U.S. Trade Deficit Sets Mark in ’85 : Import Flood Cited for $117-Billion Payments Imbalance

The United States paid out $117.7 billion more to the rest of the world than it took in last year, running up the largest deficit ever in the broadest measure of the nation’s trade with the rest of the world, the Commerce Department reported Tuesday.

The huge deficit in the balance of payments was caused primarily by the flood of foreign goods into the country, which continued unabated at a record $160-billion-a-year pace during the last three months of the year despite the sharp drop in the value of the dollar that began last September. The 1985 deficit was 9.6% greater than the $107.4-billion payment deficit in 1984, the previous record.

At the same time, foreign investment in the United States exceeded U.S. investment abroad by $84.9 billion and the United States was in debt to the rest of the world by about $56.6 billion by the end of 1985, Commerce Department analysts said.

It was widely reported last September that last summer the country became a net debtor for the first time since 1914.

In the report issued Tuesday, the Commerce Department’s Bureau of Economic Analysis put the merchandise trade deficit at $124.3 billion, the highest ever.

In an earlier report, which was based on somewhat less reliable Census Bureau and Customs Service figures that add to the import value of goods the cost of freight and insurance, the merchandise trade deficit for the year was $148.5 billion.

Thanks to a continuing, though dwindling, surplus income from U.S. assets abroad and services sold to foreigners, the 1985 deficit on trade in goods and services was somewhat smaller, but it was still a record $102.9 billion.

The current accounts balance, the broad measure reported Tuesday, consists of the net trade balance in goods and services coupled with U.S. transfer payments abroad in foreign aid and pensions and other remittances to individuals, which last year totaled $14.8 billion.

Declining Dollar

In general, economists believe that the still-declining value of the dollar eventually should help bring U.S. exports and imports more into balance as foreign goods begin to cost more and U.S. goods begin to be priced more competitively.

But this process takes from a year to 18 months even to begin to work, so there is wide consensus that trade will remain in deep deficit this year and that the current accounts balance will probably set a record of more than $120 billion in 1986.

The outlook on trade and balance of payments “gets darker for a while at first,” said C. Fred Bergsten, whose Institute for International Economics here studies trade policy.

“The fourth quarter last year was awfully bad,” Bergsten said, noting a $39.5-billion merchandise trade deficit and a $36.6-billion balance-of-payments deficit in the last three months of the year. The figures indicate the likelihood of annual deficits of well over $150 billion in both categories.

Further, Bergsten said, the record during the first two months of this year is even worse. Trade deficits are running at what he estimated to be a $200-billion annual rate.

But he agreed with many economists in and out of the Administration that “things will get better in the second half of the year,” even though he believes that the dollar needs to fall another 15% to 20% against the currencies of other major trading nations before trade deficits can fall dramatically.

Bergsten agreed that the fall in world oil prices, which should begin to expand economies in Western Europe and Japan and for the first time in nearly a decade expand domestic consumption there, “is manna from heaven.”

Thus, he said, there is little reason to fear that the dollar will fall sharply enough to drive up inflation and scare away the foreign investment that has helped keep the U.S. economy expanding.

“All signs are now pointing toward a soft landing,” Bergsten added, thereby reversing the verdict of several of his colleagues as recently as three months ago.