Domestic policy blunders helped cause the tremendous swelling of the U.S. trade deficit and volatility in the foreign exchange market, an officer of the National Association of Manufacturers asserts.

U.S. policy makers exacerbated the nation's trade deficit by enacting budget and tax policies that blunt the competitive edge of U.S. manufacturers while unduly stimulating U.S. consumption at the expense of saving and investment, said Lawrence Fox, who is the association's vice president for international economic affairs.A quarter century's lack of understanding by the U.S. government and U.S. industry of the dollar exchange rate and its critical relationship to U.S. competitiveness is the principal cause of the trade deficit, said Mr. Fox, speaking this week at the Conference Board's 1988 Financial Outlook Conference.

Other speakers agreed that Washington should shoulder much of the blame. They said the depreciating dollar is making U.S. goods more attractive again to foreigners, but the trade deficit won't fall substantially below 1987's $171 billion shortfall for another 10 years.

Mr. Fox said U.S. exports suffered when policy makers incorporated trade into foreign policy goals.

Our Export-Import Bank was allowed to fall to one-tenth its size at the end of the Carter administration, he said. Export controls were used

excessively to help achieve foreign policy goals that could not be achieved that way.

As an example, he cited the government's suspension of incentives to keep U.S. manufacturers at home. At the national level, the investment tax credit was terminated, making American investment in the United States more costly and accentuating the short-term advantage for U.S. firms to manufacture abroad or source products and parts abroad, Mr. Fox said.

Tax changes in the last decade and volatility of the U.S. dollar in the foreign exchange markets made long-term financial planning among companies nearly impossible, he added.

The dollar exchange rate is a central issue in our country's future, Mr. Fox said, but he doubted that fiddling with the dollar's exchange rate is the panacea for the U.S. trade deficit.

Little or no exchange rate changes have taken place in roughly half our markets, including Canada, Latin America and most Far Eastern countries other than Japan, Mr. Fox pointed out. He suggested that a readjustment in the international exchange rate system will be necessary for U.S. manufacturers to reap the benefits of a weak dollar and to stymie the huge U.S. trade deficit.

The consensus among top economists who spoke during this week's meeting is the dollar will come under increasing pressure to devalue further against the deutsche mark and yen later this year. They said the United States will muddle through 1988 and settle for a slower growth rate. This slowdown will set the stage for a mild recession in the early months of 1989, they said.

I expect some volatility in the foreign exchange market in the year ahead and exporters should hedge their dollar positions carefully in the next six to 12 months, said speaker Alfred Holden, who heads a consulting firm under his name.

In his speech, Conference Board economist Delos Smith predicted the trade deficit for 1988 to be between $175 billion and $185 billion, up from $171 billion in 1987. He put the 1989 trade deficit in the range of $185 billion and $195 billion.

Economists at the conference agreed with the speakers that the weak dollar has triggered export activities. John Pitcher, managing economist of Bell Atlantic, said his telecommunication service company saw a surge of orders for installation of telephone equipment in the business and manufacturing sectors.

Bell Atlantic service covers the District of Columbia, Virginia, West Virginia, Maryland, Pennsylvania, New Jersey and Delaware.

We don't expect the service sector industry to decline for the next couple of years, Mr. Pitcher predicted. For the manufacturing sector, they're just starting a period of good times.