Baker Predicts $40-Billion Fall in Trade Deficit

WASHINGTON — Treasury Secretary James A. Baker III, citing the effect of lower interest rates and a declining inflation rate, predicted Sunday that the U.S. trade deficit will decrease by “about $40 billion” in 1987.

The U.S. trade deficit hit a record $169.8 billion for 1986, although the year ended with a December deficit of $10.7 billion for the lowest monthly imbalance in 21 months, the government reported Friday.

Baker, interviewed on ABC-TV’s “This Week With David Brinkley,” said that he expects “substantial progress” on the deficit in 1987, as a result of legislative cuts in the defense budget within the past few years.

“There’s going to be a substantial deficit reduction in 1987, about $40 billion,” Baker said. “That’s a big deficit reduction. And generally speaking, we’re moving into the fifth year of sustained expansion in this country. Only twice since World War II have we had this. Interest rates are lower than they’ve been in nine years. Inflation is lower than it’s been in many, many years.”

Last year, Baker also predicted a reduction in the trade deficit, estimating a drop to $135 billion. However, the deficit rose to nearly $170 billion.

Baker and West German Bundesbank President Karl Otto Pohl, who also appeared on the program, signaled they were moving closer to agreement on an appropriate value for the dollar.

“The current exchange rate is much more consistent with the economic fundamentals than the exchange rate we saw a few years ago,” Pohl said.

Baker agreed: “As you heard the president of the Bundesbank saying, the relationship between the currencies today better reflect the economic fundamentals than they had at the time of the (September, 1985) Plaza agreement.”

The finance ministers of the five leading democratic industrial nations--the United States, West Germany, France, Britain and Japan--agreed at that 1985 meeting to work together to devalue the high flying dollar.

The unusually diplomatic remarks on both sides suggested that the finance ministers may be preparing to meet to discuss volatile currency markets at another gathering of the finance ministers of the five countries.

Baker said in congressional testimony on Friday that there were no plans for another meeting of the called Group of Five leading democratic industrial nations. However, he acknowledged that such a meeting had been considered.