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U.S. trade deficit improves slightly in May

The trade deficit fell in May, reflecting a rise in U.S. exports to the highest level in history and a temporary decline in foreign oil prices. But the improvement was likely to be short-lived, with oil prices again hovering around record levels.
/ Source: The Associated Press

The trade deficit fell in May, reflecting a rise in U.S. exports to the highest level in history and a temporary decline in foreign oil prices. But the improvement was likely to be short-lived, with oil prices again hovering around record levels.

The Commerce Department said Wednesday that America’s trade imbalance declined to $55.3 billion in May, an improvement of 2.7 percent from April.

However, the deficit with China rose to $15.8 billion, the highest since last November, pushed upward by a 25.6 percent surge in imports of Chinese clothing and textiles.

Even with the narrowing of the overall deficit in May, the trade imbalance through this year’s first five months is running at an annual rate of $681.6 billion, 10 percent above last year’s all-time record of $617.6 billion. Analysts believe the underlying trends are so strong that the deficits this year and in 2006 will set new record highs.

“There is no question that the deficit this year will be worse than last year. A number of the improvements in May were temporary,” said Nariman Behravesh, chief economist at Global Insight, an economic forecasting firm in Lexington, Mass.

Analysts noted that while global oil prices declined in May, fears about adequate supplies have sent prices surging in recent weeks to record levels above $60 per barrel.

Critics blame the deficits on free-trade policies pursued by President Bush and his predecessors. They contend those policies have failed to protect American workers from unfair overseas competition, prompting American companies to move production to low-wage countries at a cost of more than 3 million manufacturing jobs over the past five years.

China, which has replaced Japan as the country with which the United States runs the largest deficits, is often singled out for much of the criticism.

The administration, anxious to win congressional approval of a new free trade agreement with six Latin American countries, has recently toughened its stance with China. It reimposed quotas to stem a flood of Chinese textile and clothing imports and is pressuring China to crack down on copyright piracy and to revalue its currency.

But private economists believe there is little chance China will allow more than a modest increase in the yuan’s value, which means China’s currency and that of other Asian currencies will likely remain undervalued against the dollar. If there is no change, Asian products will remain cheaper in America and American products will be more expensive in China.

For that reason, analysts are forecasting that the trade deficit will remain at record levels, raising concerns about the U.S. ability to continue depending on foreigners to hold ever-larger amounts of American dollars and dollar-denominated assets.

Should foreigners decide to reduce or even slow the rate of increase in their dollar holdings, it could mean a sharp fall in the value of the dollar as well as falling stock prices and rising interest rates.

None of those problems is evident yet. While the dollar is off its highs of early 2002, the decline has been gradual and in recent months the greenback has even been rising in value.

“We don’t seem to be having any trouble financing our large and growing trade deficits,” said David Wyss, chief economist at Standard & Poor’s in New York.

Wyss said foreigners are beginning to demand a higher return for their dollar holdings by pursuing outright purchases of U.S. companies such as the current targeting of Unocal by a Chinese oil company.

May’s trade performance was helped by strong export sales, which edged up 0.1 percent to a new record high of $106.9 billion. Sales of agricultural products, industrial supplies and consumer goods all set records.

Imports, after setting a record in April, dropped by 0.9 percent to $162.2 billion in May, reflecting a $1.3 billion decline in America’s foreign oil bill to $18.1 billion.

The improvement in oil came on the price side, with the volume of imports rising. But the average price for a barrel of crude dropped to $43.08, still the second highest level on record, but down from the record $44.76 average per barrel price set in April. The average oil import price tracked by the government is lower than the spot oil price set in market trading, which hit an all-time settlement high of $61.28 last week.

Analysts predicted the oil bill would swell in coming months by $3 billion or more, reflecting the recent gains in oil prices.

After China, the largest deficits were with Japan, at $6.6 billion, and Canada, at $4.8 billion. The deficit with the 25-nation European Union totaled $10.5 billion.