Pressure From Abroad

By John Greenwald.

The U.S. once saw itself as an economic island, so large and strong and independent that it could all but ignore the rest of the world. That view has long been obsolete, and events last week provided fresh and painful evidence of how closely American interests are tied to decisions made in other countries. On international money markets, nervous traders sent the formerly high-flying dollar into one of its sharpest and fastest tailspins ever. The plunge caused fears in some quarters that a protracted slide in the currency's value could be getting under way.

Meanwhile, policymakers in Tokyo outraged the Reagan Administration and Congress by what seemed at first to be an effort to please them. The source of the tension: an announcement that the Japanese would retain quotas on the number of cars exported to the U.S. That move deeply disturbed the White House because Reagan last month had invited Tokyo to drop the quotas in the hope that Japan would respond by opening its markets to American products. Said White House Spokesman Larry Speakes: "It's the President's position that export restraints are not an acceptable substitute for market opening."

Congress was fighting mad too, but for a slightly different reason. In announcing that it will maintain auto quotas, the Ministry of International Trade and Industry said it will raise the ceiling 24%, to 2.3 million vehicles a year. Angered Senators responded by voting 92 to 0 for a so-called trade war resolution that calls on Reagan to take all appropriate action to persuade Japan to remove barriers to American products. The only objections before the vote on the nonbinding measure came from legislators who argued that it was not strong enough. Said Montana Democrat Max Baucus: "I want to say only one word--boeki-senso. That is Japanese for trade war." Snapped Lawton Chiles, a Florida Democrat: "The U.S. can't go on playing Ann Landers and letting the rest of the world cry on our shoulders when it comes to foreign trade. Even Ann Landers can spot a bad deal when she sees one."

Lawmakers are particularly eager to pry open Japan's $20 billion telecommunications market. In the past two months, Administration officials have stepped up negotiations with Tokyo to win greater access to that market. The talks have been in anticipation of the gradual conversion of giant Nippon Telegraph & Telephone from a government monopoly to a private company, a change that begins this week. So far, though, Washington's representatives have been frustrated by what they consider to be Japanese reluctance to grant freer trade, and have made no more than modest progress. Said one top negotiator: "Substantial differences remain."

The Reagan Administration sees increased telecommunications sales to Japan as a key to closing the yawning American trade gap with the rest of the world. The Commerce Department reported last week that the U.S. foreign trade deficit widened to $11.4 billion in February, the biggest shortfall in five months. The largest single portion, $4.2 billion, represented the difference between U.S. exports to Japan and the flood of imported Japanese products. Because of such gaps, the total trade deficit is expected to reach at least $140 billion in 1985, up some 15% from the record set last year.

Reagan had hoped to swell American exports by eliminating car quotas as a gesture to the Japanese. Since 1981 Tokyo has limited its shipment of autos to the U.S. to less than 2 million units a year. When he gave Japan free rein to end those restrictions, the President hinted broadly that he expected something in return. "I hope," he said, "that we can look forward to reciprocal treatment by Japan concerning the high-level discussions under way between our countries in the weeks ahead." But the Japanese seemed to decline that gambit when they announced that they will keep the quotas.

Ironically, Tokyo decided to continue limiting car exports as a concession to the U.S. In recent months, the Japanese government has been increasingly worried by Washington's rising anger over the trade imbalance between the two countries. Japanese planners had hoped to ease the tensions by keeping some curbs on auto shipments. When they announced the new quotas, M.I.T.I. officials called them "a transitional step toward the attainment of free trade." But the bureaucrats' solution has infuriated everyone, including Japanese carmakers, who want to ship all the vehicles they can.

Japan seems to have backed itself into a clas- sic damned-if-you-do-and- dam ned-if-you-don't corner. While the White House faulted Tokyo for failing to remove the restrictions, Detroit joined Congress in criticizing the Japanese for boosting the export ceiling above its previous level. Owen Bieber, president of the United Auto Workers, predicted that the extra shipments will cost the U.S. 90,000 jobs, although some experts dispute that figure. Said he: "The reports from Japan regarding a huge 25% increase in auto exports to this country merely confirm what the U.A.W. has said all along. The Japanese auto manufacturers are preparing to unleash a flood of additional exports to this market."

U.S. carmakers, whose profits could be cut by the increased competition, were also bitter. Said Chrysler: "The American worker and the American economy will suffer because 2.3 million cars coming here from Japan over the next twelve months is going to cost American jobs and is going to worsen a trade deficit already out of control." The company said the additional Japanese autos would equal the output of two U.S. assembly plants and six or seven supplier facilities.

The extra shipments, though, should benefit American consumers, who may spend less for some popular Japanese models than they would have if the quotas had not been raised. Said Harvey Heinbach, an auto analyst for Merrill Lynch: "While I do not see list prices coming down as such, there will be savings in terms of the premiums that are now paid on cars, and lower costs for financing and options like rust-proofing and special trim." In certain cases, Heinbach estimated, consumers could save as much as $1,000. Dealers are already planning promotional sales.

The importation of more cars from Japan would probably raise the U.S. trade deficit and could hurt the dollar, which was already sliding rapidly last week. The British pound, worth just over $1.03 on Feb. 26, fetched $1.24 on Friday. In all, the dollar has lost 6% of its value against the currencies of major U.S. trading partners in the past three weeks. "It's never been as wild as this," says Christine Patton, a senior vice president of Manufacturers Hanover Trust who runs that bank's foreign exchange operations.

Traders dumped dollars out of fear that the U.S. economy may be slowing, and because some interest rates have fallen. They also fretted about the health of the American financial system following last month's panic at Ohio savings and loans and reports of troubles at Texas banks. Says Patton: "There is great concern that the American miracle may be a bubble on the verge of bursting."

Though an extended flight from the dollar would rekindle U.S. inflation and cause chaos in world money markets, Washington has so far shown little concern. Indeed, Reagan was in a buoyant mood Thursday when he clanged the opening bell for trading at the New York Stock Exchange. He was the first American President to visit the exchange while in office. "We are not worried about what the dollar has done," said one Administration official. "There are limits to how far it can fall."

But the White House is less sanguine about its relations with Japan. In order to stress the importance of the trade issues, the President last week sent a special envoy, Gaston Sigur, a Japanese specialist on the National Security staff, to Tokyo with a letter for Prime Minister Yasuhiro Nakasone. The Prime Minister meanwhile said that a new package of measures designed to make it easier to export to Japan will be announced next week.

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With reporting by Gisela Bolte/Washington and Frederick Ungeheuer/New York, with other bureaus