<!DOCTYPE HTML PUBLIC "-//IETF//DTD HTML 3.2//EN">  <HTML> <HEAD> </HEAD> <BODY BGCOLOR="#FFFFCC" TEXT="#000000" LINK="#660000" ALINK="#003300" VLINK="#660000"> <TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="476">   <TR> <TD COLSPAN="2" ALIGN="LEFT" VALIGN="TOP">  <a href="http://economist-02-ng.iconnet.net/click.ng;spacedesc=joc_front_story_full"> <img src="http://economist-02-ng.iconnet.net/image.ng;spacedesc=joc_front_story_full" WIDTH="468" HEIGHT="60" BORDER="0" HSPACE="0" ALT="Advertisement"></a>  <IMG SRC="../images/common/dot_banr.gif" WIDTH="468" HEIGHT="13" BORDER="0" HSPACE="0"> </TD> </TR>   <TR> <TD VALIGN="TOP" ALIGN="LEFT" WIDTH="465">  <IMG SRC="../images/br_tpnws.gif" ALIGN=LEFT WIDTH="220" HEIGHT="29" BORDER="0" HSPACE="0" ALT="JOC Top News">   Trade gap threatens American prosperity July trade figures will show that things were worse than predicted BY GORDON PLATT JOURNAL OF COMMERCE STAFF  There is no such thing as a free lunch. The bill is coming due for America's insatiable appetite for cheap imports as corporate profit sinks, stock prices fall and the economy struggles to fight off the effects of the widening trade deficit. Plunging exchange rates have caused a flood of imports to enter the U.S. market at falling prices amid the spreading turmoil in emerging markets. This will again be evident when the U.S. Commerce Department reports its July trade deficit figures on Thursday. "The peak in corporate profits coincided with the collapse of economic growth in the Far East in mid-1997," said Brian Fabbri, chief economist for North America at Paribas in New York. "U.S. corporations lost profitable markets where rising incomes fed demand for U.S. products, and newly created industrial capacity raised global output of many manufactured goods," Mr. Fabbri said. Cheap imports absorbed market share and forced domestic manufacturers to lower prices to meet competition, he said. "Simultaneously, the domestic economy was operating at full employment, with attendant rising wage costs," Mr. Fabbri said. "Price constraints and rising costs thus squeezed corporate margins." Profits to fall Since costs are expected to escalate further, and the inflow of imports to the United States is expected to continue, corporate profit is projected to decline for the balance of 1998 and through 1999, he said. "At a time when the world economy is facing its biggest challenge, there's no leadership," said Earl Johnson, foreign exchange economist at Bank of Montreal in Chicago. President Clinton and Russian President Boris Yeltsin are threatened with impeachment. German Chancellor Helmut Kohl could be defeated and Japan has no effective leadership, he said. "Wall Street is concerned about the crisis spreading to Latin America. I don't see Russia turning around, and Asia is still there as a problem," Mr. Johnson said. The growing U.S. trade deficit is having a "contractionary" effect on growth in gross domestic product, and that threatens to become a bigger problem for the U.S. economy, if the financial crisis in Japan and emerging markets becomes more acute, Treasury Secretary Robert Rubin said last week in an interview to be published in the Sept. 28 issue of Fortune magazine. Mr. Rubin, however, reiterated previous forecasts for continued "solid growth and low inflation." "We've increased our trade deficit, and that's contractionary," he said. "If those problems get worse, that could have a far greater impact here." The situation has taken a turn for the worse in the past week, with the shock waves rattling markets throughout Latin America. Brazil late Thursday raised its interest rates to 49.75% to staunch a massive capital outflow; the Mexican peso has also come under attack. Even the surplus in services exports -- which the United States has come to rely on to cushion the widening merchandise trade balance ---- could be threatened if protectionist forces gain a foothold, economists warned. U.S. service exports into foreign markets show a 20-year history of trade surpluses, said David Strongin, vice president and director of international finance at the Securities Industry Association. Financial services exports reached a record $13.5 billion in 1997, up from the previous record $9.0 billion in 1996, he noted. "The long-term secular trend is for more liberalization of markets around the world," Mr. Strongin said. "Lately, however, we have seen a step backward." The concern is that there could be a general retrenchment "if you saw more Malaysias," he said. Malaysia has imposed currency controls, and even free-wheeling Hong Kong has intervened repeatedly in its stock and currency markets. The U.S. merchandise trade deficit probably widened by about $1.5 billion in July, according to a survey of key U.S. ports and freight carriers conducted by the Bank of Tokyo-Mitsubishi's New York office. Economist Michael Niemira said he calculates another drop in monthly U.S. exports, making the first time since at least 1986 that exports have been so consistently weak. And unlike some months in which U.S. exports have been weak to Asia but strong elsewhere, he said the survey of July activity shows that exports "were weak in all regions surveyed." "Exports to the Pacific-rim countries remained depressed," he said. Meanwhile, July saw imports jump again. Mr. Niemira's current import conditions index jumped 3.8% for July, its largest gain in the past year. Again, imports from Asia were strong into West Coast ports, including a pickup in perishable goods shipments into California. July was also very strong for imports at Great Lakes ports due to a hefty inflow of steel and steel products. The bottom line, the economist said, is that "there are no signs that U.S. export performance has stopped deteriorating or that the U.S. appetite for imports has waned. As a result, the trade deficit is likely to balloon further before stabilizing." The U.S. current account deficit, the broadest measure of the nation's trade performance, soared 21% to a record $56.5 billion during the second quarter this year as Asia's economic woes sapped exports, the Commerce Department said. In addition to a swelling deficit on trade in goods with the rest of the world, the United States posted a higher shortfall on investment income in the second quarter as more money was paid to foreigners on their U.S. investments. The broadest measure Current account measures not only goods and services trade but also investment flows between countries as well as direct government-to-government payments, usually grants like those the United States makes to Israel. That makes it the broadest measure of total U.S. trade activity. The second-quarter current account deficit was up from a previous revised record shortfall of $46.74 billion set in the first quarter. The report showed a significant shift in foreign investors' portfolios of U.S. investments in the second quarter, moving money out of U.S. stocks and into U.S. Treasury securities as investors sought safe haven in U.S. government-backed debt amid worldwide uncertainty. Foreign holdings of U.S. securities aside from Treasuries dropped by $7.49 billion from first-quarter levels to $69.53 billion. But holdings of U.S. Treasury securities, which had been reduced by $1.7 billion in the first three months this year, soared to $25.7 billion in the second quarter, the department said. So far, the United States has been able to attract the foreign capital needed to finance the current account deficit, said Mr. Johnson of Bank of Montreal. "However, the dollar has been weaker in the past three or four weeks," he said. "The dollar is not the first choice of global investors any more. If the dollar continues to weaken, it won't be as easy to finance this deficit in the next six months." <CENTER> <A HREF="./">joc home</A>  |  <A HREF="e25940.htm">next</A> </CENTER>      </TD>  <TD WIDTH="10" VALIGN="BOTTOM"><IMG SRC="../images/common/blnk_dot.gif" ALIGN="LEFT" WIDTH="10" HEIGHT="0" BORDER="0"></TD>  </TR> </TABLE> </BODY> </HTML>