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1st annual trade gap drop in 6 years

Weak dollar helps bring 2007 deficit lower. December shortfall of $58.8 billion is narrower than expected.

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By David Goldman and Chris Isidore, CNNMoney.com staff writers

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Even with record imports, the U.S. trade gap narrowed in 2007, the first annual decline since 2001.
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NEW YORK (CNNMoney.com) -- The gap between the nation's imports and exports narrowed in December, according to a government report Thursday, leaving the gap for the year sharply lower and ending a five-year streak of record annual trade deficits.

The December gap came in at $58.8 billion, down from $63.1 billion in November. Economists surveyed by Briefing.com had forecast the gap would narrow to $61.5 billion.

A weak dollar during the year lifted exports, which allowed the 2007 trade gap to narrow by 6.2% to $711.6 billion, even as imports continued to increase due to the record price for oil imports during the year.

The average price of a barrel of imported oil hit a record $82.76 during the month, up 3.9% from November and 53.7% from year-earlier levels. The December spike in prices brought the full-year average price for oil imports to $64.27 a barrel, up 10.8% from 2006.

Americans spent an average of $8,350 for every man, woman and child on imported goods and services during the year.

Trade deficits have been rising steadily for 16 years, soaring from only $31.2 billion for all of 1991. The gap has reached record highs eight times in the last 10 years, driven greatly by the widening deficit with China.

The last time the trade gap declined briefly was in 2001, a recession year when a downturn in the economy trimmed the appetite for imports.

"The trade gap normally narrows when the economy slows," said Jay Bryson, international economist with Wachovia. "[With] continued strong growth in the rest of the world, dollar weakness, and slow growth in consumer spending ... the trade gap will continue to narrow."

If, as many economists believe, the U.S. economy has entered into another recession, it could again lead to a smaller trade gap this year - especially if overseas economies stay strong, which would allow U.S. exports to continue to grow.

"If oil comes down, you could see a significant decline in trade gap," said Bryson, who expects the trade gap to narrow in 2008, perhaps by as much as $80 billion.

"Even if the economy begins to improve, it will take a while before the dynamics begin to change."

By far the biggest source of the trade gap is China, which during the year passed Canada to become the largest source of U.S. imports. Because Canada is a buyer of U.S. exports, it remains the largest U.S. trading partner.

The trade gap with China was up 10.2% to $256.3 billion during the year, or about 36% of the overall gap.

"Asian exports are really taking off," said Peter Morici, a University of Maryland professor who believes that the trade gap will begin to grow again in 2008. "There is at least a 7% productivity gap between the U.S. and China."

Morici said that China's increasing productivity contributes to the trade gap with the United States that hurts the American economy. "A gap in exports compared to imports creates a drain on demand for U.S. goods that will push us into a recession," he said.

That U.S.-Chinese gap actually grew at a slower pace in 2007 than it has over the last decade, when it posted a compounded annual growth rate of 18% to rise from only a $56.9 billion gap in 1998.

In 2001, China passed Japan to become the country with the greatest trade imbalance with the United States. To top of page

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