Trade Deficit Posts First Improvement Since 1980

The U.S. trade deficit in 1988 posted its first improvement of the Reagan years, narrowing to $137.34 billion, the government announced Friday in a report that economists said showed how far America must go before its trade problems are solved.

The Commerce Department said exports, led by a surge in manufactured goods, shot up a dramatic 26.8% last year to an all-time high of $322.22 billion. This increase supplied much of the economy’s momentum in 1988 as factories hired more workers and expanded production facilities to meet the export demand.

However, imports rose to a record as well, climbing 8.3% to $459.56 billion. The trade deficit is the difference between imports and exports.

The deficit declined almost 20% from an all-time high of $170.32 billion in 1987. It marked the first improvement since 1980, the last year of the Carter Administration. In that year, America’s total deficit was a much smaller $31.4 billion.

Through the 1980s, America’s trade deficit steadily deteriorated, posting record imbalances year after year, caused in part by the huge federal budget deficits, which increased demand in the economy.

The Bush Administration, which has made reducing the budget deficit its No. 1 priority, said the new trade figures showed the imperative need for Congress to enact the President’s revised budget, which projects a big drop in the deficit while calling for a reduction in the capital gains tax as a way of spurring investment in new plants and equipment.

“Reducing the cost of capital, increasing personal saving and promoting research and development will go a long way to ensure that America wins at home and in the global marketplace,” Commerce Secretary Robert A. Mosbacher said in a statement.

But private economists noted that the December deficit showed little improvement from November, with both months continuing a trend of higher imbalances, which began in June.

“It is pretty clear that over the last six or seven months, the improvement in the trade deficit has stalled out,” said Lawrence Chimerine, head of the WEFA Group, an economic consulting firm in Bala-Cynwyd, Pa. “The longer this keeps up, the harder it will be to finance our borrowing and the more we lose control of our own economy.”

The string of $100-billion-plus trade imbalances, beginning in 1984, has transformed the country into the world’s largest debtor nation as Americans handed over billions of dollars to foreigners to pay for such items as imported cars and color televisions.

Cynthia Latta, an economist with Data Resources Inc., said she did not expect to see any further improvement in the trade deficit this year, and some economists even forecast that the imbalance might begin to rise again.

That would spur renewed demands to erect protectionist trade barriers opposed by the Bush Administration and would depress economic growth and jeopardize the Administration’s effort to reduce the budget deficit without a tax increase.

Half of Growth

The narrowing of the trade deficit and the boom in business investment contributed fully half of overall economic growth in 1988.

For 1988, sales of manufactured goods surged 25.2% to $214.8 billion, reflecting gains in various categories from heavy capital equipment to consumer goods. Hefty increases were posted in sales of office machinery, up 24%; electrical machinery, up 30%; chemical sales, up 21%, and aircraft, up 24%.

Sales of agricultural products climbed 29% to $37.02 billion with sales of wheat up 60%, corn up 57% and soybean sales up 11%. Analysts said much of the increase reflected higher prices as a result of last summer’s severe drought.

The rise in imports came despite the fact that America’s foreign oil bill declined in 1988, dropping by 6.5% to $41.8 billion, reflecting cheaper oil. Oil prices averaged $15.29 per barrel last year, down from $18.12 in 1987, while the volume rose to an average of 7.4 million barrels per day, up from 6.8 million barrels daily in 1987.

Car Purchases Down

American purchases of foreign cars and trucks totaled $56.02 billion in 1988, down 2.8% from the 1987 total.

America’s largest trade imbalance in 1988 was, as usual, with Japan, a $55.4-billion imbalance. It represented two-fifths of the total deficit and was down only a modest 7% from the all-time high U.S.-Japan deficit set in 1987.

William Archey, a trade expert at the U.S. Chamber of Commerce, said that by the fourth quarter of 1988, America’s trade deficit with Japan was rising again and “this growing deficit with Japan will remain a politically charged issue as the United States moves to implement the new trade law.” The 1988 Trade Act gives the President expanded powers to retaliate against unfair trading practices.

The deficit with the 12-member European Economic Community showed a much more dramatic improvement in 1988, narrowing by 47.2% to $12.8 billion.

The deficit with Canada, the largest U.S. trading partner, declined by 9.6% to $10.6 billion.

For December, imports and exports both rose to record monthly highs. Exports climbed 5.6% to $29.19 billion, reflecting increased sales of industrial supplies and capital equipment, while imports rose 3.3% to $41.09 billion, reflecting higher purchases of foreign cars and consumer goods.