By Tom DiChristopher
The trade deficit swelled in January, registering the largest gap in more than three years, as exports to China and the European Union plummeted and oil imports surged.
Economists expected the deficit to widen only slightly. Instead, it leaped 4.18 percent from $50.4 billion in December, adjusted, to $52.6 billion in January, according to a report by the Department of Commerce.
The trade deficit with European Union expanded this month to $8.5 billion, a 40 percent increase over the January 2011 gap of $5.1 billion. Europe buys about one-fifth of U.S. exports.
European leaders are attempting to drive down debt, undoing the social welfare system that has helped to stabilize and propel growth in Europe in the process, said Adam Hersh, economist at the Center for American Progress, a liberal think tank. That decision will contribute to more volatile growth in the world.
Conversely, China is expanding its social safety net, which has limited fear of risk and spurred entrepreneurship, Hersh said.
The Chinese government recently revised its GDP growth targets downward to 7.5 percent, causing concern that demand for exports will slump.
The Chinese central government set the target to cool growth in some sectors and balance its economy. But local government officials in cities and townships make choices about new business and infrastructure to invest in, and they still have incentives to grow the economy quickly, Hersh said.
“Every time they set that target, they end up growing faster than that target,” Hersh said. He expects growth to slow, but not to 7.5 percent.
Steep declines in exports to China in January are not cause for immediate concern because those numbers are not seasonally adjusted and could represent an irregularity, such as a large, one-time purchase of capital goods, Hersh said. The report showed a 26 billion trade deficit with China, a 3.5 percent increase over the same month last year.
The oil deficit also grew to $67.5 billion in January. The price of oil ticked down from December, but oil imports by volume reached a five-month high.
Oil prices have since risen steadily. The average cost of a gallon of gas today is $3.76, up 15 percent from the average of $3.27 on January 1. The United States is the world’s largest importer of oil, so price increases hit its balance sheet particularly hard.
Americans imported a record number of cars in January. Industrial supplies and materials and capital goods also contributed to strong import numbers.
Economic recovery, particularly in employment, the housing market and automobile sales, is fueling imports, said Hugh Johnson, chairman and CIO of Hugh Johnson Advisors. However, if the trade balance continues to deteriorate beyond $55 billion, he said, job growth could begin to slow down.
“It’s not going to cripple the U.S. economy, because there are other things happening, but it would have a significant impact on U.S. growth,” Johnson said.
In the worst case scenario, competition for limited demand could lead foreign countries to close off U.S. export channels through tariffs and hidden trade barriers, said Alan Tonelson, research fellow at the U.S. Business & Industrial Council Educational Foundation.
Exports of services, capital goods and automotive vehicles and parts drove American export growth.
Despite these gains, Tonelson said manipulative trade practices, particularly in China, and a culture of borrowing from foreign creditors to purchase exports have contributed to the erosion of America’s manufactured goods export. The manufacturing trade deficit in January was $55.45 billion, larger than the total trade deficit.
“The fact that the manufacturing deficit on a yearly basis continues to exceed overall trade deficit ought to tell us that American domestic manufacturing remains saddled with major competitiveness problems,” Tonelson said.