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The U.S. trade deficit rose to a five-month high in July, with the politically sensitive gap with China hitting a record high, which economists said could embolden the Trump administration to aggressively pursue its “America First” agenda.

The administration’s protectionist trade policy has left the United States embroiled in tit-for-tat tariffs with the European Union, Canada and Mexico as well as an escalating trade war with China. President Donald Trump claims the United States is being taken advantage of by its trade partners.

The deterioration in the trade deficit reported by the Commerce Department on Wednesday came a day before the end of a public comment period on a list of $200-billion worth of Chinese goods widely expected to be hit with tariffs soon.

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“America still isn’t getting a fair deal on trade and that can only mean one thing,” said Chris Rupkey, chief economist at MUFG in New York. “President Trump is going unleash another $200-billion in tariffs on China imports.”

The Commerce Department said the trade deficit increased 9.5 per cent to $50.1-billion as exports of soybeans and civilian aircraft dropped and imports hit a record high. The trade gap has now widened for two straight months.

Economists polled by Reuters had forecast the trade shortfall swelling to $50.3-billion in July.

The government imposed import duties on goods including steel, aluminum, washing machines and solar panels early this year to protect American industries from what Trump says is unfair foreign competition. In addition, the United States and China have slapped retaliatory tariffs on a combined $100-billion of products since early July.

Washington is also seeking to revamp the North American Free Trade Agreement. The United States struck a deal with Mexico last week, but negotiations with Canada have been contentious.

The administration says eliminating the trade deficit will put the economy on a sustainable path of faster growth. But economists say some of the government’s policies such as a $1.5 trillion tax cut package early this year will worsen the trade deficit. The fiscal stimulus has boosted consumer and business spending, drawing in more imports.

“The U.S. cannot enjoy an investment spending boom without installing a significant amount of capital equipment and ... this means a surge in capital goods imports,” said John Ryding, chief economist at RDQ Economics in New York.

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The trade gap narrowed in April and May as farmers front-loaded soybean exports to China before Beijing’s retaliatory tariffs came into effect in early July. The deterioration in the trade deficit in July was flagged in an advance report published last month.

U.S. stocks were trading lower on fears Trump would soon ramp up the trade war with China. The dollar fell against a basket of currencies, while U.S. Treasury prices were mixed.

RECORD HIGH IMPORTS

When adjusted for inflation, the trade gap increased to a five-month high of $82.5-billion in July from $79.3-billion in June. July’s so-called real trade deficit is above the second-quarter average of $77.5-billion.

If that trend continues in August and September, trade could subtract from third-quarter gross domestic product growth. Trade contributed 1.17 per centage points to the economy’s 4.2 per cent annualized growth pace in the second quarter, which was almost double the 2.2 per cent rate notched in the January-March period.

The goods trade deficit with China surged 10 per cent to a record $36.8-billion in July. The trade gap with Mexico narrowed 25.3 per cent to $5.5-billion while the shortfall with Canada shot up 57.6 per cent to $3.1-billion.

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The trade deficit with the European Union soared 50 per cent to a record high of $17.6-billion.

In July, exports of goods and services fell 1.0 per cent to $211.1-billion. Soybean exports dropped $0.7-billion and shipments of civilian aircraft decreased $1.6-billion. Petroleum exports, however, were the highest on record.

With the dollar strengthening in recent months against the currencies of the United States’ main trade partners and global economic growth slowing, exports could remain on the back foot.

Imports of goods and services increased 0.9 per cent to a record $261.2-billion in July. They were boosted by imports of computers and computer accessories. The import bill was also inflated by petroleum imports, which were the highest since December 2014 amid higher oil prices.

The price of imported crude oil averaged $64.63 per barrel in July, the highest since December 2014 and up from $62.42 in June. There were also increases in imports of automobiles and parts as well as other goods. Pharmaceutical preparations imports, however, fell $1.3-billion.

“Looking ahead, cooler global momentum and the stronger dollar will temper export growth while imports will stay well-supported by upbeat domestic demand, fiscal stimulus and the strong greenback,” said Oren Klachkin, lead economist at Oxford Economics in New York.

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