The story that won’t die

The trade imbalance remains the issue that simply won’t go away. The U.S. can’t continue wracking up increasingly higher trade and current account deficits, some people argue. At various times over the past several years, market analysts and economists have warned that at some point the U.S. will have to pay the tab. Many analysts argue that will come in the form of a dramatically weaker U.S. dollar.

China remains the main culprit in this story, especially according to some of the folks in Washington D.C. The U.S. trade deficit with China is larger than with any other country, eclipsing the $200 billion mark in 2005.

“By all estimates, it seems the currency pair in most need of adjustment is dollar/yuan,” says Charmaine Buskas of Moody’s Economy.com. “The dollar is still very overvalued compared to the yuan. The U.S. sees China as having an unfair advantage due to a weak yuan.”

The Chinese authorities did revalue the yuan last year, bolstering its currency by 2.1 percent in July 2005. Since then, however, only modest appreciation in the neighborhood of 1.2 percent has occurred. The yuan continues to hover around eight per U.S. dollar ($0.125).

In 2005, the U.S. trade deficit screamed to a new record high at $723 billion, up from 2004’s $617.6 billion. Powell sees that expansion continuing. According to his data, the first three months of 2006 totaled $196.2 billion, vs. $172.1 billion for the same period in 2005.