Asian Crisis Could Wreak Havoc on Balance of Trade
by Richard Stevenson and David E. Sanger
WASHINGTON -- After years in which the strong
economy has dampened confrontations over international trade, the
issue is set to flare again against a backdrop of turmoil in Asia
as imports surge and exporters find it more difficult to sell
their goods abroad.
The near-certainty that the U.S. trade deficit will be driven sharply higher by the economic crisis sweeping through Asia has profound economic and political implications.
Some U.S. workers could lose their jobs, and employers could feel pressure to hold down wages. The profits of multinational corporations have already been put under pressure by the downturn in Asia, unnerving investors, and analysts are forecasting more bad earnings news.
On the positive side, a flood of cheap imports could help hold down inflation and obviate the need for higher interest rates. But tensions with large trading partners like Japan could be revived.
The Asian crisis is already altering trade patterns. In South Korea, for example, U.S. goods are nearly twice as expensive, when bought with the country's suddenly devalued currency, as they were at the beginning of the year. That is squeezing U.S. exporters ranging from auto-parts makers to farmers and could imperil the jobs those exports support.
A survey this week by the National Association of Manufacturers found that four out of five manufacturing executives anticipated significantly lower exports next year because of the problems in Asia and the resulting currency fluctuations. Among the industries that the association expects to be particularly hard hit are electronics, telecommunications equipment and capital goods.
At the same time, imports from Asian countries are tumbling in price, reflecting the steep decline in the values of their currencies relative to the dollar -- a boon to consumers and a big help in holding down inflation. Government statistics released last week showed that import prices from South Korea, Taiwan, Hong Kong and Singapore fell 1.2 percent in November alone, before the most recent round of currency declines.
Economists said the effect would be to drive the trade deficit back to or above the records set in the late 1980s, although it would still be a smaller share of economic output than in the '80s.
Some foreign governments are already maneuvering for what they expect will be an increasingly nasty economic and political battle with Washington. The Japanese, clearly fearful of a backlash in Washington, are already playing down the importance of any big increase in their trade gap with the United States.
"What's the problem?" Keizo Obuchi, the country's foreign minister, said during a visit to Washington 10 days ago, departing from the usual Japanese assurances in recent years that the deregulation of Japan's economy will close its trade gap with the United States.
"If you buy Japanese goods and we use the money to buy oil from Saudi Arabia, and they buy F-16s, there is no real difficulty," Obuchi said.
In public, Clinton administration officials say the rising deficit is a sign of economic strength, not weakness, and in any case represents only a tiny fraction of the nation's economic activity. But in private, they are clearly worried.
Organized labor and other opponents of unfettered trade, especially in the liberal wing of the Democratic Party, scored a big victory last month when they blocked President Clinton's request to Congress for a renewal of his trade-negotiating authority.
A sharp increase in the trade deficit would only embolden Clinton's opponents on trade issues and would further complicate the president's efforts to persuade Democrats to support him in pursuing more market-opening deals.
"People are going to use this as a way to say that the U.S. is losing jobs to these countries and that we shouldn't be so fixated on bilateral and multilateral trade opportunities," said Rep. Robert Matsui, D-Calif., who supports Clinton's trade agenda. "As some of these numbers come out, it could be a problem for us."
Administration officials and many economists say the projected increase in the deficit is nothing more than a reflection of the strong demand for goods and services being generated by a nation growing much faster than its main trading partners.
And there are benefits from the imbalance. U.S. consumers will enjoy lower prices on Sony camcorders from Japan, Hyundai automobiles from South Korea, sneakers from Malaysia and other Asian goods. Because domestic competitors will have to hold down their prices as well, the overall inflation rate should be kept in check.
The flip side is that U.S. companies will have even less ability than they have had in recent years to raise prices in the United States. Combined with their difficulties in exporting, the profit outlook for many companies is worsening. In the last week, companies like Minnesota Mining and Manufacturing and Nike have reported or forecast disappointing earnings results in part because of the problems in Asia, and the stock price of companies like the Dell Computer Corp. have been hurt by concern about earnings.
But even the slowdown in exports will have a positive side. Many economists are forecasting that it will help take some steam out of an economy that has been threatening to overheat, thus reducing growth to a sustainable pace and preventing the Federal Reserve from raising interest rates.
