41. Letter From the Under Secretary of State for Economic Affairs (Cooper) to the President’s Assistant for National Security Affairs (Brzezinski)1
You may have seen recent alarmist reports of a huge U.S. trade deficit, running an estimated $25 billion for 1977. I write to try to put this trade deficit in perspective and to alert you to the dangers of trying to do something about it in the short term.
Three major factors contribute to the enlarged deficit:
(1) Zooming growth of fuel imports, now running around $45 billion a year, up from $37 billion in 1976. Rapid economic growth, rising oil prices, and the cold winter have all been significant factors. (We have a $20 billion trade surplus if oil is excluded.)
(2) Rapidly rising non-oil imports, due to our economic expansion and rising import prices.
(3) Slack demand abroad for our exports, which are expected to be up over 1976 only a bit more than 1% in real terms due to slow economic growth abroad.[Page 144]
Our large and growing surplus income from net investments abroad and the sale of other services leads to a current account deficit of about $12 billion for 1977, up from $8½ billion in 1976. This $12 billion is the amount which must be financed by net lending to the United States from foreigners.
The estimated U.S. current account deficit of $12 billion amounts to about 30% of the total estimated OPEC current surplus of $40 billion in 1977. The key analytical point is that so long as OPEC has substantial trade surpluses, the rest of the world must have substantial trade deficits. As the world’s largest economy and oil importing country, the U.S. should share in these deficits, and indeed must do so if we are to avoid putting unbearable pressure on other oil importing countries.
We have no problem financing our deficit, as many other countries do. So far the financing has been readily supplied to the United States by Arab members of OPEC, as well as by residents of a large number of other countries. Both sources of funds are secure, as long as no radical changes in United States economic policy are contemplated. The fact is that they do not have many other places to go, since both Switzerland and Germany discriminate against incoming funds in various ways. Since we easily obtain more than 30% of OPEC’s funds placed in Western financial markets, our objective is to permit the relending of those excess funds to other deficit countries in OECD and the less developed world.
Serious domestic political and economic problems arise from two sources: (1) continuing growing dependence on OPEC oil, and (2) rising import competition for a substantial number of domestic firms, particularly in manufacturing. Vigorous pursuit of the President’s Energy Program is an appropriate response to the first of these problems. New proposals for expanded Trade Adjustment Assistance will be a major part of the Administration response to the second problem. In addition, we continue to put pressure on our Japanese and German friends to do more for the cause of global economic expansion to help provide alternative markets for the imports which have sought out our buoyant markets.
A serious danger lies in the fact that if the United States deficit is identified as a “problem”, Congress and the public will demand a “solution”. The long run solution, as noted above, lies in our domestic energy policy as well as in the rising imports from OPEC countries. We should avoid at all costs the kind of balance-of-payments programs which we had in the 1960s, designed variously to stimulate exports, restrict imports, and discourage capital flows. They do not represent a solution under the current circumstances (except for discouragement to the importation of oil), and on the contrary would weaken the economic condition of many other countries that are already too weak.[Page 145]
Thus the United States trade deficit, while large in absolute terms, is small in comparison both to our ability to finance it and in comparison to other countries’ foreign economic difficulties. Over-emphasis on our trade deficit is only likely to raise additional counter-productive protectionist sentiments in various domestic circles.
The medium-term development of our trade balance will be primarily affected by (1) return to full employment in our major trading partners, (2) our energy policy, and (3) any tendency of our exchange rate to depreciate or appreciate, which in turn is influenced by our continued ability to attract foreign funds. There is no reason for pessimism, although the first two factors will probably take longer to have effect than we might like.2
- Source: National Archives, RG 59, Office of the Secretariat Staff, Records of the Under Secretary of State for Economic Affairs, Richard N. Cooper, 1977–1980: Lot 81D134, Box 1, Memorandums, 1977. No classification marking.↩
- In a July 14 memorandum to Brzezinski, written in response to a request for his comments on a July 8 Department of Commerce paper on the trade deficit, Hormats reached similar conclusions as to the reasons behind the deficit. Like Cooper, Hormats asserted that “there is no quick remedy for this deficit, nor should we try to decrease it quickly;” rather, the solution lay in “an effective domestic energy program,” as well as foreign economic growth and market-driven currency appreciations. Hormats stressed the importance of not “portraying this as a major problem,” so as not to risk encouraging the forces of protectionism; instead, he suggested that “any criticism should be turned around to indicate that the sooner the Congress legislates a tough energy program, the sooner the deficit can be reduced.” (Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 3, Commerce Department: 2/77–4/79)↩
- Printed from a copy that bears this typed signature.↩