Strong Economy Stokes Foreign Trade Deficit

WASHINGTON —  The nation’s foreign trade deficit widened in May as Americans, continuing their spending spree during good economic times at home, stepped up their import buying, the government reported Friday.

Commerce Department figures showed that, partly because of increased purchases of imported oil and automobiles, the trade deficit soared to $10.2 billion in May--the largest such imbalance in four months.

The U.S. trade deficit with Mexico and Canada also widened: The deficit with Mexico grew 22% in May to a high of $1.7 billion, while that with Canada doubled from its April level, rising to $1.7 billion.

However, economists said the figures had little to do with the North American Free Trade Agreement that took effect in 1994, but rather reflected the U.S. economic boom. Exports to both countries are growing.

The May figures left the overall trade deficit running at an annual rate of $115.4 billion. If it continues as expected, it will surpass last year’s deficit of $111 billion, the worst since 1988.

Some economists have predicted that the 1997 trade deficit could end up being one of the largest on record. The biggest trade deficit the United States has run up was $152.9 billion in 1987.

A large trade deficit generally is not considered desirable because it drains capital away from a country, eventually leading to a fall in the value of its currency and forcing policymakers to raise interest rates.

However, the United States has run large trade deficits since the mid-1980s without any major adverse consequences because it has been able to attract sufficient foreign investment to offset the trade deficit.

Analysts said the fast-rising trade deficit partly reflects the differences between the American economy, which is running at top speed, and the economies of its major trading partners, such as Europe and Japan.

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“We’re a strong economy in a world with weaker economies, and we’re simply sucking in imports,” said Robert G. Dederick, economic consultant at Northern Trust Co. in Chicago.

The U.S. trade picture also has been affected by the fast-rising U.S. dollar. While the rising dollar has made travel a bargain for American tourists abroad, it has made imports less expensive here and has made U.S. exports more costly abroad.

At the same time, Dederick pointed out, competition from foreign imports has played a major role in helping to dampen prices here, enabling the economy here to grow more rapidly without reigniting inflation.

“So, what’s bad for the trade balance is good for the anti-inflation effort,” Dederick said.

Even so, analysts say U.S. companies still are decidedly competitive, and the nation is enjoying an export boom. Although exports declined slightly in May, they have grown substantially for the year as a whole.

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Nevertheless, the worsening red-ink figure is expected to intensify pressure on the Clinton administration, making it more difficult to win approval from Congress for authority to negotiate more trade-opening pacts.

President Clinton has said he will seek such so-called “fast-track” authority in September. Opponents of such agreements are expected to campaign vigorously in an effort to block it.

The administration kept a low profile in the wake of Friday’s figures. Commerce Secretary Bill Daley said he was disappointed by the increase, but he expressed optimism about the trade outlook.

Critics of the administration have used the widening trade gap to attack Clinton’s trade policies, charging that trade pacts such as the North American Free Trade Agreement have cost thousands of American jobs.

However, most mainstream economists have sided with the administration, arguing that NAFTA has not had any appreciable impact on jobs. The U.S. unemployment rate has hovered around 5%--unusually low--for more than a year.

“The trade performance of the United States is strong,” despite the wider deficit, Daley said. “The economy is in good shape, and our international trade is an important--and positive--part of that picture.”

Friday’s report included these major elements:

* Imports jumped sharply in May for the seventh month in a row, surging by $800 million to a new level of $87.5 billion. Much of the rise stemmed from increased purchases of foreign petroleum and automobiles.

* Exports fell $700 million to a new level of $77.2 billion after rising during most of the first four months of the year. The drop was mostly due to weak demand in Europe and Japan.

The U.S. trade deficit with China soared 9.1% in May to $3.8 billion--marking its worst showing in seven months and the third time in history that the U.S. deficit with China has exceeded that with Japan.

The increase reflects rising purchases of toys, shoes and clothing from China.

By contrast, the U.S. trade deficit with Japan fell by 25% over the month, plunging to $3.6 billion following substantial increases earlier in the year. Even so, the deficit with Japan is running 14% above that of 1996.

The rise in the value of petroleum imports came despite a decline in crude oil prices, which fell to $17 a barrel in May--their lowest level in 15 months--following price cuts in the three previous months.

Imports of foreign cars and auto parts were up $331 million to $11.7 billion in May, even though auto shipments from Japan declined by $256 million.

Analysts said Friday’s report on trade portends some good news: The U.S. trade posture is unlikely to contribute to any overheating of the U.S. economy during the second quarter, as some forecasters had feared.

* STATE ADDS JOBS

California’s surging economy added 20,100 jobs in June, cutting unemployment to 6.2%. D1

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Trade Troubles

The trade deficit increased in May, in part because of growing imbalances with Canada and Mexico. It can fluctuate widely because of many factors, including the value of the dollar, the relative strength of the U.S. economy and American consumers’ appetite for foreign goods.

U.S. Trade Deficit

Overall deficit in billions

U.S. deficit with Canada

(in billions)

April: 0.8

May: 1.7

U.S. deficit with Mexico

(in billions)

April: 1.4

May: 1.7

Source: U.S. Commerce Department