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Saturday, February 11, 2006 - Page updated at 12:00 AM

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Soaring U.S. trade deficit a cloud over robust economy

The Washington Post

WASHINGTON — The U.S. trade deficit soared to a record in 2005 for the fourth year in a row, according to a government report released Friday that provided a reminder of the dangers hovering over a generally robust economy.

The United States imported $725.8 billion more in goods and services than it exported last year, the Commerce Department said. That is up 17.5 percent from last year, and it is an all-time high not only in dollar terms but also as a proportion of the economy; the figure is equal to 5.8 percent of gross domestic product.

For December alone, the trade gap increased to $65.7 billion from a revised $64.7 billion the month before. That is the third highest monthly deficit ever.

In some respects, the trade deficit reflects the strength of the U.S. economy, at least relative to other major trading partners.

Because U.S. economic growth has been rapid in recent years, U.S. consumers are snapping up foreign goods of all kinds — autos, electronics and clothing being some of the biggest categories.

At the same time, relatively sluggish growth in economies such as the European Union and Japan has dampened demand for goods made in the United States. Thus even though U.S. exports rose 10.4 percent last year to $1.27 trillion, imports surged 12.9 percent to nearly $2 trillion.

The gap worries many economists because it means the United States must borrow heavily from overseas.

The dollars that Americans spend on imports are typically invested by foreigners in the bonds of the U.S. Treasury and mortgage agencies such as Fannie Mae and Freddie Mac, so the more the trade deficit widens and persists the greater U.S. indebtedness becomes.

That is why some analysts fret about a scenario in which foreigners would sell off U.S. securities en masse, causing interest rates to soar and the global economy to fall into recession.

However, overseas demand for U.S. investments last year was powerful enough to drive up the dollar against key currencies.

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"It's true that many of us have been concerned that foreigners will grow tired of financing these ever larger trade deficits, and so far there hasn't been much sign of that," said Jeffrey Frankel, a Harvard economist who served on former President Clinton's Council of Economic Advisers.

"But there are plenty of reasons to be concerned. We know (the trade deficit) means we're borrowing against the future, and that our children will have lower standards of living than they would otherwise. And just because a 'hard landing' hasn't happened yet doesn't mean it won't."

Analysts predicted the 2006 trade gap will be even worse, with Global Insight forecasting it could hit $810 billion, reflecting lagging economic growth overseas that could hold back U.S. exports.

"Trade is far and away the largest weight on the U.S. economy at present," said Mark Zandi, chief economist at Moody's Economy.com. "This is a risky time."

Improvement in the deficit this year may prove difficult because the U.S. economy is stronger than most of its trading partners, economists said.

"There is still significantly stronger growth in the U.S. relative to the rest of the world," said John Shin, an economist at Lehman Brothers. "That's been the dominant factor in terms of continued large trade deficits and that's not going to change much this year."

Information about 2006 outlook provided by The Associated Press. John Shin comments provided by Bloomberg News.

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