U.S. Trade Gap Widens to Near-Record Level in June

The U.S. trade deficit surged in June to $11.31 billion--the second-highest monthly imbalance in history--the government reported Thursday, raising new concerns about the strength of the global economy.

The surprisingly large June trade gap also called into question recent efforts by the U.S. Treasury and the Federal Reserve, along with foreign central banks, to bolster the U.S. dollar’s value against Japanese and German currencies--a strategy that could ultimately make U.S. exports pricier. Until recently, a weak dollar had helped U.S. exports grow by nearly 16% this year compared to 1994.

The deficit--the difference between June exports of $64.5 billion and imports of $75.8 billion--jolted some observers who had predicted that the slowing U.S. economy would inhibit Americans’ spending on foreign goods and services and thus help narrow the trade gap.

But although the Commerce Department reported that June imports did in fact decline by $500 million, sales of U.S. goods and services abroad dropped even more--by $800 million, largely because the weakened economies of Canada and Mexico have clamped off demand from two of the United States’ three largest trading partners. Exports of cars, auto parts and machinery were especially hard hit.

In addition, the continued sluggish economic performance of nations in Asia and Europe, where U.S. companies depend on strong consumer demand, have worsened the export picture for the United States.

Continuing trade deficits are bad for the economy over the long term because they place more dollars in the hands of foreigners, reducing the currency’s value on foreign exchange markets and ultimately making domestic goods more expensive.

Looking for the silver lining, economist Susan Hering of Salomon Bros. said the rising deficit--up 2.4% from a revised May imbalance of $11.05 billion--is due partly to the fact that the U.S. economy is out-performing its trading partners.

“We are still running a substantial trade deficit and improving only slowly,” Hering said. “But we have to take heart that it is leveling off, unlike when it was continually deteriorating pretty much for the last year and a half.”

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The June deficit surprised analysts who were expecting exporters to reap the benefits of a dollar that was weak--at least until the U.S. government and foreign central banks intervened recently to boost the greenback’s value against the German mark and the Japanese yen.

But William Cline, senior fellow at the Institute for International Economics, said the positive effects of a weak dollar take a year or so to register fully in export growth. And now, even those benefits may be short-lived.

Some economists contend that the recent intervention was aimed at stimulating the flagging Japanese economy by forcing down the value of the yen.

But Treasury Secretary Robert E. Rubin has denied that the intervention was intended to accomplish this.

A number of economists argue that the June trade report should put pressure on the United States to back off from boosting the currency in favor of encouraging stronger exports of U.S. goods and services.

But Rubin and other Clinton Administration officials defended the intervention on the grounds that a stronger dollar is in the nation’s interest. A healthier dollar helps the U.S. economy in a variety of ways, including reducing inflationary pressures by making imports less costly to American buyers, the officials said. A more stable currency also helps hold down interest rates because it encourages more foreign investment in this country.

The dollar lost a little ground Thursday. In late New York trading, a dollar bought 97.05 yen, down from 97.78 late Wednesday, and 1.4728 marks, down from 1.4782.

The White House was quick to put a positive spin on the trade figures, pointing out that the trade deficit with Japan narrowed for the third straight month and that exports of goods overall are trending upward.

But the optimism was overshadowed by sobering details of the June trade deficit, which was surpassed only by April’s deficit of $11.42 billion. The U.S. trade deficit with Japan narrowed to a $5.3-billion deficit from $5.5 billion in May but is still high. Deficits with China and Western Europe worsened from May to June.

America’s foreign oil bill was up 1% in June to $5.09 billion. The increase came even though the price per barrel of crude oil fell slightly to an average of $16.81 in June, down from $17.39 in May.

Although exports of U.S.-made goods over the first half of 1995 were $285 billion, up 15.9% from the same period last year, imports have climbed more steeply to $370.4 billion, up 17.4%.

While monthly deficit figures can be volatile, the U.S. “merchandise trade deficit,” or the imbalance expressed in goods alone, is firmly on course to eclipse the 1987 record of $152 billion.

Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, noted that the good news is that the United States is running a $31-billion surplus in services trade--finance, telecommunications, computer and entertainment areas where the nation’s exports are growing quite strongly.

But the worsening trade picture with Canada and Mexico, the two North American Free Trade Agreement partners, is sure to add fuel to the arguments of NAFTA opponents who say the trade bill exports jobs, not products.

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With Mexico, the U.S. trade deficit in June was $1.6 billion, the same as in May. But the year-to-date deficit of $8.5 billion is a $10-billion turnaround from the slight U.S. surplus midway through 1994. The year-to-date goods deficit with Canada is $8.2 billion, or $3 billion higher than last year.

But Cline of the Institute for International Economics said NAFTA is on the right track.

“I do not think that the case for NAFTA was that we should have ever-rising trade surpluses with Mexico,” Cline said. “That was not sustainable. It has more to do with what we are efficient at, and whether we want a healthy economy on our southern border or a basket case.”

The Washington Post contributed to this story.