- The Washington Times - Wednesday, January 12, 2005

The trade deficit soared to $60 billion in November and is a headed for a full-year record of more than $600 billion, defying hopes that a big drop in the dollar would narrow the gap.

The ballooning cost of oil imports and an avalanche of imports from China and other developing countries are among a host of factors keeping the deficit stubbornly high. Economists worry that the deficit is resisting traditional remedies, having bloated to historic and possibly dangerous levels over 5 percent of economic output.

The biggest surprise in yesterday’s deficit report from the Commerce Department was a 2.3 percent drop in exports during November. That came despite the dollar’s loss of half its value against the euro since 2002 and nearly as large drops against other major currencies that should be making U.S. goods cheaper and more attractive to overseas buyers.

The more competitive dollar had prompted some improvement in exports, which grew by 6 percent in the past year. But those gains were overwhelmed by a 20 percent jump in imports of oil, electronics, cars and other foreign goods.

“The trade gap remains a genuine, but not imminent, danger to economic growth,” said Oscar Gonzalez, economist with John Hancock Financial Services, noting that the unexpectedly large gap in November will shave growth in the fourth quarter.

How much longer the United States will be able to keep running such large deficits, which must be financed with loans from abroad, is not certain, he said.

“We’re in a waiting game,” he said. “Right now we have a voracious appetite, and the rest of the world keeps setting the table — and paying the bill — for us.”

Federal Reserve officials worry openly about the consequences of running not only an unprecedented trade deficit but federal budget deficits that also are in record territory over $400 billion a year.

“Unavoidable economic logic suggests that eventually this situation will prove unsustainable,” said Cathy Minehan, president of the Federal Reserve Bank of Boston, in a speech yesterday.

Economists say the budget deficit, which measures overspending by the government, is feeding the trade deficit, which measures overspending by the country as a whole.

Peter Morici, a business professor at the University of Maryland, blames the trade deficit for a disappointing economic performance and paltry job growth in recent years.

No substantial progress will be made in bringing the deficit down until China allows its currency to appreciate against the dollar, like other major U.S. trading partners have in the past three years, he said.

The U.S. deficit with China is the largest with any country by far, and the fastest growing. Running at $148 billion a year, the deficit with China accounts for a quarter of the overall trade gap.

China’s policy of fixing its currency, the juan, to the dollar has increased its advantage in penetrating U.S. markets. It maintains that advantage by purchasing dollars in the open market, thereby propping up the U.S. currency. Japan, South Korea and Taiwan do the same to a lesser degree.

Their currency intervention is providing the equivalent of a 23 percent subsidy for U.S. consumers on imports from Asia, Mr. Morici calculates.

“Without forceful efforts” to change Asian currency policies, he said, “U.S. workers will continue to face a tough job market and wages will continue to stagnate and fall.”

The U.S. deficit with the Organization of Petroleum Exporting Countries and other oil exporters, which is running at around $135 billion a year, rivals only China’s in size. A $30 billion jump in the oil deficit last year was fueled by a spike in oil prices to records between $40 and $55 a barrel.

While higher prices usually prompt consumers to cut back on imports, that has not happened with oil because there are no widely available substitutes for gasoline in cars. Because of that, economists expect imports of oil to only increase in future years.

The dollar’s slump since 2002 has exacerbated the oil deficit problem. Global oil prices are denominated in dollars, and OPEC producers have cited its shrinking purchasing power as a reason for keeping prices high.

“A falling dollar does not necessarily equal falling imports” for many goods besides oil, said Joseph P. Quinlan, chief market strategist at Banc of America Capital Management.

A large share of imports represents cross-border trade between affiliates in the same company, he said. This has been the case for decades for U.S. auto companies, which frequently ship back and forth between assembly lines in Detroit and nearby Canada.

But the practice has grown exponentially in the past decade through globalization of nearly every sector. Now, European automakers have American affiliates that perform the final assembly and sell cars in the United States. Shipments between two parts of the same companies are recorded as imports.

As much as 60 percent of U.S. imports from Europe and 80 percent of U.S. imports from Japan constitute transfers within multinational companies, Mr. Quinlan said.

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