52. Memorandum From the President’s Assistant for Domestic Affairs and Policy (Eizenstat) and Robert Ginsburg of the Domestic Policy Staff to President Carter 1
- The Trade Deficit (At Your Request)2
This memorandum summarizes the accompanying papers on the trade deficit prepared by Treasury and Commerce.3
DIMENSIONS OF THE TRADE DEFICIT
1. Size. The trade deficit is expected to be about $27 billion in 1977, an $18 billion deterioration from the $9 billion deficit for 1976. Imports are projected at approximately $149 billion, with oil accounting for 30% of the total, and exports at $122 billion.
2. Trade Account and Current Account. The current account balance includes the merchandise, agricultural products, and raw materials of the trade account as well as “invisible” items such as tourism, freight and transportation, investment income, and unilateral transfer payments; it measures a country’s net balance in international transactions in goods, services, investment income, and transfer payments. Invisibles are projected to be in surplus by about $11½ billion in 1977 ($8 billion in 1976). Accordingly, the current account should be in deficit by about $15½ billion ($27 billion trade deficit less $11½ billion invisibles surplus) in 1977 ($1 billion deficit in 1976).
Although less inclusive, the trade account is often given greater popular and political attention than the current account because in measuring the export and import of tangible products it is viewed by some as a better guide to the net impact of international trade on U.S. jobs. (That view is somewhat overdrawn because: (i) there is considerable labor content in such invisible items as tourism, freight, and banking and insurance services; (ii) there is relatively limited labor content in U.S. agricultural products, which account for roughly 20% of our exports; and (iii) about 50% of our imports are themselves necessary inputs for the production of goods in the U.S.)[Page 183]
3. Geographical Distribution. All the projected 1977 trade deficit can be accounted for by deficits the U.S. will be running with OPEC countries. The U.S. will be in rough balance with the non-OPEC world as a whole. However, the deterioration in the U.S. trade balance between 1976 and 1977 is accounted for partly by a deficit in our trade balance with Mexico and Brazil, our fourth and tenth largest export markets (we normally run surpluses with these countries but they are currently embarked on domestic stabilization policies), and a somewhat larger than usual deficit with Hong Kong, Korea, Taiwan, Japan and Canada (we normally run trade deficits with all these countries).
4. Product Distribution. The U.S. will run a $40 billion deficit ($45 billion in imports, $5 billion in exports) in fuels (oil, gas, coal, nuclear fuel) in 1977 ($32 billion deficit in 1976) and a surplus of approximately $13 billion in all other products. In assessing the $18 billion deterioration in our trade account between 1976 and 1977 on a product by product basis, the $8 billion increase in fuels accounts for over 40% of the total and a decline in our surplus in manufactured goods from about $19 billion in 1976 to $13 billion in 1977 accounts for another 1/3.
5. Lag in Exports. While imports were up 26% in 1976 and are expected to increase by another 20% this year, exports increased only 7% in 1976 and are expected to increase only about 6% in 1977. Since these changes include price increases, the real volume of U.S. exports will be essentially flat for 1976 and 1977. Treasury attributes the imbalance between imports and exports basically to the oil situation and slower rates of economic growth abroad than in the U.S. Commerce is concerned that the lag in exports may also reflect some decline in international competitiveness of U.S. goods.
6. Prospects for the Future. The 1978 trade deficit is expected to be as large or larger than that for 1977. Although long-term projections must be considered with caution, Commerce expects a substantial trade imbalance to continue at least through 1980.
CAUSES OF THE TRADE DEFICIT
1. Oil. Fuel imports, up almost $17 billion since 1975, are the most important factor in the trade deficit. The oil export revenues of the OPEC countries as a group are so huge that, even with large percentage increases in imports, they are running current account surpluses in the range of $40–$45 billion.
In a global context in which the oil-importing countries as a group must run deficits to absorb the $40–$45 billion OPEC surplus, the U.S. movement from current account surplus in 1975 to rough balance in 1976 to a $15½ billion deficit in 1977 has been “appropriate”—without that movement, the financially weaker countries (both developed and LDCs) might be running unsustainable deficits which could be handled [Page 184]only by sharp and destabilizing changes in their domestic economic policies. However, of the financially stronger countries (U.S., Japan, West Germany, Switzerland, and The Netherlands), only the U.S. is doing its part in assisting adjustment to the international consequences of the OPEC surplus. (To be sure, some of our “strong” allies might argue that we are not doing our part where it counts most—cutting back substantially on imported oil.)
