Trade deficit boomerangs

July 7, 2025

The US trade deficit grew by 18.7% in May to $71.5 billion from April's low of $60.3 billion and exports were curbed. May was the first full month of the pause on April 2nd tariffs, with just the 10% baseline tariff remaining. However, the 90-day agreement with China was only reached on May 12. As a result, a $7.4 billion decline in imports from China was offset by an increase in imports from elsewhere.

May represented another round of stocking up as firms prepare for the approaching 90-day pause deadline for Liberation Day tariffs. Retailers of motor vehicle and parts dealers stocked up the most, up 0.6% in spite of new automobile and parts tariffs going into effect in April and May. Nondurable goods wholesalers, likely pharmaceuticals, stocked up 0.5%, while all other retailers increased inventories by 0.2%. Only durable goods wholesalers drained inventories, down 0.8%, though some of that stock could be moving downstream.

145% tariffs on China for half the month of May took its toll, with both imports and exports falling $7.4 billion and $1.7 billion, respectively. That slashed the deficit with China by nearly 20%. Imports from China as a share of total imports stood at their lowest level since February 2001, seasonally-adjusted.

Other countries saw larger deficits with the US which more than made up for the decline in the deficit with China. Deficits with Mexico, Ireland, South Korea, Taiwan and Vietnam all increased. Some of that increase could be trans-shipments from China, which the administration has tried to target in its new deal with Vietnam of 20% tariffs on imports, but 40% on trans-shipments.

Imports were essentially flat in May, down $0.2 billion. However, gold imports, which do not factor into the GDP calculation, declined by $1.5 billion. Imports outside of gold increased approximately $1.3 billion. Imports of computers and passenger cars drove gains, growing by $4.4 billion and $3.1 billion, respectively. Pharmaceutical imports also rose, up $2.5 billion. Weakness in consumer goods ($4 billion decrease) offset other imports. Declines were broad-based across consumer goods categories, but most dramatic in categories that are more exposed to tariffs, such as clothing, toys and household appliances. Services imports were flat.

Exports decreased $11.4 billion. Approximately $6.5 billion of that decline was in gold exports, which do not factor into the GDP calculation. The remaining $4.9 billion decline was driven by energy exports, food and capital goods (including semiconductors, aircrafts and medical equipment). Those declines more than offset modest increases in exports of pharmaceuticals, jewelry and diamonds and passenger cars.

After accounting for changes in prices and gold imports/exports, the headline change in the trade deficit is likely overstated, but not by much. Stronger orders in June suggest that the trade deficit could continue to widen as importers did another round of stocking up.