How trade deficit gives US a negotiating edge

In trade negotiations, the United States has an unrecognized advantage: It has a huge trade deficit.

Considering last year's $248 billion deficit, America's trade partners can't accuse the US of being especially protectionist. After all, those abundant US imports are an important economic benefit to surplus nations such as Japan, Canada, China, or the European Community. They create jobs.

Also, if a trade battle gets nasty, a US threat to impose restraints on imports has greater weight. Surplus nations have proportionately more to lose in the way of exports.

David Aaron, undersecretary for international trade in the Commerce Department, admits to that bargaining vantage.

This year, the US trade deficit will worsen again, partly because the price of oil has risen sharply. Charles McMillion, chief economist of MBG Information Services in Washington, predicts a deficit of $310 billion.

March trade data, due Thursday, will be deep in the red.

Another virtue of the trade deficit is economic: It moderates US growth. Americans buy imports instead of goods made in the US. That hurts some US industries, such as steel. It also encourages the Federal Reserve not to raise interest rates for fear of a rebirth of inflation.

The US economy is "running pretty much full speed," says Mr. Aaron, visiting Boston.

Such handsome US economic growth sucks in imports. But 40 percent of US customer nations are in recession, and others, such as most European nations, are growing only slowly, notes Aaron. Thus they are buying less in American goods.

Aaron expects the demand for US exports to rise as economies abroad pick up, soon reducing the trade deficit.

Meanwhile, the US pays for its trade deficits by piling up debts. Mr. McMillion estimates the US owes a net $2 trillion to governments, businesses, and individuals in other nations. The US was a $1.3 trillion debtor nation in 1987.

A broader measure of US international activities that includes investment flows, tourism, and royalties, as well as merchandise trade could be deeper in the red this year than the trade deficit. About $320 billion to $330 billion, McMillion reckons.

Last year this "current account" deficit was $233 billion and less than the trade deficit.

Part of this change is that the earnings of America's multinational corporations from their massive investments abroad were $22 billion less than what foreign firms got from investments in the US.

Aaron doesn't see any "doomsday scenario" arising from America's huge deficits and debts. They have been around for many years. Many foreigners like to have financial reserves and other investments in the politically stable and prosperous American economy.

But some economists wonder if bad US news, say a revival of inflation, would prompt a financially destabilizing outflow of foreign money.

Aaron also notes developments in two trade areas:

1. Negotiations with China over its entry into the World Trade Organization are tentatively scheduled to resume this week. Some lower-level Chinese negotiators had hinted that the accidental bombing of the Chinese Embassy in Belgrade might upset the talks. But not the top Chinese negotiators, Aaron says.

"We will need a better deal than the one negotiated in Washington," says the undersecretary, referring to a near-deal reached during the visit of Chinese Prime Minister Zhu Rongji to the US last month.

President Clinton wants an agreement, he adds.

2. The US will push for the launch of a Millennium Round of global trade negotiations when trade ministers of WTO nations meet next November in Seattle.

But the US prefers to negotiate on an issue-by-issue basis. Its major trading partners call for a comprehensive approach where concessions in one area, say agriculture, could be offset by concessions in another area, say government procurement.

Aaron believes the issue-oriented approach can bring quicker results, perhaps within three years. The last major trade talks, the Uruguay Round, took eight years to complete.

But many trade experts, including Washington trade consultant Harald Malmgren, fear a sectoral approach will keep negotiators from tackling trade barriers in politically difficult areas. These would include farm policy in Europe and Japan, and peanuts and sugar in the US.

Politicians need to be able to point to trade benefits to accept cuts in protectionist measures, he says.