- The Washington Times - Friday, February 13, 2004

The trade deficit jumped 17 percent to a record $489 billion last year, propelled by an explosion in trade with China.

America’s $124 billion deficit with China is now twice its trade gap with Japan, three times its deficit with Mexico, and substantially above its $100 billion deficit with all of Western Europe.

But U.S. exports to China also are rising rapidly, and its exports to the rest of the world grew for the first time in three years last year, in large part due to the weakness of the dollar.

Jay Bryson, global economist at Wachovia Securities, sees signs that the overall trade deficit has peaked and will start to gradually improve as a result of the dollar’s decline, even if the deficit with China keeps soaring.

“Turning the trade deficit around is like trying to turn an aircraft carrier around. It will take time,” he said. “By the middle of the year you will start to see smaller deficits as growth in exports outstrips growth in imports.”

Exports grew by 4.5 percent last year, led by a 10 percent surge in exports of capital goods such as airplanes and heavy machinery during the fourth quarter.

Meanwhile, imports of autos and other consumer goods decelerated during the year both as a result of rising import prices — which increased by 1.9 percent — and apparently exhausted American consumers who may be tapped out after a record auto-buying binge in recent years.

With growth picking up overseas, Mr. Bryson expects U.S. exports to surge by 12 percent or more this year as U.S. companies capitalize on the renewed price competitiveness caused by the dollar’s 15 percent decline against other world currencies.

Trade with China, which has multiplied tenfold since 1990, has not been affected by the dollar’s decline because China fixes its currency against the dollar — giving it a substantial advantage over other U.S. trading partners.

The flood of imports from China includes many goods produced by Japanese, South Korean, European and even American companies, which have established plants in China to exploit the country’s low wage rates and currency advantage.

Under fire over the explosive growth in the trade deficit with China, the Bush administration has been coaxing the Asian giant to adopt a more flexible currency like those of other countries whose economies are among the largest in the world.

China has agreed to do so, but insists it first reform and strengthen its shaky banking system to withstand being buffeted by turbulent world currency markets that often whipsaw free-floating currencies.

“They have acknowledged the need to move to a flexible exchange rate,” Treasury Secretary John W. Snow told the Senate Budget Committee yesterday. “They rightly point out that they can’t do it tomorrow, because their financial structures are so rudimentary. But they are beginning to take steps.”

Mr. Snow said China is considering some halfway measures to raise the value of the yuan, short of eliminating the restrictions that have fixed the currency at 8.3 to the dollar since 1995.

“There’s increasing talk about maybe moving to a partial float or a currency basket,” he said.

Some Wall Street firms are predicting a one-time revaluation of the yuan raising its value by 5 percent to 10 percent this year.

While the increasing trade with China is often portrayed on the campaign circuit as a threat to U.S. workers, Ed Yardeni, chief investment strategist with Prudential Securities, said China’s rapid growth while the rest of the world was in recession served as an important source of strength and stability.

China, with growth exceeding 8 percent in recent years, has become an engine of growth for Asia and, with the United States, is driving a boom in growth worldwide that likely will last for years and usher in another era of prosperity, he said.

“China is proving to be a big catalyst for the U.S. industrial sector,” he said. U.S. exports to China soared by 28 percent last year as China snapped up aircraft, power-generating systems, and construction and farm equipment.

“While the U.S. is sucking in a lot of Chinese products, the Chinese market is opening up to U.S. goods” as a result of its December 2001 entry into the World Trade Organization, he said.

Chinese authorities are nurturing rapid growth to hold down social unrest and keep unemployment from rising. Because the country holds a quarter of the world’s population, the rapid growth has broad effect, from pushing up prices for oil, copper and other commodities, to creating a vast new market for cell phones and computers.

Last year, 112 million Chinese signed up for cell-phone service, and they are buying phones at the rate of 5 million a month, Mr. Yardeni said. The 2008 Summer Olympics scheduled in Beijing is driving fast-track development of big-ticket construction projects, he said.

“The current global boom started when China joined the WTO,” but really was unleashed last year after the global uncertainties created by the war in Iraq, corporate scandals and terrorist attacks dissipated, he said.

TRADE GAPS

The United States’ top five trade deficits by country in 2003:

CountryTrade deficit

China$124.0 billion

Japan66.0 billion

Canada54.4 billion

Mexico40.6 billion

Germany39.2 billion

Source: Commerce Department

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