The US trade gap in goods and services with the rest of the world fell to 677.1 billion dollars last year, down 3.3 percent percent from 2007, the Commerce Department reported.

In December, the trade deficit decreased for the third consecutive month to a seasonally adjusted 39.9 billion dollars, a drop of 4.1 percent from November, as Americans continued to slash spending on imports and US exports dwindled in a domestic recession and weakening global demand.

Although the narrowing of the gap is seen as a positive sign for economic imbalances, analysts pointed out the drop reflects slumping trade volume in a weak global economy.

"The clear message is that global trade activity has collapsed, as the world economy sinks deeper into recession," said Nigel Gault at IHS Global Insight.

"This report underscores the collapse in world trade in the fourth quarter as export volumes have declined by 33.6 percent at an annual rate over the last three months and import volumes have fallen 21.1 percent on the same basis," said John Ryding at RDQ Economics.

The trade report came as Canada, the largest US trade partner, reported its first monthly trade deficit, for December, since May 1976 and China said exports fell by the steepest margin in more than a decade in January.

The US trade gap in December was the smallest deficit since February 2003, but higher than analysts' consensus forecast of 35.5 billion dollars.

According to the Commerce Department data, 2008 was the second year in a row the shortfall has narrowed, after a decline of 7.0 percent in 2007. The last time there was a back-to-back annual decline was in 1990-1991.

The December data reflected a months-long trend of imports falling more sharply than exports. Imports plunged 6.0 percent in December from November, to 133.8 billion dollars, while exports dropped 5.5 percent to 173.7 billion dollars.

Overall US trade volume shrank 5.7 percent in December from November.

A decline in oil imports that began in July was less steep in December than in previous months, with a drop of 6.7 percent to 22.3 billion dollars.

The average price of a barrel of imported oil fell again, to 49.93 dollars, its lowest level since December 2005.

The trade gap with number-one partner Canada continued to shrink in December, falling to 2.8 billion dollars, a low last seen in June 1999.

The United States's politically sensitive massive trade gap with China, the nation's number-two trade partner, shrank for the second consecutive month, to 19.9 billion dollars, with imports plunging 11.3 percent from November.

But on an annual basis, the gap with China, by far the biggest US trade deficit, swelled to an all-time high of 266.3 million dollars in 2008 from 256.2 million dollars in 2007.

Shortly after President Barack Obama took office on January 20, his administration accused China of manipulating its currency to maintain a trade advantage shortly, an accusation denied by Beijing.

Imports from Japan, the fourth-biggest US trade partner after Mexico, fell in December to their lowest level since January 2004 but the deficit increased slightly to 5.3 billion dollars from 5.0 billion.

The US deficit with Mexico rose 17 percent to 4.1 billion dollars, while that with the European Union shot up 25 percent to 7.0 billion dollars.

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