Merchandise Trade Gap Improves But Deficit Is Still Running High

THE nation's trade gap improved in July, but is still running as high as the Mississippi River.

The Commerce Department reported yesterday that the nation's merchandise trade deficit for July was $10.3 billion, down from $12.1 billion in June, when it was the highest in five years. The shift was mainly caused by a 4.6 percent drop in imports, while exports declined only 1.5 percent.

``The flood crest has faded but we are still left with a flood-like level of imports and a flood-like trade deficit,'' says Robert Dederick, chief economist at the Northern Trust Company in Chicago. The July trade gap was the third-highest this year and worse than any monthly deficit in 1991 or 1992.

Economists believe the July numbers indicate that the United States had bought more imports than the country could absorb in June. As a result of high inventories, importers cut back slightly in July. The key import drops took place in autos, auto parts, and consumer goods.

Because Japan and Europe are mired in recession, US exporters are still having difficulties. Without the boost from exports, Mr. Dederick says, the trade imbalance ``continues to be a drag on the US expansion.''

The surge in imports this year has been led by a jump in capital equipment, such as computers, office equipment, and large industrial machinery. Imports from this sector have been growing at a double-digit pace every quarter.

``The upturn in capital spending is a favorable sign, motivated by a desire to be more efficient in the world market,'' says Richard Rippe, chief economist for Prudential Securities Inc.

THE trade news also comes at a time when the US dollar, compared with major European currencies, is stronger than 12 months ago.

Richard Stuckey, chief economist for DuPont, says this will be detrimental to many multinationals as they near the end of the year. For example, a German subsidiary of an American company would get fewer dollars for its deutsche marks when it remits a year-end dividend to its parent company. Mr. Stuckey says he expects the dollar to get stronger once interest rates start to fall in Europe. But the opposite is true in Japan, where the yen has been strong compared with the US dollar.

Economists say that the high trade deficit may make it more complicated for President Clinton to get Congress to pass the North American Free Trade Agreement (NAFTA).

``Higher trade deficits would give opponents of NAFTA a clear example of the effects of import competition,'' Mr. Rippe says. ``They can use the deficits and higher imports as an example of what you can expect if you reduce trade barriers.'' He says the passage of NAFTA will increase US exports, not decrease them.

The president has enlisted the aid of former Presidents Bush, Ford, and Carter to try to convince Congress to pass the trade pact. If he is successful, Clinton may look west for his next trade initiative.

According to Australian Prime Minister Paul Keating, who met with the president on Tuesday, Clinton agreed that the US should ``assign a higher priority to its trading relations with the Western Pacific and the Asia-Pacific economic community.'' Mr. Keating, in a speech Wednesday at the Asia Society, said he left Washington with the conviction that Clinton is putting the US on the right path - ``a path west to the Pacific.''