- The Washington Times - Monday, September 18, 2006

America’s trade deficit increased in the spring to the second-highest level in history, reflecting a big jump in payments for foreign oil and a deterioration in the country’s investment position.

The deficit in the U.S. current account rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent from the first three months of the year, the Commerce Department reported yesterday.

The current account is the broadest measure of foreign trade. It covers not only trade in goods and services but also investment flows between countries. The deficit represents the amount that the United States must borrow from foreigners to cover the shortfall between exports and imports.

With congressional elections seven weeks away, Democrats are hoping that voter unhappiness with the rising trade deficit will help them win control of the House and Senate.

For its part, the Bush administration is resisting efforts to raise protectionist barriers such as a bill sponsored by Sens. Charles E. Schumer, New York Democrat, and Lindsey Graham, South Carolina Republican, that would impose 27.5 percent tariffs on all Chinese imports in retaliation for China’s currency system.

U.S. manufacturers contend that China is undervaluing its currency by as much as 40 percent to make Chinese goods cheaper than American products.

Treasury Secretary Henry M. Paulson, who will visit China this week for talks with top officials, said yesterday that the administration wanted to see China make progress on a number of economic reforms. But the former Goldman Sachs chief executive officer sought to lower expectations for any breakthrough during his first trip to China as a member of President Bush’s Cabinet.

“I am not looking for immediate solutions or quick fixes to any particular economic issue,” he told reporters in Singapore.

The deficits through the first six months of this year put the country on track for a fifth consecutive annual deficit, surpassing last year’s mark of $791.5 billion. The record high for a single quarter was a $223.1 billion imbalance in the October-December period last year.

So far, foreigners have been happy to hold dollars in payment for American purchases of cars, televisions and foreign oil. But the concern is what would happen should foreigners decide they want to hold less in dollar-denominated assets.

A rush for the exits by foreigners could send U.S. stock prices and the value of the dollar plunging and American interest rates sharply higher.

A separate report by Treasury yesterday showed that net foreign purchases of U.S. securities totaled $26.5 billion in June, the lowest amount since May 2005.

For the second quarter, the current account deficit as a percentage of the overall economy stood at 6.6 percent, the same level as the first quarter. The total deficit of $218.4 billion was $5.2 billion higher than the $213.2 billion first-quarter deficit.

The deterioration was larger than analysts had been expecting. The deficit for goods rose by $2.6 billion, reflecting the higher oil prices, to $210.6 billion.

The deficit on investment flows increased to $4.1 billion, up $1.6 billion from the first quarter. As recently as a year ago, the balance on investment income was in surplus. Analysts expect this deficit to grow larger in coming quarters, reflecting the rising ownership of U.S. assets by foreigners.

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