By Paul Blustein
Washington Post Staff Writer
Friday, February 20, 1998; Page G01

The Commerce Department yesterday tallied the 1997 U.S. trade deficit at $113.75 billion, the highest in nearly a decade -- and if that sounds big, just wait until the Asian financial crisis starts to wreak its effects on this year's trade flows.

Asia's economic problems had a barely perceptible impact on the trade figures for last year, because the region's falling currencies and stock markets didn't immediately translate into changes in orders and shipments of exports and imports.

But economists predict the trade gap will surge to record levels this year and next -- as Asia's ailing tigers cut back their purchases of U.S. goods and the American economy sucks in more Asian products, which have become much cheaper as Asian currencies have plunged.

"Asia is in the tank, and we've only begun to see the impact on the trade deficit," said Lawrence Chimerine, chief economist at the Economic Strategy Institute in Washington. Chimerine predicts the trade gap will increase by about $40 billion to $50 billion this year -- which would put the total well over $150 billion.

A trade deficit of that size "is a big concern," he added, because it will translate into slower U.S. growth, some losses of high-skill jobs and a possible rise in protectionist sentiment.

In one harbinger of things to come, exports to South Korea fell 26 percent in November and December from the same two-month period in 1996. Although analysts cautioned against reading too much into the notoriously volatile monthly figures for individual countries, they said that such sharp reductions in U.S. exports to Asia will soon become commonplace, and many agreed that falling exports will have a bigger impact on the overall trade flows than rising imports.

Imports from crisis-stricken countries such as Thailand, Korea, Malaysia and Indonesia, while sure to increase substantially, will probably supplant imports from other regions such as Latin America -- so America's total imports may rise only modestly, according to the consensus among many forecasters.

But American exports to Asia -- which account for more than 30 percent of all U.S. exports -- are facing the double whammy of falling demand in the region and the impact of the dollar's strength, which has sent the cost of U.S.-made products soaring in Asian markets.

"The loss of exports should be viewed with extra weight, because exports are in our most dynamic sectors, with the most stable jobs and best paying jobs," said J. David Richardson, an economist at the Institute for International Economics in Washington, who authored a study showing that jobs associated with exports pay an average of 15 percent more than other jobs. "So we're losing quality as well as quantity."

But falling exports and a rising trade gap shouldn't pose a serious threat to U.S. economic prosperity, many economists say. Job losses in, say, a factory producing machinery for sale in Asia can be offset by job gains elsewhere in the U.S. economy, which has continued to generate employment at a robust pace -- as Clinton administration officials were at pains to point out yesterday.

"An increase in the trade deficit is not an adverse reflection on U.S. economic performance; quite the contrary," said Janet L. Yellen, the chief White House economist. The trade gap, she said, is in many respects "a reflection of [U.S.] strength in comparison with the performance of our trading partners," because when the United States is growing faster than other foreign nations, it will import more from those countries than they will buy from the United States.

In a briefing for reporters, Yellen and Charlene Barshefsky, the U.S. trade representative, sought to put a positive spin on yesterday's trade figures. Exports grew 10 percent to a historic high of $932 billion last year, Barshefsky pointed out, and Yellen observed that the $113.75 billion deficit in goods and services is only "a modest increase" over the $111 billion posted in 1996.

But Barshefsky expressed unhappiness over the trade results with Japan and China, two of Washington's most frequent sparring partners in trade disputes. The United States posted a record $49.7 billion deficit with China, and the $55.7 billion deficit with Japan, though not a record, was 17 percent higher than the 1996 deficit. U.S. exports to Japan fell, so Mexico supplanted Japan as the second-largest overseas market for U.S. products.

Barshefsky reiterated U.S. warnings that Japan must increase imports by stimulating its sluggish economy and scrapping burdensome regulations, and she vowed to "aggressively pursue market-opening initiatives" in China.

Beijing often complains that its trade gap with the United States is artificially inflated, and a number of U.S. experts agree. One of the problems is that U.S. exports shipped through Hong Kong to the Chinese mainland are counted as exports to Hong Kong, while Chinese products shipped through Hong Kong to the United States are counted as Chinese exports even though they are sometimes substantially modified in Hong Kong. But other analysts point out that Hong Kong has become part of China anyway, and they argue that Chinese exports to the United States are probably understated because of smuggling and other factors.

In any event, the rising deficit with China -- and the rising overall deficit -- is bound to cause political headaches for the administration as it seeks to pursue international economic initiatives such as maintaining and expanding trade ties with Beijing and Latin America.

But Barshefsky and Yellen countered that the Asian crisis and its effects on U.S. trade had, if anything, fortified the case for U.S. involvement in the global economy. "Asian markets are a chief purchaser of U.S. goods," Barshefsky said. "We can't sell there if they can't buy, and this is one of the reasons why it is so critical to do all we can through the [International Monetary Fund] to stabilize the situation in Asia."

Political fallout from the Asian crisis may grow as U.S. firms begin to feel the loss of exports to Asia. "A lot of the companies I talk to say they began to see declines in orders to Asia in December, and it affected their shipments in January," said ESI's Chimerine.

At the American Automobile Manufacturers Association, for example, "We don't have numbers yet, but anecdotally I've been told that auto exports from the United States into Asian markets have just about stopped," said Andrew Card, the organization's president. "It started near the end of the last quarter of last year, but in January, exports to Asia virtually dried up."