Trade gap: A surprise decline

NEW YORK (CNNMoney.com) -- The nation's trade gap fell unexpectedly in June, as strong exports more than offset higher oil prices and a rise in imports from China.

Imports outstripped exports by $58.1 billion in June, according to the Commerce Department report, down from a revised $59.1 billion deficit in May.

Economists surveyed by Briefing.com had forecast that the gap would rise to $61 billion.

The gap narrowed even as the trade gap with China, which has been getting increased attention as of late, rose to $21.2 billion, up 5.7 percent from May and 7.7 percent from a year earlier.

The trade gap with China has gotten particular attention due to safety concerns about a number of Chinese products. Toymaker Mattel (Charts, Fortune 500) Tuesday announced another recall of more than 7 million Chinese-made toys due to the danger posed by lead paint and loose magnets. The recall comes less than two weeks after it recalled 1.5 million other Chinese-made toys sold under its Fisher-Price brand that cost the company $30 million.

There have also been recalls in recent months of Chinese-produced toothpaste, seafood, animal feed and tires for light trucks, all due to concerns about the safety of the products. But even without the safety questions, there are rising concerns among many smaller U.S. manufacturers and some politicians about the ever-increasing trade gap with China.

The gap with China now accounts for 36 percent of the nation's overall trade deficit, up from just 30 percent a year ago. China is on the verge of overtaking Canada as the leading source of U.S. imports from around the globe. China's goods exported here reached $27.1 billion in June, just behind Canada's $27.6 billion.

Economists had expected higher oil prices, not the U.S.-China trade gap, to increase the overall trade gap in June. While the price of an imported barrel of oil rose 2.7 percent, the deficit from oil actually fell slightly in the month, the department said in its report. Meanwhile, exports rose to record levels for the third time in the last four months.

Exports rose 1.5 percent to $134.5 billion, helped by a weaker dollar that makes U.S. products more competitive in overseas markets. Imports rose 0.5 to $192.7 billion.

Jay Bryson, international economist for Wachovia, said the drop in the deficit is far more important to the country than the continued rise in the U.S.-China trade gap.

"Bilateral trade deficits don't mean anything. What matters at the end of the day is the overall deficit," he said. "I realize it causes political friction on Capitol Hill, but other than that, who cares?"

But University of Maryland professor Peter Morici said Americans should care about the U.S.-China trade gap and the fact that the Chinese yuan is essentially pegged at fix rates to the dollar, instead of trading freely.

"The bilateral deficit stubbornly keeps rising because China undervalues the yuan, and this makes Chinese exports artificially inexpensive and U.S. products too expensive in China," he said. "Efforts to curb China's exports through administrative measures have failed, and without meaningful exchange rate adjustments, the trade deficit will continue to bedevil U.S.-China relations."

Morici said that the U.S.-China trade gap now matches the U.S. dependence on foreign oil in terms of an economic problem for the nation. And he said that the nation can't keep ignoring historically high trade gaps, despite the June decline.

"The (overall trade) deficit reduces GDP by about $250 billion, and by cutting investments in research and development and labor skills," he said. "It cuts potential annual economic growth from about 4 percent a year to 3 percent.

Wachovia's Bryson said imports from China could fall in coming months due to safety concerns, but he thinks that is more likely to happen because U.S. companies worried about the cost of recalls and bad publicity will move production elsewhere, rather than U.S. consumers paying closer attention to what company makes the products or food they are buying.

"On the margin it could help to turn things around a little bit, but we'll have to wait and see how that plays out," he said.