The slow growth and current account surpluses in West Germany, Switzerland, and The Netherlands are particularly damaging to the “weak” countries of Scandinavia, France, the U.K., and Southern Europe. Only expanding markets in all the strong countries will allow the world economy to achieve a steady, sustainable growth path.
2. Favorable Economic Growth in the U.S. and Slow Growth Abroad. More than 1/2 of the $18 billion deterioration in our trade balance between 1976 and 1977 is accounted for by non-oil trade (e.g., the $6 billion decline in our surplus in manufactured goods). This is a function primarily of the relatively strong U.S. economic recovery, which has led to substantial increases in imports, and relatively slow growth abroad, which has constrained our exports.
The impact of differential growth rates on our trade balance is heightened by the fact that U.S. imports respond more sharply to changes in U.S. income than our exports respond to changes in foreign income, i.e., a 1% increase in U.S. income will lead to a 1.5–2.0% increase in our imports while a 1% increase in foreign income will only lead to a 1.0–1.5% increase in U.S. exports. (This is because (i) the U.S. imports a large amount of consumer goods, which are more heavily dependent upon changes in income than the agricultural products and capital goods which we export and (ii) imports constitute a smaller share of our consumption pattern than they do for our trading partners and, accordingly, are more flexible upward.)
It is not only West Germany and Japan that are growing slowly but virtually all of Europe and a number of non-oil LDCs. Some of the “weak” countries of Europe and the non-oil LDCs are embarked on domestic stabilization policies to reduce their debt and get their economies in balance and also have to pay an increasing part of their foreign exchange for oil. U.S. exports to non-oil LDCs, even in inflated dollars, have been virtually flat for the past two years.
3. U.S. Competitiveness. Any judgments about changes in competitiveness over relatively short time periods must be inherently conjectural because the conclusions reached will depend crucially on the base period chosen. Commerce points out that the export prices of U.S. manufactured goods increased relative to those of our trading partners during the period between mid-1974 and early 1976. With a 1–2 year normal lag in the impact of changes in relative prices on manufacturing [Page 185]exports, this “decline” in “competitiveness” may presently be having some adverse effect on manufacturing exports and may continue to do so for the next year or so.
However, Treasury points out that since early 1976 U.S. inflation has been lower than the average inflation rates experienced by our major trading partners and, therefore, in terms of relative prices the U.S. has probably made some small gains in “competitiveness” recently. Commerce also notes that most foreign governments do considerably more to promote and even subsidize exports than does the U.S.
The U.S. share of world manufacturing exports was 20.3% in 1976, down from 21.2% in the cyclically high year of 1975 but up from the 19.1% historic low point of 1972.
IMPLICATIONS OF THE TRADE DEFICIT
1. Economic Implications. Lagging exports have an obvious adverse effect on economic growth, jobs, and Federal tax revenues. To the extent that the sharp increase in imports (at a time when U.S. unemployment and excess capacity are high) is due to unfair competition from abroad, U.S. industry is being hurt and domestic production impaired. Beyond these truisms, there is general agreement that it is appropriate international economic policy for the U.S. to be running a current account deficit at this time. The questions relate to the causes, size, and persistence of the deficit and our ability to sustain it over time, if necessary, without adverse economic or political fallout.
Commerce believes that “persistent, excessive” U.S. trade deficits would tend to create uncertainty and instability in the world and U.S. economies, with attendant political risks.
Treasury notes that the ratio of the present current account deficit to U.S. GNP is about the same as that for the OECD as a whole (about 1% in each case) and that the U.S., with its strong economy and capital markets and stable political system, is better able to finance and manage a deficit than almost all other countries. Treasury believes that our focus should be on reducing the oil problem and urging the other “strong” countries to expand their economies, that the U.S. competitive position remains strong, and that the U.S. should not take measures which would attempt to improve our trade balance at the expense of our trading partners.
