- The Washington Times - Tuesday, April 12, 2005

The trade deficit surged to a record $61 billion in February on the escalating cost of imported oil and a flood of Chinese clothing imports, the Commerce Department reported yesterday.

With the deficit already threatening to beat by one-third last year’s astronomical $666 billion total, the possibility of political retaliation on Capitol Hill — especially over China’s currency manipulation to gain a competitive advantage — is growing.

The Senate last week overwhelmingly approved an amendment to impose stiff trade sanctions on China unless it stops keeping its currency artificially low. The legislation was withdrawn after sponsors won agreement to bring it up for a separate vote by the end of July.

The move came ironically as overall Chinese imports fell in February despite a 10 percent surge in clothing imports precipitated by a change in rules governing textile trade at the beginning of the year. Since a year ago, overall Chinese imports are up almost by half.

“Chinese trade is going to be a lightning rod in Congress in the coming months,” said John Rutledge, a former Reagan economic adviser and chairman of Rutledge Capital.

“I think this push for Chinese revaluation is a big mistake, but that won’t stop it from happening,” he said. Any move to sharply raise the value of the Chinese yuan might end up undermining growth both in China and the United States, he said.

“We don’t have enough history to know what will happen if China tightens monetary policy,” he said. “The truth behind the numbers is that the U.S. is losing its competitive advantage in technology and communications.”

The United States went from a net seller of advanced technology products to a net buyer three years ago, and the monthly technology deficit nearly doubled just in the past year.

Treasury Secretary John W. Snow also is cautioning against using a “sledgehammer” to get China to change. China already is committed to moving to a flexible exchange rate and has been working with the Treasury on plans to do so. But officials in Beijing indicate they are in no rush.

World finance leaders are expected to call for a move to a more flexible currency regime at a Group of Seven finance ministers meeting here on Saturday. China was invited to attend the last two G-7 meetings to show its growing importance in the world economy, but it bowed out this time around.

The rapidly widening U.S. trade deficit is seen as a threat to global growth and the stability of financial markets, because it could at some point prompt a free fall in the dollar. Market reaction to yesterday’s trade report was muted, however.

The dollar edged up yesterday, It recently has gained ground against the euro and Japanese yen, contributing to a widening of the deficits with Japan and the European Union in February.

Sharply higher oil prices also have caused the cost of imported oil to soar by 31 percent in the past year. Oil imports totaled $18.2 billion in February — the second highest ever — and that was before oil prices surged into record territory in the past two months.

Many in Congress see a China connection in the oil deficit, because growth in the use of cars in China has been a major factor pushing up demand and prices for oil worldwide.

National Association of Manufacturers Vice President Frank Vargo said the administration and G-7 must be more forceful with China.

“The current situation hurts countries playing by the rules and dangerously fans neoprotectionist embers” in Congress, he said.

Roger M. Kubarych, economist with HVB Group, said the administration and the Federal Reserve, for now, have no trade policy and in essence are keeping their fingers crossed that the financial markets will continue to function smoothly in the face of ever-increasing deficits.

The Fed views the deficit as a long-term risk, but at 5.6 percent of U.S. economic output, it already is well above the 5 percent threshold at which many economists thought problems would develop.

From the Fed’s point of view, the flood of inexpensive imports from China may be helpful right now because it helps to hold down inflation, Mr. Kubarych said.

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