US trade gap for year balloons to $726bn

US trade gap for year balloons to $726bn
By Christopher Swann in Washington
Published: February 10 2006 13:46 | Last updated: February 10 2006 16:49. Copyrighted by the Financial Times

The US trade deficit ballooned to a record $726bn in 2005, inflated by surging imports from China and soaring energy prices.

In December the US imported $65.7bn more than it exported, up from $64.7bn in November. The widening came in spite of a strong 2.1 per cent rise in exports. The increase was all the more impressive because volatile aircraft sales were down on the month. Imports grew by 1.9 per cent.

But with imports now almost 60 per cent larger than exports, American companies would have had to sell 3 per cent more abroad just to prevent the deficit from rising.

Over 2005, the deficit totalled 5.8 per cent of American national income. The current account deficit - a more inclusive measure that includes other income flows - was 6.5 per cent of national income.

Economists have long fretted that global investors will eventually become unwilling to finance the US deficit, without a fall in the dollar and a rise in US interest rates. So far, however, there has been no sign of demand for US assets weakening. Last year the dollar rose by 3.5 per cent on a trade weighted basis.

But Nigel Gault, the head of US analysis at Global Insight, a consultancy, said the risks were increasing to the US economy as the deficit continued to widen. “An accident has been a possibility for some time and the further we go down this road the greater the chances that it will come to an unhappy end,” he said.

The consultancy is expecting the trade deficit to rise further to $810bn this year. The politically sensitive bilateral deficit with China was $202bn in 2005 - a quarter of the total shortfall. The deficit was slightly lower on the month - falling from $18.5bn to $16.3bn.

US lawmakers have become increasingly restive over the rising deficit, threatening action unless China moves towards floating its undervalued currency and clamps down on theft of US intellectual property. Charles Schumer, a Senator from New York, has been proposing an increase in tariffs on Chinese goods to offset this alleged currency manipulation.

Imports of oil were less of a problem in December, falling to 311.5m barrels a day from 314. But during the course of the year, surging oil imports have blighted the trade figures.

Paul Ashworth, an analyst at Capital Economics, said the rising deficit with China was responsible for a third of the overall deterioration in 2005. “This will no doubt give protectionists in Congress some ammunition as the mid term elections approach,” he said.

Overall, the rising deficit detracted 1.2 per centage points from economic growth.