Trade Chasm Set Unwanted Record in '04

Gap Narrowed in December, But Annual Figure Ballooned

The U.S. trade deficit narrowed in December but was still the second-highest monthly figure ever. And that lifted the deficit for 2004 to $617.7 billion -- an all-time high that shattered the previous record, set in 2003, by 24 percent.

The trade report, issued yesterday by the Commerce Department, capped a year in which the voracious demand by Americans for imported goods drove the deficit to proportions all but unheard of for a major industrial country -- 5.3 percent of gross domestic product, up from 4.5 percent the year before. The widening gap has deepened worries that the United States is growing dangerously dependent on the capital lent by foreigners to cover the cost of the products they sell to Americans.

The December deficit decline to $56.4 billion from a revised record of $59.3 billion in November offered some hope that the trade gap's relentless surge might abate in coming months. Federal Reserve Board Chairman Alan Greenspan said last week that the deficit may soon start leveling off and possibly even shrink. Greenspan cited the dollar's fall against other currencies, which makes U.S.-made goods more competitive with products made abroad.

But yesterday's report offered insight into why a turnaround may be a long way off, because as the Commerce summary noted, imports increased nearly twice as much as exports last year. That is the opposite of what must happen for the deficit to narrow. Since the $1.764 trillion that the United States imported in 2004 is so much greater than the $1.146 trillion that it shipped abroad, exports must grow much faster than imports to close the gap.

"The U.S. trade deficit narrowed sharply, but let's not get carried away," said Joel Naroff of Naroff Economic Advisors, in a report to clients. "The level is still the second highest we have ever recorded . . . the deficit is still way too wide."

Though economists differ widely on the seriousness of the threat, the trade gap is a source of concern for several reasons. One is the risk of a crisis in global financial markets. The dollars that Americans pay for imports are invested by foreigners in U.S. securities such as Treasury bonds, and some analysts warn that as those foreign holdings rise into the trillions of dollars, so do the chances that market players could be stampeded into a panic sell-off that would send the dollar plunging and interest rates soaring.

Others cite the impact on jobs. With imports so much greater than exports, American businesses get undercut by foreign competition more than they are helped by demand overseas for their products. On that score, yesterday's report stirred especially sharp reaction from members of Congress.

"I am tired of watching ships arrive at the Port of Baltimore filled with cargo for U.S. consumers and then leave empty," Rep. Benjamin L. Cardin (D-Md.), ranking member on the House Ways and Means trade subcommittee, said in a statement. "We cannot allow a trade deficit of this magnitude to continue."

The Bush administration, which has sought to play down worries about the trade gap, did so again yesterday.

"What those numbers reflect is the fact that the American economy has been doing well relative to other economies," Treasury Secretary John W. Snow told the Senate Budget Committee. "And, as a result, we are importing more from those other economies because we are creating more disposable income than they are, relatively."

Accordingly, Snow put much of the onus for rectifying the problem on other countries, although he added that the United States could help tame the trade imbalance by increasing its savings rate. "It sure would be helpful if Japan and our other trading partners would grow faster," he said.

Much of the narrowing in December's deficit stemmed from a drop in petroleum imports that was attributable to an 11 percent fall in oil prices. Imports of other goods rose, raising the nation's total import bill by 0.1 percent, to $156.6 billion.

Economists were more heartened by the news on the export side. Shipments of U.S. goods and services increased $3.1 billion in December, to $100.2 billion, with the boost spread widely among capital goods, industrial supplies and consumer products. That result reinforced the optimism of analysts who believe the exchange rate of the dollar, which began declining in 2002, will soon exert a greater effect on trade flows, as Greenspan predicted.

The U.S. deficit remained predictably huge with one country whose currency is kept fixed against the dollar -- China. In December, the bilateral trade gap with China narrowed, to $14.3 billion from $16.6 billion the previous month, but for the year the deficit soared to $162 billion, from $124 billion in 2003.

China's currency policy has sparked complaints from the National Association of Manufacturers and labor unions that it is keeping the yuan's value artificially low, giving its products an unfair advantage in world markets. Anger in Congress over the issue has prompted some lawmakers to introduce legislation calling for across-the-board tariffs on Chinese goods.