High interest rates cause trade deficit

The story on trade protection (``US trade deficit could range from $140 billion to $160 billion for 1985'') July 12, while interesting, fails to highlight the root cause of the high trade deficit -- high real interest rates in the US. High interest rates are attractive to foreigners wishing to place their funds somewhere, and deter Americans from making financial investments abroad. As a result more dollars are demanded (by foreigners) and less supplied (by Americans), pushing the price of the dol lar up, and thereby cutting exports and raising imports. The current account deficit, which is what catches the eye of the press, is matched by a net inflow of foreign exchange for financial investment; as long as foreigners wish to invest, say, $150 billion more in United States stocks and businesses than Americans wish to invest abroad, then the current account deficit must be $150 billion.

Restrictions on imports, such as quotas on textiles or tariffs on motorbikes, will do nothing to alter the account deficit. They will restrict imports, so less jobs will be lost in inefficient parts of industries such as footwear or steel. But the dollar will then rise further, as less dollars are supplied to the exchange market, and exports will fall by just as much, reducing jobs in the more dynamic export sector.

What then is to be done if the current account deficit is to be reduced? The simple answer is to lower the attractiveness of the US for foreign financial investors, mainly by reducing domestic real interest rates. Most economists believe the key to this is a greatly reduced federal budget deficit. Jonathan Haughton Philadelphia

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