- The Washington Times - Friday, February 10, 2006

The U.S. trade deficit ballooned by $108 billion to a record $726 billion last year, reflecting wider gaps with nearly every nation and trading bloc from the European Union to China and Organization of Petroleum Exporting Countries.

Analysts see no end in sight to bloating deficits as Americans keep consuming more oil, cars and other items than they produce. A stronger dollar, solid economic growth and plentiful credit enabled Americans to indulge their healthy appetite for foreign goods last year and that is expected to continue.

“The trade gap is a canyon and I see no reasonable expectation of it narrowing anytime soon,” said Oscar Gonzalez, economist with John Hancock Financial Services.

A strong revival of U.S. exports, which last year grew by 10 percent to $1.3 trillion, and a 18 percent jump in the services surplus to $48 billion failed to stem the tide of red ink to the outside world, according to yesterday’s Commerce Department report. They were overwhelmed by a 13 percent surge in imports to $2 trillion.

So far, the U.S. has had little trouble attracting the financing it needs from investors and central banks in China, Japan and other countries to maintain the rapidly mounting deficits, which have been growing at double-digit rates.

“Our balance with the rest of the world has been a neat but potentially dangerous co-dependent game. We spend and they take our money,” Mr. Gonzalez said. “We’ll just have to keep hoping that the rest of the world, particularly China, remains happy” providing financing for the deficit.

Smooth relations with China are far from assured, however, as the U.S. deficit with the Asian giant — the largest with any nation — soared 25 percent to $202 billion and provoked protests from members of Congress yesterday.

China returns much of its export earnings to the United States by investing in U.S. bonds and other assets, supporting both consumer and congressional spending and helping to finance the trade and budget deficits.

But that has not deterred lawmakers from hinting at engaging China in a trade war if it does not raise the value of its currency or adopt other measures to curb exports that many believe are robbing the U.S. of manufacturing jobs.

One measure pending in the Senate would impose 27 percent tariffs on Chinese goods across the board if it does not quickly move its currency to higher levels against the dollar. Another recently introduced measure would subject normal trade relations with China to a vote in Congress each year.

The rapidly growing deficit with oil-producing nations, which skyrocketed 40 percent to $229 billion mostly on soaring oil prices, also has provoked calls for retaliation.

“Politicians likely will lay the blame for the U.S.’s gaping trade deficit on China and on oil,” said Jay H. Bryson, global economist with Wachovia Securities.

“China certainly could do more to open its markets and strengthen its currency. In addition, the U.S. probably would do well to rely less on imported oil,” he said.

But “if China were to drop off the face of the Earth tomorrow, the U.S. simply would import those goods from other countries,” he said. “Simply put, the U.S. runs a trade deficit because it spends more than it produces.”

The only way to produce a lasting improvement in the deficit is to slow spending and increase savings in the United States, while promoting stronger growth in U.S. trading partners, he said.

Frank Vargo, vice president of the National Association of Manufacturers, said he was “discouraged” by the explosive growth in the manufactured-goods deficit despite a second straight year of solid export growth. He attributed it to unexpected and unexplained setbacks in trade of advanced technology, where the United States was believed to have a competitive advantage.

Christian E. Weller, senior economist with the Center for American Progress, said yesterday’s trade figures were “worrisome” because of the stubborn trends and structural problems they revealed.

“Trade deficits have grown with all major trading partners” regardless of whether the dollar declined or remained flat against the partners’ currency, he said.

That indicates that the substantial recent strengthening of the euro and Canadian currency against the dollar, for example, which should have done much to curb the sizable deficits with those countries, produced little improvement, he said.

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