Good News on Trade - But Beware

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One of President Reagan's best applause lines last week was an economic figure with a lot of punch. "The news is very good," he said, provoking suspense among his audience of 9,000 people at Southeast Missouri State University. His bulletin: the U.S. trade deficit plunged to $9.5 billion during July, down from $13.2 billion in June and the smallest since December 1984. "When America goes into the market to compete," Reagan declared, "we play to win." The trade figures, which reflected a 0.7% boost in U.S. exports and an 8.9% drop in imports, prompted almost giddy reactions within the Administration. Only a day earlier Treasury Secretary Nicholas Brady had predicted during his Senate confirmation hearings that "one of the surprises of the next two or three years will be how fast" the trade gap will shrink.

Yet some economists were murmuring their doubts even as they welcomed the improvement. From January through July, the trade gap was running at an annual average of $137 billion, down from $170.3 billion last year. By historical standards the deficit remains enormous, and further progress may become increasingly difficult. A prime reason is that America's factories, which went through a long period of downsizing for efficiency's sake, no longer produce the diversity or volume of products needed to meet the heavy demands of a healthy U.S. economy.

Now that a scaled-down dollar has made American goods competitively priced, factories have been running at nearly top speed this year to fill orders from customers at home and overseas. During August, U.S. factories, mines and utilities operated at 83.7% of capacity, the highest figure since 1980. A few & industries are approaching their output limits, which means that rising U.S. demand may force buyers to look overseas for their supplies.

In some cases, U.S. companies have abandoned markets in which they lost their competitive edge, so Americans have little choice but to buy foreign. The most hopeless case is consumer electronics, in which Asians control the market not only for established products (videocassette recorders, stereos) but also for new ones (compact-disc players). Only about half the color TVs sold in the U.S. are produced in this country, and most of those are made by foreign-owned factories. Zenith, the sole remaining major U.S. manufacturer of color TVs, controls just 15% of the domestic market.

Asian companies have achieved a similar lock on the office-equipment market. No American company makes facsimile machines, a $914 million business in the U.S. Such Japanese companies as Canon and Sharp produce 94% of the small copiers sold in the U.S. as well.

Through price cutting, the Japanese and Koreans have virtually pushed U.S. semiconductor manufacturers out of the market for the dynamic random-access memory chip, or D-RAM, which serves as the electronic memory in thousands of devices, ranging from personal computers to toasters. Surging production of such products in the U.S. has caused a chip shortage that the Asian manufacturers have been able to exploit. During the first half of this year, Japanese companies shipped $978 million worth of semiconductors to the U.S., a 44% increase over the same period last year.