Trade Deficit Got Worse in August Thanks to Chinese Imports, Oil

The nation's trade deficit unexpectedly jumped 8.8% in August to $46.3 billion, the Department of Commerce reported, as imports surged while exports remained essentially unchanged.

The consensus view of economists surveyed by Bloomberg had been that the trade deficit would only rise to $44.3 billion in August from a revised $42.6 billion in July. The trade deficit totaled $49.8 billion in June and $41.8 billion in May.

In August, exports rose a scant 0.2% to $153.9 billion after a 1.9% increase in July. Meanwhile, imports jumped 2.1% to $200.2 billion after a 2.1% decline in July. So far in 2010, the trade deficit is $334.9 billion, up about 42.5% from the $235.0 billion total for the same period a year ago. That's up slightly from the year-to-July trade deficit increase of 41.6%.

In August, the real goods trade deficit, with controls for inflation, increased to $51.2 billion from $47.3 billion in July.

China: A Currency Manipulator?

It's easy to see the culprits in August's trade deficit spike: oil imports and trade with China.

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The petroleum deficit surged 5.7% in August to $21.98 billion, and the trade deficit with China skyrocketed 8.1% or by $2.1 billion to $28 billion -- a record.

News of the rising trade deficit with China undoubtedly will not be greeted warmly by Congress or the Obama administration. The U.S. government has long argued that China's policy of holding the yuan's exchange rate within a narrow band relative to the dollar results in an artificially low value for its currency, and artificially low prices for its exported goods -- helping companies in Asia's largest economy grab worldwide market share and increase the export revenues.

The House of Representatives has already passed legislation that makes it easier for U.S. companies to claim they've been hurt by China's yuan manipulation. However, the bill faces a tougher outlook in the Senate. Later this fall, the Treasury Department is also expected to release its report on whether it believes China is manipulating its currency

China argues that it must keep the yuan fixed at a low exchange rate -- presently about 6.66 yuan to the dollar -- to protect its embryonic companies and industries. The government in Beijing suggests that the best way for the U.S. to reduce its trade deficit with China is for Americans to consume less and save more.

Trade Deficit Weighs On U.S. GDP

Economists generally prefer that a nation run a trade surplus as opposed to a trade deficit, as it usually implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it's amassing capital for future investment and economic goals.

In August, the U.S. recorded trade surpluses with Hong Kong, $1.9 billion, up from $1.8 billion in July; Singapore, $1.1 billion, down from $1.2 billion; Australia, $1 billion, up from $900 million, and Egypt, $400 million, unchanged from July.

Trade deficits were recorded with China, $28.0 billion, up from $25.9 billion in July; OPEC, $9 billion, up from $8 billion; European Union, $8.1 billion, down from $9.9 billion; Mexico, $6 billion, up from $5.2 billion; Japan, $5.8 billion, up from $4.9 billion; Germany, $3.4 billion, down from $3.6 billion; Nigeria, $2.7 billion, up from $2.4 billion; Ireland, $2.5 billion, up from $2.4 billion; Venezuela, $2.2 billion, up from $1.8 billion; Canada, $2.2 billion, up from $1.4 billion; South Korea, $1.3 billion, up from $1 billion; and Taiwan, $1.2 billion, up from $1 billion.

If the trade deficit continues to rise as it did in August in the months ahead, it will certainly subtract from U.S. GDP growth. Unless business investment or consumer spending rise to compensate for international trade's increasingly large negative net impact on the nation, the economy's growth will be lower than expected.

However, the trade deficit could resume declining again, if demand for U.S.-made goods and services increases in emerging market growth in such countries as Brazil, India, Mexico, and Russia, and if oil prices fall, trimming the nation's large bill for imported oil.

And of course, the overall trade deficit would shrink further if our import-export gap with China resumed its decline, but contrary to the quips of Beijing's rulers, that's a complex issue that involves international monetary policy reform -- not just decisions by U.S. consumers to buy less and save more.