Oil Prices, Imported Goods Push Trade Gap to Record
Growth Forecasts Cut; Democrats Urge Action

By Peter S. Goodman and Nell Henderson
Washington Post Staff Writers
Wednesday, February 14, 2007

The U.S. trade deficit climbed to a record high for the fifth straight year, with 2006 imports exceeding exports by $764 billion, the Commerce Department reported yesterday. The gap reflects higher oil prices, which increased the nation's import bill, and American consumers' rising appetite for foreign-made goods.

The figures raised tensions in Washington, unleashing criticism on Capitol Hill of the Bush administration's pursuit of new trade deals. They also provoked a fresh round of demands for action against China, whose trade surplus with the United States swelled to a record $233 billion last year, according to the Commerce Department.

The data also prompted some economists to cut their economic growth projections. Several private analysts said the trade figures, combined with other indicators such as the prolonged slump in the housing market, imply the economy grew at a modest annual rate of 2.2 percent in the last three months of 2006 -- well below the 3.5 percent pace estimated earlier this month by the Commerce Department in a preliminary report.

Wall Street, as it often does, took cheer from bad news. Stocks rallied yesterday as the prospect of slower growth eased concerns that the Federal Reserve might bump up interest rates to fight inflation, and revived hopes in some quarters that the Fed might cut rates soon. But slower growth could also make businesses more cautious about expanding, meaning higher unemployment for U.S. workers.

In Congress, the new Democratic leadership used the record deficit to accuse the Bush administration of selling out the interests of American workers in pursuit of trade deals. In a letter to President Bush, top Democrats, including House Speaker Nancy Pelosi (D-Calif.) and Rep. Charles B. Rangel (D-N.Y.), chairman of the Ways and Means Committee, called the trade deficit "unsustainable," listing among its consequences "failed businesses, displaced workers, lower real wages and rising inequality."

The House leaders called on the president to submit an action plan within 90 days aimed at shrinking the deficit by removing barriers to U.S. exports and eradicating trading practices they regard as unfair.

A White House spokesman, Tony Fratto, said the letter was "not the most helpful approach." But he added that the White House would "work with Congress" in seeking approval for new trade deals.

"Trade is good for America," Fratto said. "There are dislocations for people when you trade. A factory closes, those are real people. But the benefits that accrue to all Americans are clear."

Increasing the pressure on Beijing, a bipartisan group of senators introduced legislation yesterday that would revoke China's permanent normal trade relations with the United States. That would restore the system, in place until 2001, that forced China to pass congressional review of its trade practices each year to maintain unhindered access to the American market.

The Bush administration is scrambling to stay ahead of congressional demands for action on China. Earlier this month, the administration announced that it would pursue a case against China at the World Trade Organization for allegedly subsidizing exports, a process that could eventually allow the United States to impose retaliatory tariffs.

Yesterday, U.S. Treasury Secretary Henry M. Paulson Jr. named a former Reagan administration deputy U.S. trade representative, Alan F. Holmer, as his special envoy to China for a dialogue on economic issues he launched last year.

Paulson has been under pressure to show results in his campaign to persuade China to allow the value of its currency, the yuan, to float freely. Manufacturers and labor unions in the United States accuse China of keeping the yuan artificially low to make its goods unfairly cheap on world markets, thereby taking jobs from Americans.

China asserts that it has been made a scapegoat for the loss of U.S. manufacturing jobs. Many of China's exports are produced in factories owned by U.S. firms for shipment to American stores, said Zhang Erzhen, a trade expert at Nanjing University.

Zhang echoed contentions from Beijing that China's trade surplus with the United States would be smaller if Washington relented on national-security restrictions that bar Chinese companies from purchasing some U.S.-made high-technology goods.

Despite the gap, the trade figures confirmed a trend the Bush administration has been highlighting as it seeks congressional approval for trade pacts with Colombia, Peru and Panama: In 2006, U.S. exports grew faster than imports, slightly limiting the growth of the trade deficit.

"Our booming export numbers show the competitiveness of American workers and companies," Commerce Secretary Carlos M. Gutierrez said in a statement from New Delhi, where he was meeting with Indian leaders in talks aimed at boosting trade. "Our nation's prosperity is dependent on engaging and winning in international markets." Gutierrez noted that American exports to China grew by 32 percent last year compared with 2005.

The Bush administration has pointed to robust exports as it seeks to persuade Congress to renew the administration's authority to negotiate trade deals and submit them to Congress for a simple up-or-down vote without amendments. That authority, known as "fast-track," is set to expire at the end of June, leaving uncertain both the fate of pending deals and the long-stalled trade talks known as the Doha round, which are aimed at lowering tariffs around the world.

"Trade agreements mean more exports," U.S. Trade Representative Susan C. Schwab said during a speech Monday at the National Press Club, as she urged Congress to extend the president's trade authority. "More exports mean better jobs."

But labor groups, lobbying against an extension of the president's trade authority, noted that imports dwarf exports so much that the recent gains are essentially a trifle.

In 2006, the United States exported $1.4 trillion of goods and services, 12.7 percent more than in 2005, according to the Commerce Department. But imports climbed 10.5 percent to $2.2 trillion, leaving the $764 billion deficit. Since 2001, the trade deficit has jumped 110 percent, from $363 billion that year.

"If President Bush deserves blank-check trade negotiating authority from Congress with this record, then Paris Hilton deserves to be Girl Scout of the Year," declared Alan Tonelson, a research fellow at the U.S. Business and Industry Council, an advocacy group that opposes the administration's trade policies.

Though a record trade deficit had been expected, an the acceleration in December caught economists by surprise, leading to the revision of growth forecasts. A bigger trade deficit means more U.S. demand for goods and services was satisfied by imports rather than by domestic firms.

"The economy is on the soft side," said Jan Hatzius, chief U.S. economist for Goldman Sachs. He forecasts below-average growth this year, with a rise in unemployment.

Some analysts fret that the trade deficit's continuing climb raises the possibility of a precipitous drop in the dollar. For now, China, Japan and many oil-producing countries are plowing the proceeds of their exports to the United States back into the country by buying U.S. Treasury bills, propping up the dollar and allowing the Fed to keep interest rates low. But if these nations get spooked by the size of the trade deficit and reduce their dollar purchases, the value of the U.S. currency could plunge, forcing interest rates higher and hurting the economy.

"Instead of producing products, we're just printing money," said Peter Schiff, president of Euro Pacific Capital, a brokerage firm in Darien, Conn. "We're in serious trouble."

Correspondent Ariana Eunjung Cha in Shanghai contributed to this report.

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