updated 10/30/2003 2:02:51 PM ET 2003-10-30T19:02:51

The U.S. trade deficit declined to $39.21 billion in August, the smallest gap in six months, reflecting a big drop in imports of cars and foreign oil.

Major Market Indices

However, America's trade deficit with China surged to an all-time high, a development certain to add to the pressure in Congress to punish China for what critics contend are the country’s unfair trade practices.

The Commerce Department reported Friday that the August deficit was 2.1 percent lower than a revised July imbalance of $40.03 billion. That caught analysts by surprise because they had been forecasting the deficit would widen in August.

The improvement reflected big declines in imports of cars, auto parts and oil which helped to offset a smaller drop in U.S. exports. That was the result of a big plunge in shipments of civilian aircraft.

The decline in August represented the fifth straight month that the country’s trade deficit has improved after hitting a record monthly high of $42.98 billion in March. However, even with the string of declining deficits, the overall imbalance through the first eight months of this year is running at an annual rate of $433 billion, far above last year’s record high of $418.04 billion.

Producer prices edge up
In a second report Friday, the Labor Department reported that inflation at the wholesale level rose by a higher than expected 0.3 percent in September, following a 0.4 percent increase in the Producer Price Index in August.

Last month’s rise in the PPI, which measures price pressures before they reach the consumer, was led by a huge 2.3 percent jump in food prices, the biggest increase in eight months.

Energy prices, which had soared by 1.2 percent in August, posted a tiny 0.1 percent increase in September. Gasoline costs were up 2.2 percent last month after rising 6.3 percent in August.

Outside the volatile food and energy areas, the so-called core rate of wholesale inflation was unchanged last month, an even better showing than the small 0.1 percent increase in August. This performance was likely to provide support to the view of the Federal Reserve that so far there are no signs that inflation is becoming a problem.

The Bush administration is seeking to demonstrate that it has a plan to lift the fortunes of America’s manufacturing companies, which have been forced to cut 2.7 million manufacturing jobs over the past three years in response to sluggish global demand and increased competition from imports.

President Bush sent Treasury Secretary John Snow to Beijing last month to lobby the Chinese government to cut its current rigid link between its currency, the yuan, and the U.S. dollar. American manufacturing companies contend that the yuan is undervalued by as much as 40 percent, giving Chinese products a huge price advantage.

The Chinese rejected the request to allow the yuan to rise in value against the dollar, arguing that now was not the proper time for such a dramatic change. However, the administration has promised to keep pushing the idea and Bush is expected to raise the issue during meetings he will hold with Chinese leaders later this month in Bangkok, Thailand on the sidelines of the annual summit of leaders in the Asia Pacific Economic Cooperation (APEC) forum.

One of the administration’s arguments is that China needs to voluntarily allow its currency to rise in value in order to ward off protectionist pressures in Congress. Bills have been introduced in both the House and Senate that would impose across-the-board penalty tariffs on Chinese products unless China stops what critics contend is a blatant manipulation of its currency to gain trade advantages in violation of global trade rules.

For August, America’s trade deficit with China rose 3.2 percent to a monthly record of $11.7 billion. For the year, the deficit with China is running 22 percent higher than last year’s record imbalance of $103 billion. Since 2000, the United States has recorded its biggest deficits with China, a spot that for decades was held by Japan. The imbalance with Japan actually shrank by 18.2 percent in August to $4.84 billion.

The $824 million decline in the overall deficit reflected a 2.7 percent drop in U.S. exports, a sign of weakness in many of America’s major export markets.

Imports, which had hit a monthly record in July, retreated 2.5 percent in August to $122.9 billion.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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