The U.S. trade deficit widened in July by the most in three years and the gap with China hit a record as the administration imposed tariffs on a range of Chinese goods, prompting retaliatory levies from Beijing.
The gap increased 9.5% to $50.1 billion, the biggest since February, from a revised $45.7 billion in the prior month, Commerce Department data showed on September 5.
Exports fell 1%, driven by steep drops in shipments of aircraft and soybeans, while imports rose 0.9 % in a broad-based gain.
A widening trade deficit would drag on growth in the third quarter after a narrower gap -- partly on higher soybean exports ahead of Chinese levies -- helped boost the pace of expansion in the prior period to the fastest since 2014. While other indicators suggest gross domestic product is on track for solid gains in the second half, the latest figures show how President Donald Trump’s tariffs may start to weigh on the economy.
“If we see tariffs and retaliatory tariffs, it will disrupt the flows of goods and services -- and you’ve seen some of that,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.
At the same time, another way to see the situation is that the U.S. economy “is straining to meet demand, domestic production can’t handle all the demand, so pulling in goods and services from abroad is a release valve to satisfy very strong demand,” Stanley said.
The goods-trade gap with China widened to a record $36.8 billion on an unadjusted basis, up from $33.5 billion in the prior month, according to the report.
The deficit with the European Union jumped to a record $17.6 billion from $11.7 billion, while the gap with Mexico narrowed to $5.5 billion from $7.4 billion.
The increase in the overall trade gap was the biggest since March 2015, the Commerce Department said. The median estimate of economists surveyed by Bloomberg called for a deficit of $50.2 billion.
Exports fell to $211.1 billion, led by a $1.57 billion drop in shipments of civilian aircraft and a $682 million decline in soybeans. Imports increased to $261.2 billion, boosted by computers, oil and vehicles.
"The U.S. trade deficit widened in July, sending an early signal that last quarter’s strength in net exports is set to reverse in the current period," said Tim Mahedy, Bloomberg Economics "The July data include the first mention of additional tariffs on Chinese goods, which should have pulled forward imports as domestic producers sought to get ahead of rising costs. However, the strength of the effect is dependent on the credibility of the source, and it is possible that the full impact of the tariffs will not materialize until later this year."
The Trump administration imposed duties on $34 billion of Chinese goods in early July, prompting immediate retaliation from Beijing, and another $16 billion in levies on Aug. 23. Negotiations with Canada to modernize the North American Free Trade Agreement ended without a deal by Friday’s deadline, though talks were scheduled to resume Wednesday.
The China tensions are poised to deepen, which could affect trade even more starting this month. Trump -- who characterizes the deficit as showing how past administrations’ policies have hurt the U.S. -- wants to move ahead with tariffs on $200 billion of Chinese imports as soon as a public-comment period concludes Thursday, Bloomberg News reported last week.
The trade conflict between the U.S. and China has disrupted traditional trading patterns for soybeans, the second-biggest American crop. Mexico is taking over as the top buyer of U.S. soybeans as China shuns the oilseed after imposing tariffs on American supplies in July.
The U.S. farm-trade surplus probably will drop 7.7% in the 12 months starting Oct. 1 amid the standoff with China, U.S. Department of Agriculture data showed last week. On Aug. 31, U.S. cash soybean prices fell to the lowest since the last recession ended.
Petroleum exports were a record $15.8 billion; petroleum imports of $20.3 billion were most since December 2014. Real petroleum deficit little changed at $11.9 billion.
Adjusted for inflation, goods-trade deficit widened to $82.5 billion from $79.3 billion