WASHINGTON -- The United States' trade deficit with the rest of the world rose sharply in July to the second-highest level in history, the government said yesterday in a report that fanned inflation fears and rattled the financial markets.
The worse-than-expected trade report came as Japanese auto companies, in a highly unusual move, warned the Clinton administration that they might break off their cooperation with the American auto industry, particularly their purchases of U.S. auto parts, if the White House imposes trade sanctions on Japan.
rTC The Clinton administration has threatened to put punitive tariffs on Japan on Sept. 30 if Tokyo does not agree to open its markets in insurance, government procurement, automobiles and auto parts.
The two sides began their final round of negotiations on market-opening this week, and currency speculators are already placing their bets as to whether the talks will succeed or fail.
If the negotiations fail, the dollar is expected to weaken even further against the yen; if they succeed, the dollar is likely to strengthen, as speculators conclude that the administration will not want to use currency to put pressure on Tokyo.
There was some positive news on trade matters yesterday, though. The Japanese Finance Ministry informed the Clinton administration that the government in Tokyo intended to put off imposing a consumption tax for three years instead of the two-year delay originally planned. A longer delay in the tax should help stimulate the Japanese economy and the purchase of American goods by Japanese consumers.
There also was some good trade news for the administration from Capitol Hill, where members of the House Ways and Means Committee and the Senate Finance Committee were reported close to agreement on legislation that would approve and put in force the global trade accord known as the General Agreement on Tariffs and Trade.
The GATT agreement is expected to stimulate billions of dollars in new world trade by lowering and eliminating tariffs, quotas and subsidies in 123 countries.
The United States could use the boost. The Commerce Department reported yesterday that the trade deficit in goods and services widened to $10.99 billion in July, up 21.6 percent from June's level. Sluggish summer sales of American commercial aircraft and a rise in imported oil prices that exceeded expectations were cited as the main reasons for the wider deficit.
It was the second-largest monthly merchandise deficit in U.S. history, topped only by a $15.9 billion gap in December 1985. The deficit with Japan alone soared to $5.67 billion in July, the widest since March, while the deficit with China expanded to a record $2.67 billion.
With only 10 days left before the American-imposed deadline in the Japan trade talks, each side is seeking to bring maximum pressure on the other.
In a speech in Tokyo yesterday, Lawrence Summers, the Treasury Department's undersecretary for international affairs, attacked the Japan's economic policies.
While the United States has put its economic house in order, Mr. Summers said, Japan is failing to push deregulation vigorously, failing to make domestic consumption rather than exports the engine of economic growth, and failing to stimulate its growth with proper fiscal and monetary policies.
From the Japanese side came a different message. In an open letter published in Japan and addressed to U.S. Trade Representative Mickey Kantor, the Japan Automobile Manufacturers Association said that any American sanctions would cause its members "to determine whether continued industry-level cooperation is justifiable."