"These rising trade numbers, which scare the American people and bring frothing to the mouths of politicians, are in some ways a sign of the United States doing its job," said M. Carey Leahy, the chief U.S. economist at High Frequency Economics, an economic consulting firm.
"Clearly no one will complain about an influx of cheap, high-quality Asian goods," Leahy said. "The joke that no consumer ever died in a price war is certainly true."
But, Leahy and other economists said, there is clearly a dark side to steep increases in trade deficits. Import competition and slowing exports will cost some workers in the United States their jobs, especially in manufacturing industries, and could put pressure on employers to hold down wages. Some economists think the profits of U.S. corporations will suffer, potentially unnerving stock market investors, who have been betting on continued strong earnings growth.
"It's a serious issue macro economically, and it's serious for the incomes of working families," said Thomas I. Palley, the assistant director of public policy for the AFL-CIO.
After peaking at $153 billion in 1987, or about 3.3 percent of gross domestic product, during a period of widespread concern that the United States was ceding global economic leadership to Japan, the annual deficit in the trade of goods and services fell sharply in the early 1990s, largely because the United States fell into recession, pushing down demand for imports.
But from a low of $30 billion in 1991, the deficit has bounced back steadily, to $111 billion last year, or about 1.5 percent of GDP. The deficit has been running at roughly the same pace for this year but is expected by most economists to soar next year as the United States feels the full effect of the currency devaluations in Asia. Its percentage of GDP, however, should remain well below the 1987 level.
"Signs of weaker exports, increased imports, lower commodity prices and lower prices for goods that are subject to foreign competition should increase and intensify in coming months," said Allen Sinai, an economist with Primark Decision Economics.
DRI/McGraw Hill, the economic consulting firm, said that the trade deficit would expand to $150 billion next year and to $170 billion in 1999. The projected rise for next year is $27 billion greater than the firm was projecting just two months ago, before the magnitude of the Asian crisis had become clear.
The effect on the economy could be considerable. Maury Harris, an economist at Paine Webber in New York, said he expected the rising trade deficit to cut eight-tenths of 1 percent from growth in gross domestic product next year. The economy has been growing this year at close to 4 percent.
The administration's biggest trade concern now is that a cycle of "competitive devaluations" will set in, in which countries allow the value of their currencies to decline so that their goods remain competitive with those of their competitors.
That has already happened in Southeast Asia, where there have been at least three major rounds of devaluations, the latest within the last week. Indonesia's currency, the rupiah, is now lower than it has been since 1971. That, in turn, drives the Thai baht lower and puts pressure on the currencies of Malaysia and other economies in the region. Leaders of the Southeast Asian governments, meeting in Kuala Lumpur this week, admitted to feelings of financial impotence.
"When you are up against forces that you can't fight against, there is little you can do," said Mahathir Mohamad, the prime minister of Malaysia.
The big worry now is that Japan will also allow its currency to devalue, responding to what has happened in Korea. "That is the scary scenario," one senior administration official said. "They makemany of the same products -- cars, steel, semiconductors. So the pressures in Japan to let the currency go are tremendous."
The yen got some welcome support from the Japanese government's plan, announced on Wednesday, to lower taxes by $15.3 billion to spur economic growth. The move reversed the yen's steady slide against the dollar, but it is unclear whether the threat of further weakness in the Japanese currency has passed.
So far, Japan's Finance Ministry has publicly threatened to intervene to keep the yen strong, and it made good on that threat this week. But many traders think that eventually Tokyo will bow to pressure from its large manufacturers to allow a significant decline.
Until the last few months, the administration's chief concern has been the rising trade deficit with China. The imbalance with Beijing had begun to approach the kind of numbers ordinarily seen in trade with Japan, and already U.S. officials were issuing public warnings to the Chinese.
But China's currency is not fully convertible, so it has been left out of the devaluations that have struck the rest of Asia. Still, China is hardly likely to recede as a trade problem.
Administration officials said any downturn in exports to Asia or other parts of the world would be further evidence of why the United States should continue to work aggressively to open foreign markets. But they said there was no quick and simple solution to any rise in the deficit driven by the Asian turmoil.
"Any increase in the trade deficit is not a function of trade policy, and it is not one that changes in trade policy can cure," said Charlene Barshefsky, the U.S. trade representative. "We're looking at a macroeconomic situation of tremendous proportions."
Copyright (c) 1997 by The New York Times Co. Reprinted by permission