Trade deficit hits record high for fifth straight year

Associated Press • Mar 14, 2007 at 8:00 AM

WASHINGTON - The deficit in the broadest measure of trade hit an all-time high in 2006 and for the first time the United States even ran a deficit on investment income.

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. It marked the fifth straight year the current account deficit set a record.

Investment flows turned negative by $7.3 billion from a surplus of $11.3 billion in 2005. It was the first time investment income has been negative on records going back to 1929. That means foreigners earned more on their U.S. holdings than Americans earned on their overseas investments.

While the United States has run deficits in its trade in goods every year since 1976, until last year it had still been able to record a surplus in investments.

Analysts said that figure turned negative because of the large amount of U.S. assets that have been transferred to foreign hands over the past three decades to pay for the imported cars, clothing and electronic goods American consumers love to buy.

The Bush administration contends the large foreign holdings of U.S. assets are a sign of strength. But many economists worry that foreigners might suddenly decide they want to hold less in U.S. stocks, bonds and other assets.

A rapid withdrawal could cause the value of the dollar against other currencies, as well as U.S. stock prices, to plunge while pushing interest rates higher. If the disruption were serious enough, it could push the country into a recession.

"The hope is that the transition to a lower current account deficit goes smoothly, but the danger is that people stop loaning us money before they start buying our goods," said David Wyss, chief economist at Standard & Poor's in New York. 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. Democrats contend the current account deficit illustrates that America's control over its economic destiny is being transferred to countries like China and Japan that hold sizable amounts of U.S. government bonds and other assets. "Our economic security should not be in the hands of China or Saudi Arabia or any other entity because this administration can't control government spending and because they haven't effectively negotiated trade deals around the world," said Sen. Charles Schumer, D-N.Y., a leading critic of President Bush's trade policies. The new report indicated the current account deficit for the final three months of this year did show improvement, dropping by 14.6 percent to $195.8 billion after hitting a record of $229.4 billion in the third quarter. The improvement reflected a big drop in oil prices from their record highs this summer. Despite five straight years of the current account deficit hitting new records, economists said there were signs the imbalance may narrow a bit this year. Economist Nigel Gault with Global Insight predicted the 2007 current account deficit would shrink slightly to $807 billion, the first decline since 2001. A deficit of $856.7 billion in 2006 meant the U.S. was transferring more than $2 billion daily to foreigners last year to finance the trade gap. For all of 2006, the United States had a goods deficit of $836 billion, a surplus in services of $70.7 billion and a deficit in investment flows of $7.3 billion. In addition, the government paid out $84.1 billion in a category known as unilateral transfers, which covers foreign aid. The report also showed that foreign direct investment to buy or expand companies in the United States jumped 67 percent to $183.6 billion last year, the highest level in six years. This increase came in spite of the controversy over efforts by Dubai Ports World to take over operations at several U.S. ports. Todd Malan, president of the Organization for International Investment, which represents U.S. subsidiaries of foreign companies, said the increase showed foreigners still viewed the U.S. as an attractive place for investment. The Bush administration has warned against a protectionist backlash in this country from the huge trade deficits. But Democrats, who in November gained control of both the House and Senate for the first time in 12 years, contend the administration must do more to protect American workers from unfair competition from low-wage countries with lax labor and environmental regulations. --- On the Net: Current account report: http://www.bea.gov/newsreleases/rels.htm AP-CS-03-14-07 1600EDT

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