Oil imports drive US trade deficit to a record $70bn

Driven by the soaring price of foreign oil and an insatiable appetite for imports from China, the US trade deficit hit a record of almost $70bn (£37.7bn) in August, and now threatens to become an issue in the November election campaign here.

According to the Commerce Department, the deficit climbed to $69.9bn from $68bn in July, and far outstripped Wall Street estimates of $66bn. The 2006 trade deficit is now on target to hit an unprecedented $800bn, some 6.5 per cent of gross domestic product.

"This is a pretty bad figure," David Sloan of the financial analysis group 4Cast said, as the dollar slipped back against major currencies. "We are now expecting a pretty weak third quarter growth figure, significantly below 2 per cent."

The slide in the oil price since the summer, from its peak of $78 per barrel to $58, should bring some relief. But gains here may be offset by the rising deficit with China. Yesterday's Commerce Department figures show that the bilateral shortfall climbed to $22bn in August, up from $19.6bn the previous month. US imports from China jumped to a record of $26.7bn, eclipsing exports of just $4.7bn.

That deficit dwarfed that with the EU of $11bn, and was three times the size of the deficit with Japan, once the target for US accusations of unfair trade practices. That mantle of opprobrium has passed to China, amid complaints that Beijing has been holding its currency artificially low to maintain competitiveness of its products on the US market. It also purchases annually $200bn of US securities, providing crucial support for the dollar.

Last month's visit to China by Henry Paulson, the US Treasury Secretary, appears to have accomplished little, which may be seized upon by Democrats as proof of the Republicans' alleged indifference to export of US jobs.

Peter Morici, a professor of business at the University of Maryland, said: "President Bush refuses to make protectionism costly to China and instead has chosen the path of appeasement. The Chinese sense weakness and exploit it."