updated 12/12/2007 8:54:30 AM ET 2007-12-12T13:54:30

The U.S. trade deficit rose to the highest level in three months, with record oil prices and a flood of toys and other imports from China swamping a solid gain in American exports.

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The Commerce Department reported Wednesday that the deficit for October increased to $57.8 billion, the highest level since July and 1.2 percent above the September imbalance.

The widening deficit was slightly worse than expected and occurred even though U.S. exports of goods and services rose for an eighth consecutive month, climbing 0.9 percent to an all-time high of $141.7 billion. This gain was offset by a 1 percent rise in imports to $199.5 billion, also a record, as a surge in global oil prices sent America’s oil bill soaring.

The deficit with China jumped 9.1 percent to $25.9 billion, a record for a single month.

The rise reflected record imports from China, led by large gains in shipments of toys and games and televisions as retailers stocked their shelves for Christmas. The demand for Chinese imports is still surging despite a string of high-profile recalls of Chinese products from toys with lead paint to defective tires and tainted toothpaste.

So far this year, the trade imbalance with China is running at an annual rate of $256 billion, putting it on track to surpass last year’s $233 billion deficit, which had been the highest deficit ever recorded with a single country.

Those record deficits have triggered a backlash in Congress, with dozens of bills introduced seeking to penalize China for what critics see as unfair trade practices contributing to the loss of 3 million U.S. manufacturing jobs since 2000.

Treasury Secretary Henry Paulson and other members of President Bush’s Cabinet were meeting with their counterparts in China this week for the third round of talks aimed at defusing trade tensions. While minor agreements were expected, there was likely to be no breakthrough on the biggest point of contention, China’s undervalued currency. The currency disparity makes Chinese products cheaper in America and U.S. goods more expensive in China.

Some of the legislation in Congress seeks to impose penalty tariffs on Chinese products unless China allows its currency to rise in value against the dollar at a faster rate. But Vice Premier Wu Yi, the leader of the Chinese delegation, delivered a blunt threat of Chinese retaliation should the United States impose economic penalties on China.

“I need to be quite candid about this: If these bills are adopted, they will severely undermine U.S. business ties with China,” Wu said at the opening of the talks with Paulson on Wednesday.

The gain in exports was led by increased shipments of civilian aircraft, industrial equipment and telecommunications products. U.S. manufacturers have been benefiting from a fall in the value of the dollar against many other currencies including the European euro. The weaker dollar makes U.S. goods cheaper on overseas markets while making foreign products more expensive for U.S. consumers.

So far this year, the U.S. trade deficit is running at an annual rate of $704 billion, down by 7.1 percent from last year’s $758.5 billion, putting the country on track to see the first narrowing of the deficit after five consecutive years of record imbalances.

The import gain was led by an 8.3 percent jump in the foreign oil bill with petroleum imports setting an all-time high of $29.6 billion in October. The average price of a barrel of imported crude also set a record at $72.49 per barrel. The oil bill is expected to rise even more in coming months, reflecting the fact that prices jumped to near $100 per barrel at their peak this fall.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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