By Kari Huus Reporter
msnbc.com
updated 9/30/2004 1:27:32 PM ET 2004-09-30T17:27:32

The U.S. current account deficit -- which includes the trade deficit and cross-border payments -- hit a record high of $166.2 billion in the second quarter of this year. At 5.7 percent of total GDP, it's in the zone where investors worldwide could begin betting against the dollar.

“If people start running away from the dollar… it could lead to a sharp decline in the dollar, which would be at very least unpleasant, and potentially very disruptive,” says Ted Truman, senior fellow at the Institute for International Economics.

When that might happen is a subject of debate among economists. The candidates both made modest proposals towards fiscal discipline, which is one of the core problems. But in the meantime, the deficit is fueling trade tensions with China that analysts fear could rival the U.S.-Japan tensions of the 1980s. The reason is that the deficit is expected to push $600 billion by year's end, and about one-quarter of it is due to massive imports from China.

China keeps its currency set artificially low, which critics say gives Chinese exporters unfair advantage by keeping their prices low by world standards.

The Bush administration has been under increasing pressure from protectionists to “do something” about China but so far rejected calls by unions and manufacturers that want to be shielded by quotas or high tariffs on Chinese goods.

In Congress, mounting pressure has taken the form of a bill that would threaten China with sanctions if it refuses to float its currency. China will resist heartily because it is heavily reliant on exports to keep its economy rolling fast enough to avoid massive unemployment. And China's underlying financial system may not be able to withstand a large correction in the yuan.

The bill is unlikely to move in the run-up to the election, and both candidates have distanced themselves from it so far. But the deficit, and the bill, will still be there when November elections are over.

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