Import Flood Elevates Trade Deficit

America’s trade deficit shot up to $10.2 billion in May as imports set a seventh straight record high. A flood of Chinese toys, shoes and clothing pushed the deficit with China past that with Japan, and there were big increases for Mexico and Canada, too.

The Commerce Department reported Friday that the deficit in goods and services was up 17 percent from an April imbalance of $8.7 billion, reflecting the continued surge in imports and a small setback for U.S. exports.

The Clinton administration sought to put the best face on the figures, arguing that they showed a vibrant economy growing more quickly than those of neighboring countries. But private analysts worried that the deficit will widen even further in the months ahead.

Nervous investors sent both stock and bond prices tumbling on Wall Street. The Dow Jones industrial average, which had closed above the 8,000 milestone for the first time earlier this week, dropped 130.31 points Friday to close at 7,883, erasing all of the week’s gains.

While the trade deficit was much worse than expected, traders blamed the market sell-off on other factors including a separate report showing investor confidence rose sharply in June, rekindling fears that robust consumer demand will trigger rising inflation pressures.

Wall Street wasn’t the only place with a case of the jitters. Emerging markets from Thailand to Brazil have faced heavy sell-offs in recent days stemming from fears about currency devaluation in various countries.

The turmoil raised the specter of a repeat of the 1994 Mexican peso crisis, but officials at the International Monetary Fund and the U.S. Treasury insisted Friday they were closely monitoring the situation and were not worried - yet - about a repeat of the financial crisis that engulfed Mexico.

Through the first five months of the year, the U.S. trade deficit in goods and services was running at an annual rate of $115 billion, even worse than last year’s $111 billion imbalance, the worst showing in eight years.

Robert Dederick, economic consultant at Northern Trust Co., said all the trends pointed to a higher deficit this year, with many of America’s major trading partners growing more slowly than the United States and the dollar’s continued strength making imports cheaper for Americans.

“While America’s heavy reliance on imports gives us a large trade deficit, it is acting as a damper on inflation because foreign goods restrain the ability of American companies to raise prices,” Dederick said.

For May, the deficit with China climbed 9.1 percent to $3.8 billion, the worst showing in seven months, as imports of Chinese toys, shoes and clothing all rose sharply. It marked only the third month that the deficit with China had exceeded that with Japan, although economists believe that in the near future China will permanently surpass Japan as America’s biggest trade problem.

For May, the deficit with Japan fell a sharp 25 percent to $3.6 billion. However, the improvement came after several months of big increases. This year, the deficit with Japan is running 14 percent higher than for the first five months of 1996.

The trade gap widened significantly with America’s two partners in the North American Free Trade Agreement. The imbalance with Mexico climbed 22 percent to an all-time high of $1.7 billion. The deficit with Canada more than doubled to $1.7 billion as imports from Canada climbed to $14.5 billion, the highest figure ever for a single country.

Rep. Marcy Kaptur, D-Ohio, said the huge deficit figures depicted the failures of NAFTA not covered in last week’s favorable administration report.

“The administration only wants to talk about exports. They never cover the import side of the ledger,” she said. “They are not telling the full truth about what is going on here.”

Commerce Secretary William Daley insisted that removing trade barriers will provide long-term benefits for all three countries.

“We believe NAFTA has worked,” he said.

In May, imports of goods and services set a seventh consecutive record, rising to $87.47 billion. Exports fell a slight 0.8 percent to $77.24 billion with some of that weakness reflecting falling prices for wheat and corn.

America’s foreign oil bill rose 8 percent to $5.3 billion in May as higher volume offset a slight decline in prices, which fell to a per-barrel average of $17, lowest in 15 months.