2. Political-Psychological Implications. To some, a trade deficit and a depreciating dollar are inherent signs of weakness. To others, they are potent arguments for import restraints (which, in turn, could severely jeopardize our efforts to control inflation). Although these views may have to be met in the political arena with public education, they are without economic merit. Short run “fixes” for the trade deficit (e.g., import restrictions or slowing down economic growth through monetary [Page 186]and fiscal policy or through import quotas on oil) would be worse than the problem itself.
POSSIBLE RESPONSES TO THE TRADE DEFICIT
1. Short Run. There is little we can do which will substantially reduce the trade deficit over the next year or two. Those policies which would work—such as import restrictions or cutting back on domestic economic growth—are inherently undesirable.
2. Recommendations. Treasury and Commerce are in basic agreement on the following set of responses to the trade deficit:
(a) an energy program which will reduce oil imports;4
(b) encouraging the “strong” countries (Japan, West Germany, Switzerland, and The Netherlands) to expand their economies, thereby increasing their imports;
(c) encouraging the “strong” countries to allow their exchange rates to rise, thereby reducing the price competitiveness of their exports (that kind of automatic adjustment is a basic purpose of floating exchange rates but it can be thwarted by government intervention in the exchange markets);
(d) acting against specific cases of dumping or unfair foreign trade practices;
(e) increasing official IMF resources to enable other countries to adjust to their oil problems at reasonable paces without forcing destabilizing cutbacks in their domestic economic policies;
(f) pursuing the reduction of barriers to U.S. exports in the MTN and in direct consultation with countries like Japan;
(g) increasing the export awareness of U.S. producers and increasing the promotion of U.S. exports;
(h) adequate export financing (Commerce supports an expansion of the Export-Import Bank and DISC;5 Treasury, believing that U.S. goods have not lost their competitiveness and that export subsidization would both undermine our efforts to reduce these practices by others and provoke retaliation, would not go as far in expanding the ExIm Bank and thinks DISC contributes virtually nothing and should be eliminated);6 and
(i) educating the U.S. public on the problem in order to reduce the possibility of ill-advised political reactions.[Page 187]
3. Additional Responses. Although not mentioned in the Treasury or Commerce papers, we would add the following to the list of possible responses:
(a) If the trade deficit persists and you determine that more vigorous action needs to be taken, you should seek advice from Secretary Vance and Dr. Brzezinski on possible diplomatic/political responses to encourage more equitable policies by the “strong” countries. The Treasury and Commerce papers are concerned mainly with economic responses. We know that we are pushing Japan and West Germany fairly hard already and would not recommend any additional pressure for now, but there may come a time when we need to take a broader look at our options for dealing with the underlying problem of unbalanced economic policies among our allies (probably less for reasons of our own trade deficit than to protect the stability of the “weak” countries of Europe).
(b) The IMF will meet in Washington in late September. All of the leading finance ministers, private bankers, etc. will be here. Normally the President makes brief, non-substantive welcoming remarks. You might use the occasion for a major substantive speech on international economic policy, describing the contribution the U.S. has made to world economic stability in the past few years and indicating that it is time for more equitable sharing of the burden of the oil deficit by all the strong economies.7
The speech could have the positive international consequences of (i) putting all nations squarely on notice that the U.S. should not be expected to absorb the oil deficit alone and (ii) actually galvanizing our strong allies to adopt more equitable economic policies. It could also have the major domestic benefits of educating the American people and getting out in front in a leadership role on this issue.
- Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 68, President’s Balance of Payments Statement 12/77. No classification marking. Ginsburg did not initial the memorandum. A stamped notation reads: “The President has seen,” and Carter initialed “C” at the top of the page.↩
- Not further identified.↩
- Not attached.↩
- Carter wrote “good” in the margin adjacent to recommendations (a)–(g) and (i).↩
- Carter underlined the abbreviation “DISC” and wrote “no” in the margin.↩
- Carter wrote “I agree” in the margin adjacent to this section of the paragraph.↩
- The annual joint meeting of the IMF and World Bank took place in Washington September 26–29. Carter addressed the September 26 opening session; for the text of his remarks, see Public Papers of the Presidents of the United States: Jimmy Carter, 1977, Book II, pp. 1669–1671.↩