U.S. Trade Gap Widens Slightly in July--Update

The trade deficit with the largest U.S. trading partners, including China, widened this year, further evidence the Trump administration could use to advance its trade agenda.

The trade balance in goods with China, Mexico and Canada -- which collectively account for about 45% of total U.S. goods imports and exports -- have all expanded through the first seven months of 2017, compared with the prior year, the Commerce Department said Wednesday.

The goods gap with China expanded 6.8% through the first seven months of the year compared with 2016. The deficit, $33.6 billion in July, is approaching the deepest disparity on record. The gap narrowed much of last year from record levels reached in late 2015, reflecting appreciation in China's currency and lackluster U.S. consumer demand.

Those trends have reversed, causing the gap to widen again.

"China's currency is weaker and growth in the U.S. and other big economies has been performing better," said Mark Williams, chief Asia economist at Capital Economics. "Unless something causes the U.S. economy to slow, I'd expect that divergence to grow further."

A stronger global economy is driving an upswing in world trade flows. That should provide a tailwind to U.S. manufacturers and others, supporting domestic growth. Through the first half of the year, trade was a small net boost to overall economic growth. It was a drag on domestic growth during the previous three years.

Economists generally play down the significance of trade gaps between two countries, but it is a measure the Trump administration has used as a scorecard.

"President Trump seems to believe that the U.S. deficit with China is evidence in itself that China is doing better out of the trading relationship," Mr. Williams said. "A widening trade deficit could start him thinking about tariffs again."

The White House and Commerce Department didn't respond to requests for comment.

The goods-trade gap with Mexico has widened 11.9% so far this year. Though it narrowed in July, the gap this year is trending at its deepest point since 2008, when the trade-dulling effects of the recession were just beginning to take hold.

Broadly, strong international trade adds to the signals showing the economy is a good position eight years after the recession ended.

The trade balance with Canada was nearly level through seven months last year, and it is now widening, as well, though it isn't nearly as deep as the gap with Mexico and China.

The widening deficit with U.S. neighbors at least in part reflects strengthening demand from American consumers. North American Free Trade Agreement renegotiation talks could also be playing a role, especially in Mexico, said Jeffrey Schott, senior fellow at the Peterson Institute for International Economics. Officials from the three countries are renegotiating Nafta, following up on Mr. Trump's campaign promise to revisit the pact.

"The level of uncertainly and price fluctuations in oil and other commodities affects the data," Mr. Schott said. "There could be some hesitancy on the part of traders and investors until they get a clearer signal on what the U.S. administration is demanding and the future of Mexican policy."

Trade data can be choppy, and the balances with some other countries are narrowing. The goods trade gap with South Korea has narrowed about 30% through the first seven months this year. The gap is trending at its narrowest point since 2014.

The Trump administration's chief trade negotiator said Tuesday that he is looking to negotiate some changes to the Korea-U.S. free-trade agreement. Mr. Trump has repeatedly criticized the Korean agreement, complaining in particular about the doubling of the U.S. goods trade deficit with South Korea since 2011, the year before the pact took effect.

Country-specific data produced by the Commerce Department on each month is limited to the trade in goods. The U.S. also trades services, ranging from insurance to travel, and runs a global surplus in that category.

The overall foreign-trade gap for both goods and services increased a seasonally adjusted 0.3% in July from June, reflecting weaker exports. But through seven months of 2017, U.S. exports rose 6% and imports increased 6.7% compared with the same period a year earlier. The overall trade deficit expanded 9.6% compared with the first seven months of 2016.

One wild card with trade going forward is damage to ports and oil refiners caused by Hurricane Harvey and related flooding. Exports of petroleum were near record levels in July but those shipments could slow in the coming months.

William Mauldin contributed to this article.

Write to Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

September 06, 2017 17:35 ET (21:35 GMT)