By  on March 6, 2007

WASHINGTON — The rising trade deficit is an economic and political hot potato for the Bush administration as commercial ties with China grow.

Chinese imports, which many U.S. officials contend are unfairly supported by the Communist government, propelled the U.S.' highest deficit ever with a single country last year, $232.5 billion, or almost one-third of the total $763.6 billion U.S. trade shortfall.

The impact of the deficit — the difference between what the U.S. sells abroad and what it imports — and the change it signals in the apparel industry and the overall economy is a source of debate.

Some experts perceive great danger in the fact that the U.S. both buys foreign goods and depends on governments, such as China's, to lend the U.S. money by purchasing bonds. Others see the deficit as the byproduct of macroeconomic issues such as differences in savings and growth rates in countries and are less alarmed.

The deficit reverberates throughout the economy and the apparel industry. Domestic textile and apparel producers last year, battling imports, shed 48,700 jobs to employ 573,100 workers, continuing a decades-long decline. At the end of 2006, retail prices for apparel — more than 90 percent imported — fell 4.1 percent compared with five years earlier, though they did rise 0.9 percent last year.

"We have a need for resources in the U.S., and the rest of the world is right now very eager to provide those resources," said Andrew Bernard, professor of international economics at Dartmouth's Tuck School of Business. "A large fraction of the world is aging a lot more rapidly than we are and they're doing a lot of saving right now because they know they're going to need those resources in the not-too-distant future."

After selling their products in the U.S., foreign investors use the dollars to buy, among other things, government bonds and properties, including real estate. That means America is essentially borrowing money from the rest of the world to buy today, or selling possessions to fuel consumption.

"The only real danger is if the markets decide that the U.S. is not a good bet going forward," said Bernard, noting that U.S. productivity had risen, which should help offset the deficit. "The real concern is if there is a rapid shift in sentiment."Commerce Secretary Carlos Gutierrez stressed that the growth rate of the deficit had slowed, and 89 percent of the 2006 expansion came from petroleum products, which accounted for a record $300.3 billion in imports.

Speaking after an address to the Republican National Lawyers Association last month, Gutierrez said the U.S. should focus on the export side of the equation, increasing trade with the world.

"In order to export more, what we need is to get a lot of the economies around the world growing faster and adopting better pro-growth policies," he said. "That's the solution. It's to export more, not to put protectionist policies in place in order to import less."

Politically, the trade deficit promises to figure in the debate over whether to renew President Bush's trade promotion authority, which lets the president make trade deals while restricting Congress to a vote in favor or against. The negotiating authority is key if the administration is to continue its drive to bring down barriers to commerce with other countries through free trade agreements and multilateral discussions in the World Trade Organization.

Those policies have their detractors, who see the deficit as a debt that will have to be paid back for generations.

"Basically, George Bush's economic polices are mortgaging America's future," said Peter Morici, professor at the University of Maryland's Robert H. Smith School of Business.

The trade deficit also affects nations that rely on the U.S. as the primary consumer of their products, said Alan Tonelson, a research fellow with the U.S. Business & Industry Council, which lobbies on behalf of domestic companies.

"The world is becoming ever more reliant for its growth on a customer that's becoming ever more indebted and thus ever less credit worthy," Tonelson said. "That's a very dangerous situation. Everybody is addicted to exporting to us for their growth, especially China."

Even Chinese officials seem to have grown uncomfortable with the situation.

"Cutting the huge trade surplus is the priority task for 2007," said Chinese Commerce Minister Bo Xilai in January, according to the state-controlled media. "The yawning surplus with the U.S. and the European Union has strained China's foreign trade environment, triggering more frequent trade friction."To counter the economic and political concerns of China's surplus, Bo said the country would "decisively" reduce some exports and increase imports.

China is increasingly coming under fire for polices that critics say give its exports an unfair advantage, such as currency controls that restrain the value of the yuan, making goods from China cheaper. Congress has called for action against such policies and China has let the yuan appreciate slightly.

U.S. textile companies and other manufacturers maintain that they compete against Chinese goods that are unfairly subsidized, prompting the Bush administration to bring a case against China to the WTO. That case could take years to be completed. For the foreseeable future, however, the positioning of the U.S. in apparel and textiles, when it comes to China and the rest of the world, is basically one of imports, not exports.

Factories around the globe boosted imports to the U.S. by 2.6 percent last year to a total of 52.2 billion square meter equivalents, valued at $93.3 billion. Taking market share from countries such as Mexico and Canada, China now ships 35.7 percent of those goods.

On the other side of the ledger, U.S. apparel and textile exports totaled just $16.7 billion in 2006, and although tabulated somewhat differently than import figures, still show a yawning gap. The focus on imports has helped to transform where people work and what they do, resulting in a shift from manufacturing to the service sector.

"There's this perception that people go from a high-paid union manufacturing job to flipping burgers and it's just not clear that that's what's happening [overall]," said J. Bradford Jensen, deputy director of the Peterson Institute for International Economics, a nonprofit think tank. "Not all service jobs are retail jobs."

Jensen said the average worker in business services, including jobs in the areas of movie production, law, accounting and administrative support services such as call centers, is paid $43,000 annually while the average manufacturing worker makes $35,000.

But labor advocates maintain that Bush administration trade polices are weakening the manufacturing sector, which has lost 3 million jobs since January 2001.

There are government trade adjustment programs to help workers who lose their jobs to trade, but many complain they are insufficient, including former U.S. Trade Representative Mickey Kantor, who served under President Clinton."If you're 55 years old and a textile worker in North Carolina, and you lose your job and you have two kids in college, it's not enough to give you a few thousand bucks and say we're going to retrain you," Kantor said last month during a Carnegie Endowment for International Peace seminar.

Unease about jobs is just one of the by-products of the interdependence that has arisen out of the integration of the global economy, the end of the Cold War and the rise of technology, Kantor said.

"It's going to be a part of our lives forever, but what it's done is it's created enormous insecurity, not just about jobs, but the way lives have changed," he said.

That insecurity has helped make trade a potent political issue, especially given that Democrats, who have a majority in Congress for the first time in a dozen years, often oppose Bush trade polices in favor of workers' rights and environmental protections.

Ultimately, dealing with the gap between what the U.S. sells to the world and what it buys might require several approaches, including how the country handles trade-related changes and the competitiveness of the American workforce.

"If you want to start addressing trade deficits, do it with education, do it with training, do it with an adjustment policy that says whoever's displaced needs some support," said William Brock, who was USTR under President Reagan and also spoke at the Carnegie Endowment seminar. "We get a trillion dollars a year benefit from what we've done in the past on trade and it is insane to think that we can stop that. It is insane to think that the world's going to go away. It is insane to think that we can simply pull down the shades."

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