The Disappearing U.S. Trade Gap : Economy: The $15.6-billion second-quarter deficit has almost vanished as a political issue. But the high budget deficit remains.


The U.S. trade deficit, once viewed as an embarrassing symbol of America’s fading economic might, has shrunk dramatically this year and almost vanished as an issue, with aid from an unlikely source: the recession.

The Commerce Department said Tuesday that the gap between exports and imports declined to $15.6 billion in the second quarter to the lowest total in eight years.

In the first six months of the year, the merchandise trade deficit has been running at a $60.5-billion annual rate, a huge fall-off from last year’s gap of $101.7 billion.


As a result, some optimists boldly forecast an end to the deficit that once rattled the financial world, with Americans again selling as much to other nations as they buy from them.

“It’s absolutely going to happen,” declared Ken Goldstein, an economist at the Conference Board, a business research organization in New York. “The question is will it happen as early as 1992 or 1993 or 1994?”

While that view is hardly universal, what has happened in 1991 is clear. Financially insecure Americans have held down purchases during the recession, and retailers have reduced their orders of foreign products. Aided by lower oil prices, the nation’s import bill is running almost $20 billion lower than it was last year.

At the same time, U.S. manufacturers have been selling more industrial machinery and other products overseas than ever before. Together, these phenomena have narrowed the trade gap, even as its equally maligned twin--the U.S. budget deficit--rockets toward $360 billion, according to new forecasts.

“The trade deficit will not be a major issue that economists or consumers or politicians worry about” in the next few years, predicted Lynn Reaser, an economist at First Interstate Bank in Los Angeles.

The latest trade figures are in line with this prediction. Exports in the second quarter rose by $3.2 billion to $104.1 billion, while imports were up only $438 million to $119.73 billion.


The result was the smallest quarterly deficit since the second quarter of 1983, when it was $15.4 billion. The deficit in the first quarter of 1991 was $18.4 billion.

The Commerce Department’s balance-of-payments figures, which exclude military trade, showed that the deficit with Japan narrowed during the second quarter to $9.5 billion from $11 billion between January and March.

Petroleum imports were down by $300 million to $12.9 billion during the second quarter as the price dropped sharply with the end of the Gulf War.

Does any of this matter? Yes it does, most economists contend. If American producers compete successfully with their foreign rivals, it keeps jobs in this country that might otherwise be switched overseas. There also is a financial consideration: A smaller trade gap reduces America’s indebtedness to foreign investors, who in effect have financed this country’s spending spree by loading up on U.S. Treasury notes and other assets.

“If we import more than we export to the rest of the world, the money has to come from somewhere--and what we tend to do is sell IOU’s to the Japanese,” said Robert Dunn Jr., a professor of economics at George Washington University.

Although the trade gap is generally expected to narrow over the long run, potential obstacles could impede progress in the months ahead.


A genuine economic recovery--leading to rises in employment, personal incomes and corporate profits--would spark U.S. demand for an endless catalogue of foreign-made goodies. Economies also could slow down overseas, especially in Japan and Germany, which would dampen their appetite for U.S. exports.

Longer term, important shifts in the U.S. economy offer promise of healthier trade balances with the rest of the world. American exporters are much more formidable than they used to be, aided by a dollar that is sharply lower than in the mid-1980s. Despite some strengthening of the dollar this year, the newer exchange rates still keep American companies competitive in price with foreign rivals.

In addition, many U.S. firms have enhanced their efficiency and quality, returning at least some prestige to the stamp “Made in the U.S.A.,” economists say.

American products--led by industrial equipment, aircraft and machine tools--now represent more than a quarter of all exports by the world’s seven major industrial countries, up from less than one-fifth in 1985, pointed out David Wyss, an economist at DRI-McGraw Hill in Lexington, Mass. Globally, U.S. exports are running $21 billion higher than last year, government figures show.

The shift is accomplished by firms such as Glass Strand Inc., a San Bernardino County producer of glass-making systems that was founded in the mid-1980s with an eye to overseas opportunities. The company, which has sold equipment to glass-fiber manufacturers in China and Taiwan, is pursuing deals in Eastern Europe and the Middle East that could add millions of dollars to its sales and more than double its 10-employee work force.

“As soon as we tie down one of the larger projects, we’ll have to bring in more people,” said Charles H. Coggin, president of the family-owned enterprise. “There will be a basic change in the company at that point.”


The key for Glass Strand, like many U.S. exporters, has been to create a specialized role in the global marketplace--in this case, offering affordable products to developing nations.

For all the recent success in exporting, it wasn’t long ago that economists lamented the “twin deficits” in U.S. trade and the federal budget. Some cited a link: The trade deficit was made possible because Americans were not taxed enough to pay for federal spending, the theory went in part, resulting in an under-financed federal government--and consumer public with income to unload on foreign-made luxuries.

Reports of a widening trade gap often drove down the stock market in the late 1980s--including a 108-point plunge three days before the Black Monday crash of 1987--and led to a near collapse of the dollar against the Japanese yen and German mark later that year.

The gap hit an all-time high of $152 billion in 1987. The United States hasn’t enjoyed an annual merchandise trade surplus since 1975.

Today, however, it appears that only one of the twin deficits--the budget deficit--remains a major economic problem.

Despite the receding concerns, questions still surround the future course of trade between the United States and some if its key economic partners.


Much of America’s success in cutting the trade gap has come across the Atlantic, where trade with Western Europe is now running at an annual U.S. surplus in the range of $22 billion, fueled by sales of machinery and industrial equipment. In the mid- to late 1980s, the United States ran $20-billion-plus deficits with Western Europe.

But it’s not clear whether the trend will endure. An effort by Western European nations to coordinate their economies gives rise to worries of a “Fortress Europe,” increasingly off-limits to U.S. products.

The Europeans, meanwhile, have their own fears. There is mounting uncertainty over trade with the Soviet Union. And rising interest rates in Western Europe, underscored by recent hikes in Germany, could translate into stronger European currencies. That would give American producers a price advantage.

Economic relations with Japan are another of the many question marks hovering over the trade picture. America’s deficit with Japan has narrowed but remains quite large--declining from $50 billion in the late 1980s to a $38-billion annual rate this year.

A key reason for the decline has been the emergence of transplant auto production, in which Toyota, Nissan, Honda and other car makers produce autos inside the United States. Between 1986 and 1990, the number of vehicles exported from Japan to this country fell from almost 3.4 million to 2.2 million, according to the Japan Automobile Manufacturers Assn. in Washington.

In the same period, the number of Japanese autos and other vehicles produced in this country soared from 509,101 in 1986 to more than 1.3 million last year.


Such realities prompt some to ask if the complex interlinks of the global economy are rendering traditional notions of imports, exports--and trade balances--obsolete.

“If a Japanese company produces a car in the United States, or a U.S. company produces a car in Japan, it’s not clear what’s the export and what’s the import,” Reaser said.

Beyond the economic complexities, a host of political and policy considerations will also influence the U.S. trade balance in the future. For example, the outcome of international trade negotiations and a trend toward freer trade in parts of Latin America all could affect this country’s success at selling abroad.

Other vagaries arise from the price of oil and the course of future exchange rates, which can be altered by war and political instability.

“As economists, we like to think that markets are open and free trade is the rule,” Wescott said. “But in fact, the world is a little more complicated.”


The consumer confidence index fell slightly in August. D2