The Commerce Department reported Thursday that the deficit dropped to $711.6 billion last year, a decline of 6.2 percent. The trade deficit with China continued to rise, jumping by 10.2 percent to $256.3 billion. That was the largest gap ever recorded with a single country, as Chinese imports surged despite a string of high-profile recalls of tainted products.
The Bush administration credits its free trade policies for spurring strong growth in exports while critics contend that even with the lower overall deficit, the imbalance is still nearly double what it was in 2001, the year Mr. Bush took office.
For December, the deficit fell by 6.9 percent to $58.8 billion, a bigger-than-expected improvement to close out the year.
Analysts said the decline in the dollar over the past two years has helped spur strong increases in U.S. exports, with American goods now cheaper and thus more competitive in many overseas markets.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the smaller December trade deficit will help to boost overall economic growth from the final three months of last year from the initial estimate of a mere 0.6 percent expansion. He predicted trade and a better reading on inventory stockpiles would boost growth in the gross domestic product to 1.1 percent when the figure gets revised later this month.
In other economic news, the Labor Department reported that the number of newly laid off workers filing claims for unemployment benefits fell by 9,000 to 348,000 last week. That was larger than the 6,000 decline that analysts had been expecting.
The country's trade performance is expected to be a major issue in the upcoming presidential campaign, with Democrats arguing that the huge deficits have contributed to the loss of more than 3 million manufacturing jobs since 2000 as U.S. companies moved production to low-wage countries such as China.
Lawmakers have introduced a variety of bills to impose economic sanctions on China for what they contend are unfair practices such as manipulating its currency to keeps its value low against the dollar, which makes Chinese goods cheaper in U.S. markets and American products more expensive overseas.
The administration opposes these efforts, arguing that they could spark an all-out trade war if China moved to retaliate against U.S. exports. As an alternative, Mr. Bush is seeking passage of three pending free-trade agreements with Colombia, Panama and South Korea in an effort to solidify his legacy of pushing free trade deals to promote American exports.
In an effort to counter charges that it has been lax in enforcing current trade laws, the administration has filed several unfair trade cases against China with the World Trade Organization.
In its first official condemnation of Chinese trade practices, a WTO hearing panel has found in favor of a complaint brought by the United States, the European Union and Canada alleging that China's tax policies on auto imports are an unfair barrier against imports, according to a preliminary ruling obtained Wednesday by The Associated Press.
The $711.6 billion deficit for 2007 was still the third highest on record but represented the first annual decline since 2001, a year when the deficit totaled $365.1 billion. Much of the deterioration in trade has represented ever-higher prices for foreign oil.
Last year, exports totaled $1.62 trillion, a new all-time high and an increase of 12.7 percent from 2006.
Administration officials contend that the double-digit gain in exports showed Bush's strategy of pursuing free trade deals to remove barriers to U.S. exports was working. Sales of American farm products, capital goods and autos and auto parts all set records.
Imports also hit a record at $2.33 trillion, up by 5.9 percent from the 2006 level. That increase was led by a 9.5 percent jump in oil imports, which hit an all-time high of $331.23 billion as the average annual price for crude oil rose to a record of $64.27. With oil prices rising further at the beginning of this year to above $90 per barrel, analysts expect the oil bill to keep rising in coming months.
After the $256.3 billion deficit with China, the United States recorded its next largest individual country deficit with Japan, a gap of $82.8 billion, which was down 6.5 percent from the previous year.
The deficit with Canada, America's largest trading partner, fell by 10.6 percent to $64.2 billion as U.S. exports, helped by the weaker dollar, rose at a faster pace than imports from Canada.
The deficit with Mexico increased by 15.5 percent to an all-time high of $74.3 billion, surpassing the imbalance with Canada.
The deficit with the European Union fell by 7.8 percent to $107.4 billion as U.S. exports to that region have been helped by the weaker dollar which has dropped to record lows against the euro.