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Economic growth slowed by trade gap

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At a basic level, trade deficits represent a loss of wealth for a country - money flowing abroad for goods and services produced elsewhere, supporting businesses and workers in other countries. The United States remains the world's largest exporter, and the planes, cars, equipment, food, services and other things it sells overseas accounts for hundreds of thousands of jobs at home.

But the U.S. imports even more, and the growing gap raises a number of sensitive political and economic issues for an economy struggling to regain momentum.

Some economists blame record trade deficits - and shortfalls in the broader current account - for the 2008 financial crisis as the country lived beyond its means. The deficit fell dramatically during the recession. But its return this year could amplify concern about U.S. overspending and dependence on imported oil, feed into political tension with China over its currency policies, and possibly undermine investor confidence in the dollar.

Overall, June imports topped $200 billion for the first time since the fall of 2008, while monthly exports fell to $150 billion, from $152 billion the month before.

Macroeconomic Advisers, a financial consulting firm, said its own analysis found that a June slowdown in the U.S. economy was the result of the trade deficit. The company said data indicate that imports will continue to rise - as they typically do after a recession - while exports are "trending sideways" said Ben Herzon, an economist with the firm.

It isn't the trade deficit alone that is undercutting economic growth or stoking talk of a double-dip recession. High unemployment, a drop in business inventory investment and a laggard housing market, among other things, are contributing.

But economists warn that countries cannot sustain ever-larger trade shortfalls, and the administration and the International Monetary Fund among others have been seeking ways for countries with persistent trade deficits to trim them.

The effort seems to be facing some stiff headwinds.

U.S. trade officials, for example, are betting that spending by foreign governments on roads, ports and other infrastructure will boost American companies. But it hasn't happened yet: The country's overall surplus in sales of capital goods fell from $13.4 billion in the first half of 2009 to $2.4 billion in the first half of 2010.

Exports of pharmaceuticals - another area U.S. officials point to as an export strength - have remained flat compared with a year ago, while imports have increased nearly 8 percent.

Still, the sharp jump in the June trade deficit might not be all negative.

"This may be business catching up to the fact that people ran down their inventories," said former IMF chief economist Mike Mussa, who is now a senior fellow at the Peterson Institute for International Economics. "It takes longer for stuff to arrive on the boat, so there may be a sudden surge [in imports] for a few months."

An increase in imports of industrial equipment and supplies, for example, might reflect business investment that lays the groundwork for future economic activity. For instance, a growth in imports of auto parts may presage an increase in U.S. auto production and ultimately exports.

"The trade deficit typically widens as the United States pulls itself out of a recession," and begins to import more oil, equipment and other goods, Francisco J. Sanchez, undersecretary of commerce for international trade, said in a written statement.

The debate over possible responses is a broad one - including calls for Obama to push more aggressively to open foreign markets, and suggestions by both labor and industry groups that the United States craft tax and other policies that more directly support American manufacturers. Some lawmakers on Capitol Hill have also targeted China's currency and other policies, alleging that they give that country's companies an unfair edge.

According to some analysts, economic data show the United States struggling to exploit some of its traditional advantages.

"We still think it is the 1950s and '60s and we are the dominant ones," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers. "Everyone is pouring money into R&D. What we are facing is an increasingly technologically competent world."

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