Why US shouldn't rejoice when dollar is too strong
C. Fred Bergsten, director of the Institute for International Economics in Washington and a former high US Treasury official, is internationally known as an authority on world economic problems.
In a Monitor interview Dr. Bergsten traces the impact of foreign trade on the United States economy and comes to conclusions both sober and surprising.
Among key points raised by Bergsten are the following:
* The slump in US exports has been the largest single factor pushing the US economy into recession.
* Buoyant economic recovery will be hard to achieve until the US trade balance improves.
* An overvalued dollar, stemming from the high level of US interest rates, is the prime reason why US exports are shrinking.
* Developing countries have been the most rapidly growing markets for US goods - the same countries which now are overburdened with debt.
How important is trade to the United States economy?
There has been an enormous increase in the importance of trade to the US economy over the past decade. Over 20 percent of our industrial output is now exported. Almost one-third of the profits of American firms derive from their international business - their investments as well as their trade.
Between 1978 and 1980 fully three-quarters of the total growth in the US economy came from the improvement in our trade balance. And over the last 18 months, three-quarters of the decline in the US economy has come from the deterioration of our trade balance. In fact, the deepening deficit in our trade has been by far the biggest factor pushing our economy into recession - much bigger than the housing or automobile slump.
It should be recognized that the US trade deficit in 1983 is going to rise to at least $75 or $80 billion and could reach an annual rate approaching $100 billion by the end of the year. Those numbers suggest a significant drag on the domestic economy, taking perhaps 1 or 1.5 percentage points off our GNP (gross national product) and creating additional unemployment to the tune of 1-to-2 million jobs.
As a result, pressures to restrict trade will be strengthened greatly. An overvalued dollar has historically been the best leading indicator of pressure for trade restrictions, or protectionism, in the United States.
Does this mean that recovery in the United States will be hard to achieve, unless we have a real improvement in our trade balance?
I think it does. Already, as I mentioned, the deterioration of our real net export position over the last year and a half has been the single biggest factor pushing the economy into the current recession. Few people realize that, but it is the case.
Because of the further deterioration of the trade balance expected over the coming year, we will need a substantial rise in the domestic components of the economy just to break even or get very modest growth.
Unless the exchange rate (of the dollar) is brought to an appropriate level very quickly, that drag on recovery from the external sector will continue well into 1984, given the time lags involved.
Which is more responsible for the trade balance decline - an overvalued dollar or world recession?
The overvalued dollar is the overwhelming cause of the deterioration of our trade balance. Virtually the whole deterioration, I think, can be attributed to the loss of price competitiveness that our exports have suffered through the severe overvaluation of the dollar.
It is true, of course, that our major foreign markets have been stagnant or even in decline, as Mexico and Brazil. But it is also true that we have had our own recession. Traditionally, when the domestic economy is in recession our trade balance improves, because the US demand for imports declines. This time around, the recession here and the inability of our major markets overseas to buy more of our goods roughly cancel each other out in their effect on the trade balance.
Certain US industries, like autos, steel, and textiles, are hurt by imports. Looking at the whole economy, are more jobs created by exports than are lost because of imports?
It's a complicated question because of the involvement of services. We have a huge structural and growing surplus in services trade - banking facilities, patents, royalties - a whole range of invisible trade, as it is called. It's very hard to pin down the number of jobs created through that sector. The best estimates suggest that we do on balance gain jobs from our international trade.
I have to add, however, that when we let the exchange rate of the dollar become as overvalued as it has been, that costs us jobs, because it undermines the benefits to our economy of an open trade policy.
You say - when we let the value of the dollar rise as we have. What do you mean?
The primary reason for the excessive strength of the dollar over the past two years has been the extremely high level of real interest rates in the United States. This in turn relates to the huge budget deficits - particularly the outlook for continuing huge budget deficits over the foreseeable future. That means we must tighten fiscal policy, especially in the years beyond 1983, to take pressure off the Federal Reserve.
The mix between fiscal and monetary policy over the last two years has put all the pressure for fighting inflation on the Federal Reserve. Therefore, interest rates soared to unprecedented levels. Now they have come down in nominal terms, but they are still exceedingly high in real terms. Much further reduction in real interest rates is essential, so that the dollar's exchange rate will return to a more appropriate level.
Is there another factor that has strengthened the dollar - that in a troubled world, many people have considered the United States to be the safest place to put their money?
Yes, I think the safe-haven attraction of the dollar has been important over the last couple of years, given events in Poland, the French elections, uncertainties on the international debt scene, and the like. Over time that will probably continue to be an element of strength to the dollar. There's not too much that economic policy per se can do about that. In fact, it's exactly that kind of situation where I think intervention (by the US government in foreign exchange markets) is called for to avoid inappropriate economic relationships developing from essentially random political factors of a transitory nature.