Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).

I'm with President Bush on the Iraq war issue, but I have to confess to some wage-the-dog-like thoughts recently.  Of course, it's outrageous to think that the President would launch a war to gain political advantage at home or divert attention from the sputtering economy.  But Bush is certainly lucky that the Iraq crisis heated up last week, just as the year-end 2002 U.S. trade figures came out.  Because they were atrocious.

The raw numbers are bad enough.  Last year, as U.S. economic growth wheezed along at a 2.4 percent rate that everyone considers unsatisfactory, the trade deficit shot up by 21.5 percent, to $435.2 billion.  U.S. exports fell 2.5 percent, despite more than a decade of breakneck, NAFTA-like globalization. Foreign trade barriers remained high, growth most everywhere else remained anemic, and U.S. and other multinational companies focused most of their efforts on selling to American, not foreign customers.

Yet even though the U.S. economy was stumbling, U.S. imports surged ahead by 3.8 percent -- nearly 60 percent faster than overall growth.  And as foreign observers love to point out, many of these imports came from the foreign factories of U.S. multinational companies.

As usual, the goods sector of the economy performed miserably on the trade front, with its deficit growing nearly 13.4 percent in 2002, to reach $484.2 billion.  And manufacturing led the way down, registering a deficit of $373 billion -- 15.3 percent higher than in 2001.

But a big surprise in the trade numbers was the shellacking taken by America's service sector, which supposedly represents the future of the American economy.  It has always been looney to think that exporting services could make up for the trade-induced growth, job, and wage losses suffered by American goods producers, and especially manufacturers.  Most service industries and companies, after all, aren't tradeable beyond borders or even city lines.  They're locally oriented businesses ranging from restaurants to retail stores to medical offices and utilities.  That's why America's combined two-way goods trade is nearly four times greater than its combined two-way service trade.

Even so, the service sector's trade accounts worsened markedly during 2002.  Exports were up four percent, but imports rose 14.7 percent.  As a result, the service trade surplus shrank by fully 22.6 percent last year, to $49.1 billion.  This represents the lowest level since 1991, well before anyone had heard of the New Economy.

If these industries are really America's best hopes for future prosperity, we could be in even worse trouble than we realize.  For as standard international trade theory teaches (correctly) what a country trades most successfully, it will eventually produce most successfully.

To put these 2002 figures in perspective, in 1987, when everyone but doctrinaire free-marketeers worried that the United States was facing major competitiveness problems, the trade deficit hit a pre-New Economy peak of 3 percent of the overall economy.  In 2002, this figure stood one-third higher, at more than 4 percent of gross domestic product.  And if you adjust for inflation, as has economist Charles W. McMillion of MBG Information Services, the deficit now stands at 5.3 percent of the economy -- compared with its previous 1987 inflation-adjusted peak of 2.8 percent.  

Measuring the deficit as a share of the whole economy is critical because it indicates how sustainable America's foreign debts are.  Last fall, the Federal Reserve published a study showing that most countries run into major financial trouble when their overall international deficits hit four percent of gross domestic product.  In other words, these countries' foreign creditors begin fearing that their debts have become so high that full repayment is no longer possible.  And the creditors become much less willing to continue lending.  Sometimes they cut off the credit supply altogether, and even start selling the assets they hold in the debtor country, including their stockpiles of its currency.  And other creditors tend to follow suit.  If you're curious about how this rush for the doors can end, take a look at the economic devastation in Argentina.

Of course, the United States isn't Argentina.  Its national finances are in much better shape, and its assets and currency will long have a strong underlying appeal to investors even with today's towering U.S. debts.  America is correctly seen as geopolitically secure, politically stable, and economically productive.  The return on U.S. investments is still impressive, and the dollar still serves as the world's money.  So greenbacks are still needed to buy a critical mass of traded goods and services (including oil).

Essentially, no one can know just when America's trade deficits and foreign debts will reach the tipping point in investors? minds.  But here's what we know for sure:  First, the higher these deficits and debts become, the closer we get to that point.  Second, the Bush administration's trade policy is bringing this day ever closer -- by unilaterally offering to open the U.S. market to prospective allies in the Iraq/anti-terror campaign, and by pursuing a trade agenda focusing on low-income countries that can only become major suppliers to the U.S. market, not major customers of U.S. products.

A responsible trade policy should be trying to take the nation off this road to financial ruin, rather than speed along ever faster.  So would a politically smart trade policy.  Because even in a world full of dangers, the president will have to turn his attention homeward before too long.  Or does he think he can ignore indefinitely an electorate urgently needing more growth and better jobs?

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