Because of an editing error, an item on the front page yesterday included an incorrect revenue figure for a Senate bill. The Senate voted for $9 billion in tax increases as part of a $26 billion package of deficit reductions. (Published 12/12/87)

The stubborn U.S. merchandise trade deficit soared to a record $17.6 billion in October, a 25 percent increase over the September mark, as foreign products poured into American stores despite a lower dollar that was expected to turn the trade imbalance around, the government reported yesterday.

The increase in the trade figures, which surprised Wall Street forecasters and government officials alike, immediately sent the dollar spiraling to new lows in New York and London currency markets.

An initial panic over the trade figures sent stock prices plunging in London and in early trading in New York, where the Dow Jones industrial average on the New York Stock Exchange dropped as low as 50 points below Wednesday's closing figure. Stocks recovered their losses by midday, only to plummet again in the afternoon in a wave of selling triggered by computerized trading programs, reflecting what traders said was the market's deep confusion and anxiety. The Dow average was down 47.08 points at the end of trading yesterday. {Details, Page D8.}

As part of an administration-congressional effort to calm world financial markets, the Senate early this morning voted to raise revenues by $26 billion on the way to cutting the 1988 budget deficit by more than $30 billion. {Details, Page A16.}

"Between now and year end, if anybody tells you they can give you a strategy, you're talking to the wrong person," said Philip Cannistraro, executive vice president of Amivest Corp. in New York. "There is no strategy."

Administration officials tried to put the best face on the trade figures, which U.S. Trade Representative Clayton K. Yeutter called "disappointing, but not a cause for undue alarm."

Nonetheless, the high October figure paints a dismal picture for a year that was supposed to show a recovery after four years of record trade deficits. Earlier this year, Treasury Secretary James A. Baker III had predicted a $20 billion to $30 billion improvement over 1986's record $156 billion deficit.

Instead, it appears that 1987 will show another record trade deficit as the total for January through October stands only $10 billion less than the deficit for all of last year.

On Capitol Hill, the deteriorating trade figures appeared likely to intensify pressure on Congress to pass a trade bill early next year and speed adoption of the two-year $76 billion budget deficit reduction package under consideration in the Senate. "There's only one real policy for us to follow, and that's real deficit reduction," said Senate Budget Committee Chairman Lawton Chiles (D-Fla.).

House Speaker Jim Wright (D-Tex.) said the poor trade performance underscored the need to make a trade bill Congress' top priority next year. "The worsening trade figures and the declining dollar raise the specter of ... a sunset economy for America," he said.

Congressional interest in a trade bill appeared to have lessened in the aftermath of the stock market collapse of "Black Monday," Oct. 19, which forced congressional leaders and the White House into closer cooperation. But William T. Archey, international vice president of the U.S. Chamber of Commerce, predicted "a revitalization" of the congressional push for a trade bill.

Most analysts had expected the trade deficit to increase slightly from September's $14.1 billion level. Alan Sinai, chief economist of Shearson Lehman Bros., forecast that the deficit would reach $15 billion because of higher imports. Instead, it soared $3.5 billion above the previous month's figure to $17.6 billion, the highest mark since July, when the trade deficit reached $37.5 billion.

The problem was a surge of imports, which jumped by $4.3 billion to $39.4 billion in October. Paradoxically, that increase was blamed by government and private analysts on the sinking dollar that Reagan administration strategists had counted on to lower the trade deficit. The dollar has fallen about 50 percent against most major currencies over the past 33 months, which makes U.S. products less expensive, and therefore more competitive, both in competition with imports and in overseas markets.

But the higher value of foreign currencies also increases the dollar prices of foreign goods sold in this country.

Economists from both the U.S. Chamber of Commerce and the National Association of Manufacturers said the jump in import totals was due largely to increases in the price of goods from abroad rather than the volume of foreign goods brought into this country.

"We are in a surreal world in the international trade area where the improvements that are occurring are being masked by the continuing decline in the dollar," said NAM chief economist Jerry Jasinowski. "The continued decline in the dollar is bound to worsen the trade deficit, leading to further declines in the dollar."

But a lower dollar causes jitters on world stock markets because it increases the odds that U.S. interest rates will have to go up to attract more foreign investment to this country.

Jay Goldinger, an economist with the Los Angeles brokerage firm of Cantor Fitzgerald, said the markets were reacting negatively to uncertainty over the Reagan administration's position on the dollar.

"We don't know if the administration wants the dollar up, down or sideways, and the markets hate uncertainty. We've got to have some leadership out of Washington. The world is beginning to sense that the greatest country in the world doesn't care about its own currency," Goldinger said.

Jasinowski added that part of the import surge may be due to stockpiling, especially of foreign cars and personal computers, as buyers want to bring foreign goods into the country before the low dollar drives their prices higher. About one-third of the increase in imports was caused by imports of high-priced foreign cars by dealers who were filling their lots with autos for the new model year. Japanese cars alone accounted for $538.4 million in imports.

Commerce Undersecretary Bruce Smart, who acknowledged being "somewhat surprised" by the high trade deficit, said his analysis showed that the October trade deficit traditionally runs about 10 percent higher than the average for the first 10 months of the year.

While the imports soared, U.S. exports increased by just $800 million, to $21 billion -- the eighth straight month in which exports exceeded $20 billion.

But the all-important category of manufacturing exports decreased by $356 million, with the increases in overseas sales coming from farm goods ($342 million), fish products ($16 million) and nonmonetary gold ($20 million).

The October figures revealed a major change of U.S. trading patterns as the $32.6 billion deficit for the first 10 months of the year with the "four tigers" of Southeast Asia -- Taiwan, South Korea, Hong Kong and Singapore -- exceeded the $25.1 billion deficit with Western Europe.

Commerce Secretary C. William Verity singled out those newly industrialized countries (NICs) of Southeast Asia in his statement on the trade deficit, adding his voice to administration pressure on those countries to raise the values of their currencies in line with the devaluation of the U.S. dollar.

"Failure of those countries to permit the exchange rates of their currencies to appreciate is a major cause of the problem," he said.

The trade deficit with Japan also jumped in October to $3 billion, from $1.7 billion in September, and reached $50.2 billion for the first 10 months of the year. In Tokyo yesterday, the Japanese Finance Ministry issued trade figures for November showing Japan's overall surplus has dropped for the seventh straight month. The trade surplus with the United States also decreased 14 percent in November, to $4.2 billion, the Finanace Ministry figures showed. Japanese imports from the United States were up by 40 percent, to $2.8 billion, while its exports to the United States rose 1.7 percent, to $7 billion.

The U.S. trade deficit with Canada was $1.7 billion in October, a $100 million increase from the previous month.