U.S. trade deficit shrinks, but shortfall with China widens

The U.S. trade deficit narrowed slightly in July, but the gap with China, a focus of the Trump administration's "America First" agenda, surged to a six-month high.

The report from the Commerce Department on Wednesday came against the backdrop of an escalation in the trade war between the United States and China.

The two economic giants slapped fresh tariffs on each other on Sunday, fanning fears of a global recession. President Donald Trump on Tuesday warned he would be "tougher" on Beijing in a second term if trade talks dragged on.

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The Commerce Department said the trade deficit dropped 2.7% to $54.0 billion (£44 billion) as exports rebounded and imports fell. Data for June was revised down to show the trade gap shrinking to $55.5 billion instead of the previously reported $55.2 billion.

Economists polled by Reuters had forecast the trade gap narrowing to $53.5 billion in July.

The politically sensitive goods trade deficit with China increased 9.4% to $32.8 billion, with imports jumping 6.4%. Exports to China fell 3.3% in July. The goods trade deficit with the European Union jumped to a record high, with the shortfall with Germany the largest since August 2015.

Washington imposed 15% tariffs on more than $125 billion in Chinese imports, including smart speakers, Bluetooth headphones and clothing. In retaliation, China slapped additional duties on some of the U.S. goods on a $75 billion target list, including a 5% tariff on crude oil. Additional tariffs are due in December.

The trade tensions have rattled financial markets and triggered a global manufacturing recession.

U.S. financial markets were little moved by the trade data.

EXPORTS REBOUND

In July, goods exports increased 0.9% to $138.2 billion. But with China imposing additional tariffs on U.S. soybeans, beef and pork, exports are likely to decline in the months ahead. China's commerce ministry said in early August that Chinese companies had stopped buying U.S. farm products.

A survey of manufacturers on Tuesday showed a measure of export orders received by factories plummeted in August to the lowest level since April 2009.

In July, exports were boosted by consumer goods, which increased $1.5 billion.

Capital goods exports rose $0.8 billion. There were also increases in exports of motor vehicles. Exports of industrial supplies and materials, however, decreased $1.7 billion, with shipments of crude oil falling $0.5 billion.

Goods imports dropped 0.2% to $211.8 billion. Economists believe imports rebounded in August as businesses probably stocked up on Chinese goods following the announcement of further tariffs.

The U.S.-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants.

The import bill was pulled down by a $1.5 billion decline in capital goods imports. The drop in capital goods imports suggests business investment could remain weak in the third quarter after contracting in the April-June period for the first time in three years.

But imports of industrial supplies and materials rose $0.9 billion, with petroleum products imports increasing $1.0 billion. Imports from the European Union were the highest on record in July.

When adjusted for inflation, the goods trade deficit fell $0.7 billion to $85.5 billion in July. The so-called real trade deficit is slightly above the second-quarter average, suggesting trade could again weigh on gross domestic product this quarter.

Trade subtracted 0.72 percentage point from GDP in the second quarter. The economy grew at a 2.0% annualized rate in the last quarter, slowing from the first quarter's brisk 3.1% rate. The Atlanta Federal Reserve is forecasting the economy growing at a 1.7% pace in the third quarter.

In July, the services surplus decreased $0.1 billion to $19.7 billion, the lowest level since February 2016, as imports of services hit a record high.