Trade: What the Restrictions Mean

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President Johnson's moves to correct the U.S.'s balance of payments deficit were painful to some, controversial to many, and likely to damage the nation's own interests if left in effect too long. Yet the objective was beyond cavil: to prevent recent attacks on the dollar and the speculative rush for gold from growing into an international financial crisis that could undermine prosperity around the world.

Having temporized for years, the President finally was forced to act under the goad of unexpected pressure. During the fourth quarter of last year, the deficit soared to the alarming rate of $5.7 billion a year, giving the nation a total deficit for 1967 of between $3.5 and $4 billion, the highest in seven years. By coupling his New Year's Day announcement of those figures with his stern prescription for lopping $3 billion off the deficit in 1968, the President managed to minimize the consequences. Despite the Treasury's subsequent disclosure that the U.S. lost nearly $1 billion of gold during November and December, one-twelfth of its dwindling hoard, the dollar rose strongly on the exchange markets of London, Paris and Frankfurt last week.

The main elements in Johnson's com plex bag of restrictions:

∙BUSINESS SPENDING. The President's goal is a $1 billion reduction in corporate investment overseas, which reached $5 billion last year. Under an obscure provision of the 1917 Banking Act, he decreed the first mandatory controls in U.S. history on such outlays, replacing the half-effective "voluntary" restraints in force since 1965. In South Africa and continental Western Europe (except for Greece and Finland), new investments of money from the U.S. were barred completely. Companies may finance new projects from foreign earnings and depreciation allowances, but only up to a ceiling of 35% of the average level of such expenditures in 1965 and 1966. In Latin America, Africa and Asia, investments will be held to 110% of the 1965-66 average without regard to the source of funds. Anxious not to deal the British pound another blow, the President in his edict allowed U.S. business investment in the U.K., Canada, Australia and oil-producing countries up to a maximum of 65% of the 1965-66 base period. On top of that, U.S. companies were ordered to reduce foreign bank balances to their 1965-66 average and to repatriate at least 65% of their European profits. The order, affecting about 1,000 U.S. firms, will be enforced by a new Commerce Department Office of Foreign Direct Investment. Violators face criminal prosecution and fines up to $10,000.

∙ BANK LOANS. In hopes of achieving a $500 million contraction in last year's $9 billion of bank loans to foreigners, President Johnson ordered a tightening of still voluntary controls administered by the Federal Reserve Board. As with investment controls, the new rules will hit Europe hardest. The Reserve Board asked banks to refuse to renew outstanding loans on the Continent when they mature and to reduce their short-term (less than a year) loans in the region by 40% during 1968. Just to make sure banks cooperate, the President also gave the Fed stand-by power to make the restrictions compulsory.