Chinese imports help swell US trade gap to $490b

By RUPERT CORNWELL


America's huge trade imbalance with the rest of the world is set to break all records this year, after the government reported yesterday that the deficit in October alone rose to US$41.8b thanks in part to unprecedented imports from China.

The latest figures from the Commerce department translate into an annual deficit of over US$490b, far above even 2002's previous record deficit of $418b. The news, though largely expected, put new pressure on the already weak dollar, which has fallen some 40 per cent from its peak against the euro. It plunged to new record lows against the pound and the euro and the Hong Kong authorities intervened repeatedly to defend their peg with the US currency. The markets also reacted to comments by John Snow, the US Treasury Secretary, that the dollar's fall so far had been "orderly".

According to Sal Guatieri, an economist at BMO Financial Group, the expanding deficit reflects the vigorous recovery in the US economy, outpacing the upturn in other major trading countries and sucking in imports from the rest of the world. "This probably means that the dollar needs to fall further if the trade imbalance is to be stabilised," he said. "It looks as if the US will outperform most other industrial regions, which means we are bound to see a further deterioration in the deficit."

The strengthening economy was again reflected on the stock market on Friday, where the Dow Jones index held above the symbolically important 10,000 level for the second day running.

The prime culprit for the deficit was China. Though US exports to China reached a record US$2.9b, that was dwarfed by imports from Asia's new economic behemoth of US$16.4b. The gap is likely to prompt new demands from the Bush administration that Beijing allow the yuan - pegged to the dollar - to float higher on international currency markets. But the Federal Reserve chairman Alan Greenspan, for one, does not believe that such a move would have much impact. If the dollar price of Chinese goods rose, that would help lower-cost producers in Asia and elsewhere rather than US domestic manufacturers.

The figures show more clearly than ever how the US has become "consumer of last resort" for the rest of the world. The deficit with Japan, now supplanted by China as the largest surplus-holder with the US, shot up 25 per cent in October to US$6.4b. Canada, 85 per cent of whose exports go to the US, yesterday reported a C$7.3b surplus with the US for the same month.


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