Trade Deficit Sets Record

Wednesday, March 14th 2007, 9:18 am

By: News On 6

WASHINGTON (AP) _ The deficit in the broadest measure of trade set a record for the fifth consecutive year even though the imbalance in the final three months of 2006 shrank, reflecting a lower foreign oil bill.

The Commerce Department reported that the imbalance in the current account jumped by 8.2 percent to $856.7 billion, representing a record 6.5 percent of the total economy. For the fourth quarter, the deficit shrank by 14.6 percent to $195.8 billion, the smallest quarterly imbalance since the summer of 2005.

Even with the fourth quarter improvement, administration critics say the soaring deficit for the whole year shows the failure of President Bush's trade policies to protect American workers. They contend that America is going into hock to foreigners at an alarming rate even though they have been more than willing so far to hold American assets in return for sales of televisions, cars and other goods to U.S. consumers.

The current account is the broadest measure of trade because it covers not only trade in goods and services but also investment flows between countries. It also represents the amount of U.S. assets that have been transferred into foreign hands to cover the gap between American exports and imports.

A deficit of $856.7 billion in 2006 meant that the United States was borrowing more than $2 billion daily to finance its trade gap. So far foreigners have been quite happy to sell to the United States and hold dollars in return, money that has been invested in U.S. Treasury securities, the stocks of American companies and other assets.

However, the concern is that if foreigners lose their appetite for U.S. investments, it could cause a big plunge in the value of the dollar, send stock prices crashing and interest rates soaring. If the adjustment were large enough, it could push the country into a recession.

While believing that the current account will have to come down in coming years, many economists also think the adjustment can be made at a more gradual pace that will not seriously disrupt the U.S. economy.

The $195.8 billion deficit in the fourth quarter was down from a third quarter deficit of $229.4 billion. The drop reflected a big decline in oil prices during the period compared to record oil prices hit last summer.

Many economists believe that America's trade deficit will start to show gradual improvement this year as long as oil prices do not surge again. Part of the optimism reflects growth in U.S. exports, which are being spurred by stronger economic growth in many of America's major markets and also a weaker dollar against such currencies as the euro.

A lower value for the dollar makes foreign trips for American tourists more expensive but it lowers the price of U.S. products on overseas markets, boosting exports.

The Bush administration has warned against a protectionist backlash in this country from the huge trade deficits. But Democrats, who gained control of both the House and Senate for the first time in 12 years, contend that the administration needs to do more to protect American workers from unfair competition from low-wage countries with lax labor and environmental regulations.