Oil, autos make up much of trade deficit

Monday, Aug. 15, 2005 | 12:01 p.m.

Five countries -- China, Japan, Canada, Mexico and Germany -- accounted for $39 billion, or two-thirds, of the $58.8 billion trade deficit the United States ran with the rest of the world in June.

Just two product categories -- oil and autos -- accounted for $33.7 billion of the deficit, or 57 percent. Oil is destined to drive the deficit even higher when July and August numbers are released, because oil prices have risen sharply since June. Crude oil prices closed at a record $66.86 a barrel Friday.

Still, the growing U.S. economy remained thirsty for oil even as the price jumped. There were 328 million barrels imported in June vs. 319 million barrels in May.

June's $17.6 billion deficit with China was a one-month record, surpassing the $16.8 billion in October. It is destined to widen, says Conference Board economist Ken Goldstein, who says the Chinese are pouring much of their trade windfall into high-tech research and development.

"You only need to go back three or four years, and we were running a trade surplus in advanced technology products," Goldstein says. In June, the U.S. ran a $3.7 billion deficit in advanced technology, he said.

China announced in July that it was allowing the yuan to strengthen for the first time in a decade by 2.1 percent, but the Chinese currency will likely have to rise much more to play any part in narrowing the trade deficit.

"Is this serious? It's damn serious," Goldstein says.

On the bright side, China has 1.3 billion people. About 650 million are closing in on having a disposable income of $10,000 a year or more, making China a larger potential market to sell into than Western Europe and the USA combined.

Some U.S. companies such as Yum Brands are success stories in China. The company opens a KFC or Pizza Hut in China almost every day. Its China division now generates $1 billion in revenue and $200 million in profit each year.

But most U.S. companies have struggled to significantly crack the Chinese consumer market, Goldstein says. For example, "The Economist" magazine says, the Chinese drink twice as much beer, on average, as the Germans. That seems like a market ripe for a big U.S. brewery such as Anheuser-Bush, yet Chinese beer consumption remains fragmented; consumers buy dozens of small, local brands.

This month, state-owned China National Offshore Oil Corp. bowed to U.S. political objections and withdrew its $18.5 billion offer for Unocal. But the Chinese are awash in U.S. dollars. They have been buying U.S. Treasury securities, helping to fund the U.S. federal deficit. But those dollars will increasingly be used to buy U.S. companies, Goldstein says.

That's not all bad, he says. Over the years, Japan has evolved into more of a trade partner than a rival. Tensions will ease when China does that, too, Goldstein says.