Looking homeward to ease America's trade deficit

WHILE Congress has failed to override President Reagan's veto of import quotas for textiles, it is driving toward passage of even wider-ranging legislation to restrict imports as the way to reduce America's record trade deficit. An omnibus trade bill that is highly protectionist has passed the House, and the Senate Finance Committee expects to consider a similar bill shortly that is even worse in some major ways.

These measures are the wrong answer to the problem of the deficit. At the same time, Congress is ignoring approaches that would actually make a difference.

Congress, looking through the wrong end of the telescope, sees the trade deficit resulting from an unfair flood into the United States of goods from foreign countries which are keeping US products from reaching their markets.

In fact, America's trade deficit is rooted in domestic policies that have impaired the competitiveness the US enjoyed in world trade not long ago.

The congressional penchant for protectionism overlooks two considerations:

Retaliating against unfair trade practices abroad by import restrictions would barely dent the US deficit. In fact, tariff and nontariff barriers abroad have generally diminished since 1980, especially in Japan, while the US global trade balance has swung from surplus to a record $150 billion deficit.

Fighting trade barriers and unfair practices abroad is necessary and worthwhile, and would help reduce the US deficit but still leave it far above tolerable levels. Import restrictions at home would risk a dangerous trade war, worsening the US trade picture.

Expansionary domestic policies abroad, particularly in Japan and West Germany, would also help, but would still leave a very large US deficit. If these countries stimulated domestic demand with easier money, bigger budget deficits, or tax cuts, their consumers would buy more US goods and the bilateral trade balances would improve. But the US, now running deficits with virtually every major country, would still face an unacceptable deficit.

Foreign countries say -- accurately -- that the only way the US can reduce its trade deficit is by putting its own economic house in order. Instead, the US response has been to go on the attack against its critics, in the apparent belief that the best defense is a strong offense.

By a curious twist, US officials are pressing Japan to reduce its high rate of household savings, which finances investment and generates exports, while rejecting suggestions that the US adopt policies that would favor savings and investment over consumption and deficit spending. Indeed, tax reform legislation is moving in precisely the direction of encouraging consumption and discouraging investment.

Meanwhile, the record US trade deficit continues to reflect, more than anything else, the effects of enormous budget deficits and the tight monetary policy that was required to reduce inflation. The budget deficits roll on: $202 billion in fiscal 1985; $230 billion this year; probably some improvement next year, but not enough.

Some help for the US trade balance is coming from realignment of the dollar and the Japanese yen. The yen, which stood at 260 to the dollar in February 1985, has now strengthened 30 percent, to about 160. The dollar's worldwide depreciation of 39 percent as measured by the Federal Reserve's trade-weighted index, though less dramatic, has also been helpful. American producers, whose products are becoming more competitively priced abroad, welcome it. It will reduce the trade deficit significantly in time -- if it is accompanied by responsible domestic budgetary policies rather than destructive, trade-restricting legislation.

Significant and permanent improvement depends on fiscal-monetary fundamentals, and we have a long way to go. The US is still living beyond its means and financing the budget deficit by borrowing from abroad. The Federal Reserve must keep real interest rates high enough to attract the necessary foreign financing. That in turn keeps the dollar from depreciating as much as it would otherwise, and a strong dollar makes exports less competitive.

Moreover, government borrowing absorbs too much of the nation's savings, depriving business of the capital it needs to invest, to increase productivity, and to make US goods more competitive.

Instead of trying to place blame for our trade problems on foreigners, Congress and the administration should ``look homeward'' toward domestic economic policies that are still seriously out of balance.

Sven W. Arndt is director of international economic policy studies at the American Enterprise Institute.