Foreign Trade Gap Widened Overall in Quarter, Broadest Gauge Shows

The deficit in the broadest measure of U.S. foreign trade widened in the first three months of the year to $39.75 billion as the first deficit in investment earnings in 30 years offset a sharp improvement in the merchandise trade balance, the government reported Wednesday.

The imbalance in the country’s current account balance from January through March surged by 18.6% from a fourth-quarter total of $33.5 billion and served as a stark reminder that the country’s trade problems are far from over despite a boom in U.S. exports.

The current account is the most important of all the trade statistics because it covers not only merchandise trade but also trade in the services category, which reflects primarily the flow of investment earnings between countries.

While the United States has run perennial merchandise trade deficits over the past two decades, its current account had been in surplus as recently as 1981 because American investment earnings were enough to wipe out the merchandise trade deficits.

However, in this decade, Americans have handed over billions of dollars to foreigners to pay for imported goods, transforming the country from the world’s largest creditor to the largest debtor nation. That means foreigners now own more in U.S. assets than Americans own in foreign assets.

While the Reagan Administration has tried to minimize the significance of this change, private economists have warned that it ultimately will mean a lowering of U.S. living standards as more and more wealth must be transferred to foreigners to service the huge debt.

The United States became a net debtor in 1985, but it has been able to have surpluses in investment earnings because Americans enjoyed a higher rate of return on their older overseas investments than foreigners obtained in the United States.

The report Wednesday showed that situation turned around in the first quarter as the services category went from a fourth quarter surplus of $12 billion to a deficit of $655 million in the first quarter of this year, the first deficit in the investment category since 1958.

David Wyss, senior financial economist for Data Resources Inc., said the first quarter deficit, because it was so small, could be revised to show a surplus in coming months, but he said somewhere down the road it is inevitable that investment earnings will move into a deficit to stay.

“The trend is clear and it is just a question of when we step over the line,” he said. “If you keep borrowing more and more like we have been doing, then you have got to pay interest.”

The Reagan Administration has emphasized that the costs of servicing the debt are still a small percentage of the country’s overall economy.

But Wyss and other economists said the turmoil surrounding last October’s stock market collapse showed the degree to which the American economy is now held hostage to the whims of foreign investors.

The report on the current account came a day after another trade report showed the deficit in merchandise shipments narrowed to $9.89 billion in April, the smallest monthly deficit since December, 1984.

The current account figures showed a similar decline in the merchandise trade deficit. In the first quarter, it dropped 12.7% to $35.95 billion, the best improvement in five years.

But the services deficit added $655 million to this figure and another $3.15 billion was added by U.S. foreign aid payments and Social Security benefits paid to American retirees living overseas.

All of these added up to a deficit of $39.75 billion for the first quarter, which would translate into an annual deficit figure of $159 billion.

The current account deficit for all of 1987 was a record $153.96 billion, but most analysts believe the 1988 figure will be slightly lower as merchandise trade shows further improvements in the months ahead. However, any increase in the current account deficit adds to the total indebtedness of the United States, which was $263.6 billion at the end of 1986. The accounting for 1987 will be released at the end of this month.

Many analysts believe the figure will top $400 billion, more than four times the burden of the previous debt leader, Brazil.