The Soro Enshi container ship, operated by A.P. Moller-Maersk A/S, sails from Yangshan Deep Water Port in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

U.S. Trade Gap Widens Most Since 2015; Record China Deficit

(Bloomberg) -- The U.S. trade deficit widened in July by the most in three years and the gap with China hit a record as the Trump administration imposed tariffs on a range of Chinese goods, prompting retaliatory levies from Beijing.

The gap increased 9.5 percent to $50.1 billion, the biggest since February, from a revised $45.7 billion in the prior month, Commerce Department data showed Wednesday. Exports fell 1 percent, driven by steep drops in shipments of aircraft and soybeans, while imports rose 0.9 percent 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.

U.S. Trade Gap Widens Most Since 2015; Record China Deficit

“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.

Soybean Drop

The 16 percent decline in soybean exports brought the total to $3.53 billion, though shipments year-to-date are still up 43 percent from a year earlier. Corn exports in July fell by about 11 percent to $1.28 billion.

Soybean exports “have much further to decline in the coming months to return to more normal levels,” Daniel Silver, an economist at JPMorgan Chase & Co., said in a note.

Net exports added 1.17 percentage point to GDP growth in the April-June period, the most since 2013. That helped GDP grow at a 4.2 percent annualized pace, the best in almost four years, which Trump credited to his policies.

Analysts see the reverse happening on trade in the third quarter. Silver expects net exports to subtract about 1.3 percentage point from the annualized pace of growth in the period, while Capital Economics sees a drag of “a bit more than” 1 point.

What Our Economists Say

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. 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.

-- Tim Mahedy, Bloomberg Economics

Read more for the full reaction note.

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 percent 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.