Trade Deficit Shrinks in 1988; Improvement in December Slim
America’s foreign trade deficit shrank to $137.3 billion in 1988--$33 billion less than in the previous year, the Commerce Department reported Friday. But the imbalance narrowed only slightly in December, apparently confirming that further improvement is apt to be slow.
The figure for 1988, down from a record $170.3-billion deficit posted in 1987, marked the first time that the yearly deficit has declined since 1980. The improvement has resulted from a fall in the value of the dollar, which makes U.S. goods more competitive.
But the department’s monthly report for December showed that imports continued to exceed exports by $11.9 billion--barely $300 million below November’s level--despite a respectable increase in exports, which soared $1.65 billion, or 0.6%, to a record $29.2 billion.
Strong Demand for Imports
Import buying by Americans climbed by $1.3 billion, or 0.3%, in December, partly because of a rise in oil prices. The deficit has remained on a plateau now for more than five months, following visibly more dramatic gains during the early part of 1987.
The Bush Administration hailed the reduction in the trade deficit for 1988 as “good news” for the economy. White House spokesman Marlin Fitzwater said that the trade picture is continuing to show “a trend of improvement.”
But that may be nearing an end, as continued strong demand for imports here at home--combined with the inability of some export industries to increase their production using their existing plant facilities--constrains the pace of improvement.
Also expected to be a factor is the recent rise in oil prices, which is likely to bloat the nation’s oil import bill by as much as $4 billion over the year. Economists said that some of that already is evident in the December figures.
Internal government estimates show that the trade balance is likely to dip only modestly this year, possibly to $125 billion or so for the year as a whole, from the $137.3 billion recorded in 1988.
Private analysts warned that if the trade deficit does not begin to shrink more rapidly, the United States could be faced with the choice of allowing the dollar to fall further--at the risk of exacerbating inflation--or of slowing the economy to help dampen import buying.
David Levine, economist at Sanford C. Bernstein & Co., said that he believes the trade picture will continue to show gradual improvement for two or three more quarters “even if the dollar doesn’t drop further.” But he said that the improvement “will pretty much end in late 1989.”
And Lawrence Chimerine, economist for Wharton EFTA in Philadelphia, said that he expects to see “one or both eventually”--either further downward pressure on the dollar or slower domestic demand, adding: “The trade problem is going to be with us for a long, long time.”
No Surprises
The Federal Reserve Board already has begun to nudge interest rates higher, in part to slow the economy and to keep the dollar from falling too far. But President Bush appears to have rejected any slower-growth strategy. Some analysts fear that there may be a clash between the two.
Financial markets echoed similar sentiments. Although the stock market surged ahead Friday despite the trade report, the dollar declined slightly on foreign exchange markets and traders still were apprehensive that the Fed might move to nudge interest rates still higher.
Still, the figures were generally in line with what the markets had expected.
The $11.9-billion deficit for December was calculated on the traditional basis. A new measure of the trade gap that the department will adopt next month to replace the current system showed the December deficit at $10.2 billion, down from $10.7 billion in November.
The new compilation, similar to the statistics-gathering procedures used by most other countries, showed the deficit for 1988 at $118.7 billion, down from $152.1 billion in 1987. The calculations do not count insurance and freight charges that have been incurred abroad.
The December report highlighted several new developments in the nation’s trade patterns:
- Imports of capital goods, often cited as a sign that U.S. industries are beginning to expand their overall production capacity, appeared to peak out in December, and thus are less likely to bloat overall import levels in coming months.
- Exports of consumer goods continued to expand, a reflection of the cheaper dollar, which makes U.S. products more attractive overseas. And agricultural exports remained relatively weak, partly because of flooding and transportation problems in the Midwest.
The figures for the year reflected substantial improvement in the United States’ trade balance with virtually all its major trading partners:
- The U.S. trade deficit with Japan shrank to $55.4 billion in 1988, compared to $59.8 billion in the previous year.
- The deficit with Western Europe fell to $12.8 billion, from $24.3 billion in 1987.
- The deficit with Canada dipped to $10.6 billion, from $11.7 billion in 1987.
- With the newly industrial economies such as Taiwan and South Korea, the deficit fell to $31.6 billion, from $37.7 billion in 1987.
