37. Memorandum From Secretary of the Treasury Blumenthal to President Carter1


  • The U.S. Trade Balance

Our analysis of the U.S. trade balance indicates the following:

A. The Facts

The U.S. trade balance will be in deficit by at least $25 billion in 1977, an increase of some $16 billion from last year. The deficit in 1978 may be as high or higher. Since we will be paying some $45 billion for fuel imports this year, we will have a surplus of $20 billion on all other trade. The reasons for this large deficit are several. Major factors include:

1. A substantial increase in our oil import bill. About 40% of the increase in the deficit between 1976 and 1977 is accounted for by our trade with the OPEC nations.

2. Differential rates of growth in the U.S. compared with many of our traditional markets. As we grow faster, we import more. Since our markets abroad are showing only sluggish growth, our exports also will increase less rapidly.

3. Higher food prices and slower growth in the developing countries, particularly those in Latin America, account for 40% of the deterioration in the U.S. trade account between 1976 and 1977. Mexico and Brazil, both of whom have embarked on stabilization programs, account for 20% of the swing.

There is no evidence that our basic export competitive position has declined. The swings are on the import side. In addition, the U.S. has a large and growing surplus on international services, primarily due to large receipts of income from our foreign investments. This surplus offsets part of the trade deficit—thus the current account balance, which includes both trade and services, is expected to show a deficit of about $12 billion this year.

B. Am I concerned about this situation? There is reason to be concerned—but more for political and psychological reasons than for economical ones.

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1. Such large imbalances may “weaken” the dollar. While a fall in the exchange rate in the dollar strengthens U.S. competitiveness and thus reduces excessive trade and current account deficits, this downward movement of the exchange rate is disturbing to some.

2. It gives ammunition to protectionists and special interest groups.

3. To some observers such a large deficit just plain looks bad. This view of trade deficits is deeply ingrained in the conventional wisdom. The purely economic effects—on U.S. output and employment—appear to be negligible and thus not worrisome, at least in the short run.

C. What Should We Do?

1. We should indicate concern and watchful alertness, avoiding any appearance of complacency or inaction. At the same time, we should take every public opportunity to put the situation into proper perspective.

2. We should stress export promotion and financing even though this is unlikely to have significant effects. We should look into possibilities for stimulating exports of agricultural products.

3. We should encourage the strong countries to take action to reduce their current account surpluses, by appropriate exchange rate policies and domestic economic expansion—as was agreed at the Summit. In this respect, recent statements by Prime Minister Fukuda have been encouraging2—but this will not have a big impact on our deficit in the short run. Also we should seek to promote sustainable expansion in the LDCs to maintain or increase their import capacity.

There are several things we should not do:

1. We should not implement protectionist measures.

2. We should not attempt to artificially depreciate the exchange rate, in violation of international agreements we have taken the lead in negotiating. This probably would not work in any case since others would merely follow suit.

In the final analysis, the basis of our trade “problem” is energy. There is a world oil trade deficit that must be shared until it is eliminated. An effective U.S. energy policy is the key to reducing this deficit, [Page 138] and reasonable expansion by our partners abroad will contribute to a better sharing of the deficit.

W. Michael Blumenthal3
  1. Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 88, Trade Deficit [1]. No classification marking. Watson forwarded the memorandum to Carter, with copies to Lance, Schultze, and Cooper, under cover of a July 6 memorandum. (Ibid.)
  2. Not further identified. In telegram 9730 from Tokyo, June 29, the Embassy noted, among other indications, Japanese press reports on “Fukuda’s consultations with his economic ministers on how to achieve Japan’s GNP growth goals and how to cope with persistent criticism from abroad of Japan’s trade and current account surpluses,” and suggested that “a consensus for a more responsible Japanese trade policy appears to be firming up.” (National Archives, RG 59, Central Foreign Policy File, D770231–1232)
  3. Blumenthal signed “Mike” above this typed signature.