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Trade Gap Expands

Despite Dollar's Fall, Deficit At Record Level

By Paul Blustein
Washington Post Staff Writer
Saturday, March 12, 2005; Page E01

The U.S. trade deficit widened in January to $58.27 billion, the second-highest monthly gap on record and the latest sign that the fall in the dollar has not yet started to shrink the chasm between imports and exports.

The trade figures, issued yesterday by the Commerce Department, showed that exports rose 0.4 percent in January, to $100.8 billion. But imports rose even faster -- 2.9 percent to reach $159.1 billion -- underscoring the difficulty of closing the gap.

A cargo ship is berthed at the port in Seattle yesterday. The U.S. trade gap widened in January to the second largest ever as imports swamped exports. (Kevin P. Casey -- Bloomberg News)

The figures defied predictions that the deficit problem will soon abate thanks to the cheaper dollar. The drop in the U.S. currency, which began in early 2002, has helped boost the competitiveness of U.S. goods in world markets, and some economists, including Federal Reserve Board Chairman Alan Greenspan, have argued that the dollar's slide will start having a major impact on the trade figures as consumers and businesses adjust their behavior.

But the U.S. appetite for foreign goods showed no evidence of slackening. To the contrary, imports of all kinds posted gains in January: shipments of foreign-made autos were up 2.8 percent; TVs and VCRs were up 12.4 percent; capital goods were up 1.7 percent. Moreover, the surge in January imports came despite a drop in the value of crude oil imports. Since January, oil prices have risen about $7 a barrel, leading economists to predict that the nation's import bill will be correspondingly higher in February and March.

"We continue to expect the trade deficit to get worse before it gets better," said John Shin, a senior economist at Lehman Brothers in New York. The danger, he noted, is that the widening gap poses "a lurking financial risk, across all markets," because as the United States imports more it must effectively borrow more from foreigners, who typically take the dollars they receive for their goods and invest them in U.S. Treasury bonds. America's rising indebtedness to the rest of the world has aroused fears of a panicky sell-off of the dollar together with U.S. bonds and stocks.

Yesterday's report triggered a renewed slide in the dollar, a day after markets were roiled by worries that Japan might shift some of its massive reserves of foreign currency from dollars to other currencies.

The euro rose against the dollar to as high as $1.3482, compared with $1.3417 late Thursday, then retreated to $1.3457 in late afternoon trading. Against the 12-nation European currency, the dollar lost 1.6 percent this week. Against the Japanese yen, the dollar slipped to 104.00 yen, from 104.13, finishing the week down 0.8 percent.

The Bush administration highlighted the positive side of the trade figures, as it has done in the past, by pointing out that the deficit stems from stronger growth in the United States relative to other major economies. Citing the sluggish expansions in countries such as Japan, Germany and France, Treasury Secretary John W. Snow said, "What that suggests clearly is that they are creating a lot less disposable income than we are and therefore they are not able to buy as much from the United States." Snow's comments, reported by wire services, came after a speech in San Antonio.

Shin and other private economists generally agree that the stubbornly high trade deficit can be attributed in no small measure to the robust U.S. expansion.

"The main message of the report is that, the weaker dollar notwithstanding, strong U.S. demand for goods versus its trading partners continues to drive up the trade gap," economists at JPMorgan Chase Bank said in an analysis of the Commerce figures.

The January deficit was exceeded only in November, when the gap hit an all-time high of $59.42 billion. For all of 2004, the deficit totaled a record $617 billion.

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