1988 Trade Deficit $135.3 Billion--Best Showing Since 1985

The deficit in the broadest measure of U.S. trade narrowed to $135.3 billion last year for the best showing since 1985, despite a steep deterioration in the balance on investment earnings, the government reported today.

The Commerce Department said the deficit in the current account, also known as the balance of payments, shrank 12.1% from the record imbalance of $153.96 billion set in 1987.

The current account is the most important trade statistic because it measures not only trade in merchandise but also transactions in investments and other services.

The big improvement last year came entirely from merchandise trade, where the deficit shrank by 21.1% to $126.5 billion. This reflected a 28% surge in American export sales, which was enough to offset a 9% rise in merchandise imports.

However, in an ominous sign for the future, the nation’s surplus in the investment category shrank by 76% last year to a slight $4.78 billion, down from $19.76 billion in 1987.

Billions Spent Abroad

This decline reflected the fact that foreign holdings in the United States have increased to such an extent that foreign investment earnings now rival and, economists say, will soon surpass American investment earnings overseas.

As recently as 1981, the United States ran surpluses in its current account because the nation’s cushion in overseas investment earnings was enough to offset perennial deficits the country ran in merchandise trade.

However, in this decade, Americans have handed over billions of dollars to foreigners in exchange for imported goods. This development has helped transform the United States from the world’s largest creditor nation, a position now held by Japan, to the world’s largest debtor country.

Simply put, that means that foreigners now own more in U.S. investments than Americans hold in overseas investments.

With today’s report, U.S. net debt probably climbed above $500 billion at the end of 1988, up from from $368.2 billion at the end of 1987. The exact accounting of the U.S. net debtor position will not be released by the Commerce Department for several more months.

Lower Standard of Living

While former President Reagan maintained that the big rise in foreign investment was simply a sign that the United States offered excellent opportunities, many private economists contend that Americans’ standard of living will be reduced as the country is forced to transfer more assets abroad to service the debt to foreigners.

Today’s report showed that the current account deficit for the October-December quarter declined by 2.1% to $31.9 billion, compared with a revised $32.6-billion deficit in the third quarter.

The quarterly improvement came from a rebound in the services category to a surplus of $4.5 billion, after two consecutive quarterly deficits. Those deficits in services, which primarily reflect investment earnings, were the first in that category in 30 years.

But despite the rebound in the fourth quarter, economists say the trend is clearly in the wrong direction and they predict 1989 probably will be the year that the services category dips into deficit for the foreseeable future.

That will mean that for the country’s overall balance of payments to improve, the United States will have to start running surpluses in merchandise trade, something it last managed to do only once in the last 15 years.