors, airplanes, computers, and other goods.
Tax policy. The US might move toward consumption taxes to encourage consumers to save. Congress might reconsider its decision to eliminate the tax deduction for individual retirement accounts. Some studies have indicated IRA funds were new savings.
Steps to make US companies more competitive and quality-conscious. Manufacturers have to increase productivity, which lags behind that in Japan, Germany, France, and Britain. ``How do our tractors stand up over time?'' Aho asks.
Better international cooperation. The US economy has been the engine of world growth for the past three years. Slower economies in West Germany and Japan forced companies there to export. Now, the US is trying to use peer pressure to get those economies moving again. ``If the world expanded on a more even keel we might not have seen these imbalances,'' Aho says.
Increases in scientific and technical education. I.M. Destler, author of the book ``American Trade Politics,'' points out that one reason the US has a huge trade deficit with Japan is that ``Japan spends billions on process-related research and development.''
For communities such as Reading, how the US answers these questions will be important.
Like many other communities, Reading was a manufacturing center at the turn of the century. In the 1950s, the city's chief employer was Berkshire Knitting Mills, a hosiery mill.
By the 1960s, however, lower wage rates forced many of Reading's textile firms to move south. Many of those mills have moved to the Far East. One exception is Reading-based VF Corporation, which maintains several mills in the Southern US.
Reading filled up the old mills with outlets, selling clothes that are slightly imperfect or out of style. Today, the outlets employ 3,000 to 5,000 workers. ``Tourism is the fastest-growing segment of the economy, with the outlets leading the way,'' says Spiro Patton, a professor at Widener University in nearby Chester.
In the summer, tourists from Latin America and Europe make excursions to the mills, buying thousands of dollars' worth of garments. ``The lower-valued dollar should make the items even more attractive,'' Professor Patton says.
The shrinking dollar will help sell a lot of US goods. But it will also mean that the US needs to adjust. ``If we still have an expanding pie, the standard of living will rise,'' Aho predicts, but not as fast as it used to.