US trade deficit likely to smash records

Sharp jumps in oil imports and the politically contentious deficit with China helped push the overall US trade deficit to $40.3bn in July, up from $40bn in June, and making it likelier than ever that the total deficit this year will smash all previous records.

In a separate unwelcome development for the Bush administration, new claims for unemployment insurance rose last week by 3,000 to a two-month high of 422,000. The figures only underline the message of the latest jobless figures for August, that even if the economy is starting to recover, it is not yet creating jobs. According to the Commerce Department, imports and exports rose in July, imports to a near record of $126.5bn, and exports to $86.1bn, the best performance since May 2001. The data has two implications: that an improving world economy and weakening dollar may make life easier for US exporters - but that the country's appetite for imports is more voracious than ever.

The deficit with China alone jumped by 13.5 per cent between June and July to a record $11.3bn. This is bound to fuel demands here that China allow a rise in the yuan, which some economists say is undervalued by up to 40 per cent. During a visit to Beijing last week, John Snow, the Treasury Secretary, pleaded unsuccessfully for such a step.

But the case for revaluation is less clearcut than it seems. A rise in the yuan would upset US consumers by increasing the cost of a vaste swathe of popular goods. It could also hurt sales at the many US companies, which have set up manufacturing operations in China. China's overall trade acccounts moreover are more or less in balance, very different from Japan in the 1980s, when a deliberately undervalued yen put the country in surplus with virtually every one of its trading partners. The US deficit with Japan rose in July to $5.9bn.

The July shortfall only confirms that the total trade 2003 deficit will set a record. At $244bn, the first half deficit was 25 per cent higher than the $195bn a year earlier, when the annual deficit reached $529bn.

Private economists are forecasting a current account deficit of over $500bn for 2003, which must be financed by foreign currency inflows of some $1.5bn a day. Simultaneously, following Mr Bush's tax cuts and his latest $87bn funding request for Iraq, the federal budget deficit could top $550bn for the 2003/2004 fiscal year, starting 1 October.

Meanwhile, the US appetite for imported oil continues to grow. July imports totalled 340m barrels, or 11m bpd, costing $9.1bn in that month alone.

The combination of soaring deficits and disappearing jobs will be grist for Democratic candidates campaigning for the presidency, as they focus on Mr Bush's handling of the economy.

The White House claims the free trade policies it advocates will stimulate growth, and thus jobs, at home. But critics say the only jobs being created are in China, not the US. As the elections grow near, Mr Bush may come under domestic pressure for more protectionist measures.