Current account trade deficit hits second highest level on record

Monday, September 18th 2006, 1:20 pm
By: News On 6

WASHINGTON (AP) _ America's trade deficit increased in the spring to the second highest level in history, reflecting a big jump in payments for foreign oil and a deterioration in the country's investment position.

The deficit in the U.S. current account rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent over the first three months of the year, the Commerce Department reported Monday.

The current account is the broadest measure of foreign trade. It covers not only trade in goods and services but also investment flows between countries. The deficit represents the amount the United States must borrow from foreigners to cover the shortfall between exports and imports.

Democrats called the widening of the deficit further evidence that President Bush's free-trade policies have left American workers exposed to unfair trade competition and a steep loss of manufacturing jos.

``Since President Bush took office, we have lost 3 million jobs and America's trade deficit in motor vehicles has climbed by approximately 20 percent,'' said Rep. Marcy Kaptur, D-Ohio, a frequent critic of Bush's trade policies.

``The recent announcement by Ford Motor Co. of production cutbacks and plant closings will only exacerbate the situation,'' she said. ``Still, the administration clings to the same failed policies.''

With just seven weeks left until the congressional elections, Democrats are hoping voter unhappiness with the rising trade deficit will help them win control of the House and Senate.

For its part, the administration is resisting efforts to raise protectionist barriers such as a bill sponsored by Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., that would impose 27.5 percent tariffs on all Chinese imports in retaliation for China's currency system.

U.S. manufacturers contend China is undervaluing its currency by as much as 40 percent to make Chinese goods cheaper than American products.

Treasury Secretary Henry Paulson, who will visit China this week for talks with top officials, said Monday that the administration wanted to see China make progress on a number of economic reforms. But the former Goldman Sachs chief executive sought to lower expectations for any breakthrough during his first trip to China as a member of Bush's Cabinet.

``I am not looking for immediate solutions or quick fixes to any particular economic issue,'' he told reporters in Singapore.

The deficits through the first six months of this year put the country on track for a fifth consecutive annual deficit, surpassing last year's mark of $791.5 billion. The record high for a single quarter was a $223.1 billion imbalance in the October-December period last year.

So far, foreigners have been happy to hold dollars in payment for American purchases of cars, televisions and foreign oil. But the concern is what would happen should foreigners at some point decide they want to hold less in dollar-denominated assets.

A rush for the exits by foreigners could send U.S. stock prices and the value of the dollar plunging and American interest rates sharply higher.

A separate report by Treasury on Monday showed that net foreign purchases of U.S. securities totaled $26.5 billion in June, the lowest amount since May 2005.

For the second quarter, the current account deficit as a percentage of the overall economy stood at 6.6 percent, the same level as the first quarter. The total deficit of $218.4 billion was $5.2 billion higher than the $213.2 billion first quarter deficit.

The deterioration was larger than analysts had been expecting. The deficit for goods rose by $2.6 billion, reflecting the higher oil prices, to $210.6 billion.

The deficit on investment flows increased to $4.1 billion, up $1.6 billion from the first quarter. As recently as a year ago, the balance on investment income was in surplus. Analysts expect this deficit to grow larger in coming quarters, reflecting the rising ownership of U.S. assets by foreigners.

The deficit on unilateral transfers, the category that includes foreign aid, increased by $900 million to $20.4 billion in the second quarter, while the surplus in services edged down slightly to $16.8 billion.