U.S. Trade Gap Grew To New High In August

By Howard Schneider and Nell Henderson
Washington Post Staff Writers
Friday, October 13, 2006

The U.S. trade deficit rose to a record $69.9 billion in August, driven by high oil prices, a growing trade gap with China and rising consumer demand for imported goods from antiques to appliances, the government said yesterday.

The trade deficit was 2.8 percent bigger than in July, despite strong growth in exports, led by sales of agricultural products and aircraft, the Commerce Department reported. American companies sold $122.4 billion worth of goods and services overseas in August, an increase of $2.7 billion over the previous month.

American companies and consumers bought far more from abroad, however, with imports rising to $192.3 billion. That included $20.8 billion worth of crude oil, as demand remained strong through the summer despite prices that exceeded $77 per barrel in July.

The widening trade deficit is a further drag on U.S. economic growth, which has slowed sharply this year, in part because of a downturn in the housing market.

The trade report prompted several analysts to lower their estimates of recent economic growth to an annual rate of about 1 percent in the July-through-September period, or less than half of the 2.6 percent pace of the previous three months.

Such forecasts bolstered financial-market expectations that Federal Reserve policymakers will keep interest rates steady through the end of the year as they watch how the economy evolves. They hope the economy slows just enough this year to dampen inflation without sliding into a recession.

The latest trade-deficit figure "gives the Fed further reason to keep rates on hold," Jason Schenker, an economist at Wachovia Corp., said in an analysis for clients.

Schenker was among several analysts who think the trade deficit narrowed in September and is likely to shrink further in October because of the recent declines in oil prices and a drop in gasoline demand after the summer driving season. Oil settled at $57.86 yesterday on the New York Mercantile Exchange.

"While the sharp rise in the August deficit is a little disconcerting, this should be the high-water mark for the deficit this year," wrote Brian Bethune, a U.S. economist at Global Insight, a financial forecasting and analysis firm.

Even so, the trade deficit for 2006 appears on track to set another new high, surpassing last year's record $716 billion. Through August, the country had spent $523 billion more on imports than it sold abroad.

Democratic leaders, contending that theft of American ideas overseas is one factor in the trade deficit, sent a letter to President Bush yesterday, urging him to take immediate steps to protect American intellectual property. In a statement, House Democratic Leader Nancy Pelosi of California argued that lax enforcement of copyrights and patents is costing the U.S. economy $250 million a year.

"The president's failed economic policies have resulted in another month of record trade deficits, once again highlighting the need for a new direction," Pelosi said. "We must pursue an aggressive trade enforcement agenda so that U.S. businesses and workers do not pay the price for countries that refuse to play by the rules."

Bush said this week that his administration understood that problem and was working on it; Treasury Secretary Henry M. Paulson Jr. raised the concern in recent meetings in China.

Politically, the new figure from the Commerce Department highlights the continued trade gap with China, which widened to a record $22 billion, a 12 percent increase over the month before.

The mismatch in trade between the two countries has led to pressure from the Bush administration for China to let its currency rise in value against the dollar, which would make Chinese-made goods more expensive in world markets -- and American-made goods more competitive.

The trade gap is not entirely welcome news for China. The country reported yesterday that its September trade surplus was $15.3 billion, the second highest on record, after August, and a sign that efforts to tame the country's runaway economic growth are not taking hold quickly.

The flood of money into China has increased inflation and raised concerns about the overvaluation of real estate and other assets. China's leaders fear if they do not slow economic growth to a manageable pace, they risk a financial meltdown that could lead to social unrest.

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