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Cutting US Foreign Trade Deficit Will Not Be Done by a Quick Fix. US will have a tough time eliminating it, but other countries can help - Germany and Japan could rein in their deficits, with developing countries modestly boosting imports. GUEST COLUMN

IT is widely taken for granted that the United States should greatly reduce, and preferably eliminate, its large foreign trade deficit. Five years seems, superficially, a plausible time to reach this objective, since in the same period the deficit rose from rough balance in 1982 to $154 billion in 1987. But in fact, some simple calculations suggest that the US is unlikely to eliminate the trade deficit in just five years. That means the US will still depend on foreign capital in the mid-1990s, and thus will continue to build up its foreign debt.

Indeed, without the help of the developing countries, it seems unlikely the deficit will be eliminated.

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Strictly speaking, the problem is the US current-account deficit, which includes trade in services and payments on investments as well as merchandise trade.

What kind of changes would be needed to balance this deficit? In 1988, the US ran a current-account deficit of about $135 billion. By the end of 1993, the US will be paying a further $40 billion to $50 billion in interest or dividends on the additional debt accumulated by foreigners. But little help is likely to come from agricultural exports, because of heavy foreign interference with that sector. And imports of services will grow roughly as rapidly as exports.

So the bulk of the improvement will have to come from exports of manufacturers. If that were to happen, it would be a bonanza for US manufacturing.

What would this require of the US economy?

Much of the manufacturing sector runs close to capacity, with total manufacturing output at about $950 billion.

Spare capacity could provide about $60 billion of the approximately $180 billion improvement in net exports of manufactured goods that is needed. To increase manufacturing capacity sufficiently over the next four years to provide the remaining $120 billion extra in exports would require an annual investment of about $60 billion in new capacity-increasing plant and equipment in each of those years, much of this new plant and equipment coming from the manufacturing sector itself. That leaves virtually no room in the manufacturing sector for stepping up production aimed at domestic consumption.

Since Americans probably must cut their prices, relative to foreign goods, to improve their trade balance by $180 billion, the need for increased manufacturing output will be even greater.

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Thus the US economy could probably reach trade balance in five years. But it will only be with difficulty, and certainly not without an increase in taxes or a tighter rein on government expenditures than is now envisioned.

What about the adjustment required abroad?

If US exports minus imports of manufactured goods are to improve by $180 billion over five years, the position of the rest of the world must deteriorate by that amount. Where will the change come?

Many developing countries would love to import more to raise their investments and improve standards of living. But they are sharply constrained, because they can't finance more imports. Indeed, a number of them have been running merchandise trade surpluses to service their large foreign debts. Until the debt problem is solved - and no comprehensive solution is even under serious discussion - the developing countries as a group are unlikely to absorb more than $30 billion of the required swing in the US trade balance. Even that amount is concentrated in a relatively few countries such as Taiwan and South Korea.

The possible contributions of the communist countries are similarly limited by their inability or unwillingness to borrow on a substantial scale.

That leaves Japan and Western Europe to make the bulk of the adjustment, requiring, say, a deterioration of $75 billion each in their net exports of manufactures. In Europe, today's surpluses are concentrated in Germany and its neighbors the Netherlands and Switzerland. Other European countries, like Britain, France, and Spain, are worried about their deficits even today, and certainly would not accept a substantial further deterioration.

West Germany and Japan are both embarrassed by their large trade surpluses, and would welcome their diminution. So a deterioration of $25 billion each would be greeted with relief as contributing to world equilibrium and reducing protectionist pressures in the US and elsewhere.

But both these economies have thrived in the past on export-led growth, and both have identified export performance with high social virtue. Attitudes are changing slowly in Japan, but such changes are not yet evident in Germany. The second $25 billion each in trade deterioration would therefore generate some anxiety; and the third $25 billion each, all in a five-year period, would very likely lead to public panic, as an emergent trade deficit did in Germany in 1980, during the second oil price increase.

Swings of this magnitude are more than public opinion would tolerate. The German and Japanese governments would be pressed to take corrective action well before the US trade deficit had been eliminated.

The upshot is that without a solution that permits developing countries to increase greatly their imports, the excess savings of Germany and Japan will continue to come to the US, and it will be impossible to eliminate the US trade deficit by the mid-1990s. Further substantial reduction is both possible and desirable, but elimination of the deficit is improbable unless developing countries can be restored to rapid growth through new borrowing.

Richard N. Cooper is Boas professor of economics at Harvard University.

US Trade Balance With Major Partners

For 1988, in millions of dollars

US US Nation Exports Imports Balance Canada $70,861.9 $80,921.3 $-10,059.4 W. Germany 14,331.3 26,502.8 -12,171.5 Soviet Union 2,767.6 578.0 2,189.6 Japan 37,732.1 89,802.1 -52,070.0 Britain 18,403.5 18,041.7 361.8 South Korea 11,289.5 20,189.1 -8,899.6 France 10,132.7 12,227.5 -2,094.8 Mexico 20,643.4 23,276.9 -2,633.5 Saudi Arabia 3,799.2 5,593.7 -1,794.5 Taiwan 12,130.8 24,803.7 -12,672.9 Brazil 4,289.2 9,323.8 -5,034.6 Hong Kong 5,690.8 10,242.8 -4,552.0 Total (in billions) $322. $440.9 $-118.7

Source: U.S. Commerce Dept.

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