Trade Gap Ballooned In October

By Paul Blustein
Washington Post Staff Writer
Thursday, December 15, 2005

The U.S. trade deficit soared to a record $68.9 billion in October, surprising forecasters and rekindling worries about imbalances in global trade that menace the world economy.

The October trade gap, announced yesterday by the Commerce Department, compares with a $66 billion trade deficit in September, the previous high.

Many analysts viewed the September figure as an upward blip attributable to unusual factors, in particular the effects of Hurricane Katrina and a strike at Boeing Co. Few if any economists had expected the gap to widen in October. Among 62 forecasters surveyed by Bloomberg News before yesterday's release, estimates ranged from $59.5 billion to $65 billion.

But once again, imports raced ahead of exports. Thanks in large measure to increased sales of civilian aircraft, exports rose 1.7 percent, to $107.5 billion. But imports rose 2.7 percent, to $176.4 billion, partly because of the nation's higher petroleum bill but also because of an $800 million increase in purchases of foreign cars and a $400 million boost in imported consumer goods.

"Investors did a double-take" at the September trade deficit, Jay H. Bryson, global economist at Wachovia Corp., wrote in an e-mailed analysis of the report. "However, their eyes really bugged out this morning" when the October figures were released. The dollar dropped sharply against major currencies yesterday, though stocks rose.

If current trends hold, the deficit for 2005 will be about $100 billion more than last year's record $617.6 billion. In some respects, that simply reflects the continued robust growth of the U.S. economy, which draws in imports at a much more rapid rate than the more anemic economies of Europe and Japan -- a point the Bush administration has made repeatedly.

"Our economy is growing faster than some economies around the world," said White House press secretary Scott McClellan. The trade gap shows the need for other countries to expand at a healthier pace, he said.

But as the deficit continues to mount, so does U.S. indebtedness to overseas investors, because many of the dollars that Americans pay for imports end up invested by foreigners in the bonds of the U.S. Treasury or mortgage agencies such as Fannie Mae. Many of those investors are in the manufacturing powerhouses of Asia or in oil-exporting countries, and they consist of government-controlled central banks, private individuals and financial institutions.

"The American consumer loves to buy foreign-made goods and services, and as long as the consumer has that affliction -- for lack of a better word -- we're going to have to attract capital from overseas," said Drew T. Matus, senior economist at Lehman Brothers in New York.

However, he added, that "leaves you vulnerable to the whims of foreign investors" who might lose their appetite for U.S. bonds, thereby causing U.S. interest rates to rise and possibly triggering a financial crisis that would be felt worldwide. Although the chances of such a crisis may be small, "the idea that foreign investors might shift out of our assets -- whether they are private investors or official investors -- is not far-fetched at all," Matus said.

In reaction to the trade news and a report showing a rise in Japanese business confidence, the U.S. dollar fell against the yen, trading at 117.42 yen per dollar yesterday, compared with 119.90 yen Tuesday. The dollar also weakened slightly against the euro, to $1.1994 per euro, from $1.1962.

The dollar has nonetheless rebounded in 2005 from a steep drop over the previous 2 1/2 years. That has surprised some economists who expected the burgeoning trade deficit to push the dollar down further. One major factor behind the dollar's strength is the relatively higher interest rates available on U.S. bonds compared with European and Japanese bonds, which makes investors eager to put their money in the United States.

The monthly bilateral deficit with China also widened, to a record $20.5 billion, sparking renewed denunciations in Congress, especially from Democrats, of White House policies on trade with Beijing.

"The Bush administration has failed to craft an effective strategy to deal with China's unfair trading practices," said Rep. Benjamin L. Cardin (D-Md.), ranking minority member of the House subcommittee that oversees trade policy. "Because of this failure, American businesses continue to be at a serious disadvantage," as reflected in the deficit.

Cardin and other members of Congress focused much of their criticism on the administration's inability to secure a change in China's currency system, which for much of the past decade has kept the exchange rate of the Chinese yuan at a little over 8 yuan per dollar. Beijing's critics say that exchange rate makes China's already inexpensive goods even cheaper than they would otherwise be.

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