The continued increase in the US trade deficit has some labor and business leaders worried about where the country's economy is headed and calling for strong action to narrow the gap.

The Commerce Department reported that the year's trade deficit widened by 0.8% in May to $63.8 billion.

"If we don't take action, we're going to be losers in the end," said Tom Buis, president of the National Farmers Union at a summit held by the AFL-CIO and the US Business and Industry Council.

Two of the major areas of concern are the loss of American jobs and the continued shrinking of the industrial sector.

According to US Bureau of Labor Statistics, all but two states saw manufacturing jobs disappear between mid-1998 and early 2005. States hit particularly hard include California, which lost over 350,000 manufacturing jobs, and North Carolina, which suffered a drop of more than 220,000.

Critics contend that agreements such as the North American Free Trade Agreement and most-favored nation trading status for China have been a major factor in the job losses and the closing of factories.

There was some good news from the Commerce Department's report. Exports showed the biggest percentage gain, 2.4%, since December 2004, helped by a slightly weaker dollar.

The rosy export results were offset by record petroleum imports.

The dollar could be devalued even more, said William Greider, national affairs correspondent for the Nation magazine. Recent increases in interest rates, Greider argued, have kept the value of the dollar too high.

Robert Scott, senior international economist at the Economic Policy Institute agreed with Greider, saying that a decline in the dollar would be the best short-term solution to the trade deficit. A weaker US dollar is an incentive for foreign traders eying US markets.

Scott said more aggressive action could be taken, such as imposing a temporary across-the-board surcharge on imports, which he said is legal under World Trade Organization guidelines for countries facing severe trade deficits.

A surcharge could force China to revalue its currently depressed currency, Scott said, because China relies heavily on exports to the US. A boost in Chinese currency would help shrink the growing US-China trade deficit and help give American exporters a more competitive market.

"American leaders have no choice but to start restricting imports until a balance in trade is restored," said Kevin L. Kearns, president of the USBIC, which represents mostly small and middle-sized manufacturing companies.

Daniel Griswold, director of trade policy studies at the Cato Institute, disagreed with the concern showed over the trade deficit.

"When you look beyond the bottom line, there's a lot of positive news in this morning's report," he said. "Exports are up 12% over last year," he said, "That's nothing but good news."

Griswold said the trade deficit widened in large part because the price of oil increased, which he said is a passing phenomenon.

The increase in imports, Griswold said, is the result of an expanding American economy and robust US demand.

The growing role played by foreign investors who help keep the US economy afloat despite trade and federal budget deficits was also a concern for those at the summit.

Robert Blecker, a professor of economics at American University, said the US has to borrow about $800 billion of foreign money annually.

"Once people stop investing here, well, we're in trouble," Blecker said.

Numerous economists, including experts at the Economic Policy Institute and the Cato Institute, have suggested that if foreign investment in the US were to decrease, the economy could suffer a major slowdown. (Dow Jones)