Economic Indicators | Trade and Globalization

Trade Fax: February 19, 1998

  Trade fax    

Japan, China lead increase in U.S. trade deficit

The merchandise trade deficit rose 4.1% in 1997 to its highest level on record, the U.S. Commerce Department reported today. The aggregate U.S. trade deficit in goods hit $182 billion in 1997 (using the Census basis), an increase of $12 billion over 1996. Almost all of this growth is explained by rising deficits with China (up $10 billion) and Japan (up $8 billion).

The broader goods and services deficit rose 2.4% last year to $114 billion, the highest level since 1988. The unexpectedly sharp 24.3% increase in the monthly trade deficit in December is in all likelihood a harbinger of much bigger deficits in 1998.

Trade Balance -TableThe U.S. goods deficit with Japan increased from $48 billion in 1996 to $56 billion in 1997. Imports increased significantly in vehicles and office machinery, including computers. The continued growth of this deficit is a result of the 60% appreciation in the dollar in 1995, engineered by the U.S. Treasury and the Japanese Finance Ministry. The expanding deficit is also reinforced by continuing barriers to U.S. imports and investment in Japan.

The goods deficit with China expanded from $40 billion in 1996 to $50 billion in 1997. The most rapidly growing imports included office machinery and computers, apparel, footwear, and electrical machinery. As with Japan, much of the increase in the deficit with China reflects the cumulative effect of currency misalignments-in China’s case a 30% currency devaluation in 1994. China’s extreme forms of export promotion, combined with a surge in foreign investment by U.S. firms such as Motorola and Intel in factories making products for our market, have also helped fuel the growth in Chinese exports.

Competitive devaluations by China and Japan helped create the conditions that led to the Asian financial crises of 1997. Firms in newly industrializing countries such as Thailand and Indonesia and in more established countries such as Korea rapidly expanded production capacity in the early 1990s. China and Japan subsequently took markets away from these firms, leaving them unable to make payments on money borrowed to finance the new factories.

Because of the Asian crises, U.S. trade deficits will rise next year, perhaps by as much as $100 billion, according to many economists. An increase of this size would dislocate about a million U.S. jobs, mostly in high-paying manufacturing industries such as industrial machinery, electronic equipment, and transportation equipment.

U.S. trade deficits with the NAFTA countries declined in 1997 because of rapid economic growth in Canada and Mexico. Canada experienced a consumption-led recovery from a long recession that began in 1989 when the U.S.-Canada free trade agreement was implemented. Retail sales in Canada grew 6.4% in the year ending in September, pulling in U.S. imports.

The deficit with Mexico fell in 1997, as Mexico continued to recover from its deep recession. That country’s structural problems remain, however, and its rising overall trade deficit suggests a future drop in the peso.

Despite the improvement in regional trade balances, U.S. job losses due to NAFTA continued to increase in 1997. The U.S. Department of Labor has certified that 154,180 workers have lost their jobs (as of December 22, 1997) because production shifted to Mexico or Canada or because imports have increased from one of those countries. These workers, who are eligible for special NAFTA Transitional Adjustment Assistance, worked in 1,325 firms located in 48 states.

by Robert E. Scott


The Economic Policy Institute TRADE FAX is published upon the release of year-end trade figures from the Commerce Department. For more information contact EPI at 202-775-8810.


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