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US trade deficit drops sharply to $43.6 billion in February

martin crutsinger, ap economics writer

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The U.S. trade deficit declined sharply in February as imports from China fell by a record amount and American exports rose for a third straight month.

The deficit fell to $43.6 billion in February, 9.6 percent below January's deficit of $48.2 billion, the Commerce Department reported Tuesday. Exports rose a tiny 0.2 percent to $192.9 billion. Imports dropped 1.8 percent to $236.4 billion as the flow of Chinese goods tumbled by $8.6 billion, led by a big drop in cell phone imports.

The politically sensitive trade deficit with China narrowed in February to $23 billion, 26.6 percent below the January total. President Donald Trump, who was sharply critical of Chinese trade practices during last year's presidential campaign, will hold his first meeting with Chinese President Xi Jinping later this week in Florida.

In a tweet last week, Trump said that his meeting at Mar-a-Lago with the Chinese leader would be "a very difficult one in that we can no longer have massive trade deficits and job losses."

During the campaign, Trump attacked China for pursuing unfair trade practices such as manipulating its currency. He said that if China did not reform, his administration would impose punitive tariffs on Chinese imports. So far, Trump has not followed through on those threats. But his meetings with Xi on Thursday and Friday could prove pivotal in determining the administration's future course in relations with China.

Trump often targeted China and Mexico for attacks on the campaign trail, blaming both nations for the loss of millions of good-paying U.S. factory jobs. Trump has said he will renegotiate the North American Free Trade Agreement with Mexico and Canada, which Trump called a "disaster" during the campaign. However, a draft letter that would begin the renegotiation process, which leaked last week, indicated that at least initially, Trump was taking a less combative approach in the renegotiations.

The small rise in exports in February was led by U.S.-made autos and autos parts, which climbed 1.5 percent to the highest level since July 2014. Exports of petroleum products were up 8.6 percent. Those gains helped offset declines in exports of commercial airplanes, farm products and industrial engines.

Paul Ashworth, chief U.S. economist at Capital Economics, said that January deficit jump followed by the sharp improvement in February reflected the impact of the Chinese New Year holiday. That prompted Chinese producers to accelerate deliveries of their products in January to get ahead of the shipping shutdowns that occurred because of the holiday.

"As things stand now, the monthly data point to a 3 percent annualized gain in real exports in the first quarter and a more modest 2 percent increase in real imports," Ashworth wrote in a research note. "As a result, we expect net external demand to make a modest positive contribution to overall GDP growth."

Ashcroft forecast first quarter GDP growth at 1.7 percent, down slightly from the 2.1 percent gain in the fourth quarter.

American manufacturers have struggled for more than a year with economic weakness in major export markets and a rising value of the dollar, which makes U.S. goods less competitive on foreign markets. However, economists believe both of those trends may ease in 2017, helping to lift the fortunes of American exporters.

The trade deficit is the difference between exports and imports. A larger deficit reduces overall economic growth because it means the country is buying more products from foreign producers rather than domestic companies. Last year's deficit was $500.6 billion.

The deficit with Mexico shot up 46 percent in February to $5.8 billion while the deficit with Canada, the other partner in NAFTA, dropped 38.1 percent to $2.1 billion.

The deficit with the European Union declined 18.6 percent to $9.4 billion, led by a 9.2 percent drop in the deficit with Germany.