Trade gap worse than expected Deficit jumped 44% in June

August 20, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- The U.S. merchandise trade deficit rocketed 44 percent in June to $12.1 billion, undermining economic growth prospects, producing a massive support operation for the dollar against the yen and complicating the Clinton administration's efforts to win approval for the North American Free Trade Agreement.

Exports dropped 3 percent to $37.6 billion while imports jumped 5.1 percent to a record $49.7 billion -- together producing the worst monthly deficit since October 1987, the Commerce Department reported.

The figures, which were much worse than expected, reflected weak demand for U.S. goods in recession-racked Europe and Japan, and continued appetite by U.S. consumers and businesses for foreign-made products despite slow growth at home. Some economists worried yesterday that the imbalance would be repeated in coming months as the United States remained the only growth area in the industrialized world.

The deficit prompted the administration to reverse its policy of letting the dollar find its own floor against the yen. Lawrence Summers, Treasury undersecretary for international affairs, said the administration was concerned that the strength of the yen was threatening to choke off Japanese and global economic growth.

Chris Rupkey, economist with Mitsubishi Bank, New York, said the administration appeared to be reacting not only to the trade figures but also to an emergency economic meeting of Japan's new coalition government which decided to study import deregulation, a prerequisite to increasing U.S. exports to Japan.

"It's been a long time since we've seen a bigger day," said David Jones, chief economist with Aubrey G. Lanston & Co, New York. "It was massive."

The trade setback did little to rock the financial markets' recent advance. The Dow Jones industrial average ended the day at a record high of 3,612.13, while the bond market also registered new gains.

Market watchers said the trade figures had limited impact on the markets because of the cushion effect provided by the multibillion dollar investment shift from low-yield certificates of deposit into stocks and bonds and because the statistics were two months old.

But many economists were less sanguine.

"It's pretty rotten news," said David Wyss, economist with DRI/McGraw-Hill, Boston.

"These are just appalling numbers," said Gregory Woodhead, an economist with an AFL-CIO task force on trade. "It's part of a continuing trend [suggesting] that U.S. jobs and manufacturing are definitely at risk."

Charles McMillion, president of Washington-based MBG Information Services, predicted the new trade figures, combined with weak housing and retail demand, would reduce economic growth in the second quarter to an expected annual rate of 1.4 percent from 1.6 percent.

"Recessions don't last for ever," Mr. McMillion said. "Surely, there will be some turn round at some point, but there is a worldwide demand problem."

The new figures were released as Mr. Clinton announced the appointment of lawyer-banker William Daley to be the administration's chief lobbyist for NAFTA, the trade agreement designed to unite the United States, Canada and Mexico into the world's largest free trade zone.

And while the weak U.S. export performance will strengthen the administration's argument for opening overseas markets, the widening deficit will also provide ammunition for NAFTA foes.

"A weak economy"

"It hurts the selling of NAFTA," said DRI/McGraw-Hill's David Wyss. "It suggests a weak economy, and a weak economy suggests we should try to keep our jobs ourselves instead of giving them to foreigners."

Steve H. Hanke, professor of applied economics at Johns Hopkins University, said: "I think it will fan the flames for more protection. I think the figures will play into the hands of the Ross Perots and those who are opposed to freer trade arrangements."

Dr. Hanke, who is chief economist of FCMI Corp. in Toronto, predicted "more of the same" trade pattern in coming months, saying: "I don't see a rapid turn-round and pickup in the U.S. economy, and further more, I see more decline on the horizon overseas."

The new figures pushed the trade gap for the first six months of the year to $56.6 billion, 55 percent higher than the figure for the same period last year, suggesting this year could rack up a total deficit of more than $110 billion compared with $84.5 billion in 1992.

Part of the import surge was an increase in the number of goods, particularly computers, made overseas by U.S. companies in low-wage countries, such as Mexico, and brought back for sale to American consumers.

"I am not saying they are doing anything wrong, but that's what's happening," said Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis, who estimates the trade deficit in computers alone will reach $18 billion this year.

One-third of the June trade deficit -- $4.3 billion compared to $3.75 billion in May -- came from the U.S.-Japanese trade imbalance, caused largely by the difficulty in penetrating Japanese markets and the continued appetite here for Japanese consumer goods, particularly autos and electronics.

Alan Tonelson, research director at the Economic Strategy Institute, said: "We face very different problems with Europe and Japan. With Europe the problem does seem to be slow or nonexistent growth. With the Japanese it seems to be an economy that is one gigantic trade barrier."

U.S. trade negotiators agreed last month on a new framework for talks with Japan on reducing the persistent trade imbalance. The talks are due to open next month.

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