US Trade Deficit With China

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  1. #1

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    US Trade Deficit With China

    Can all of you econ gurus out there please explain the big deal behind the US trade gap? Please use small words so that I understand them.
    Here's my obviously uneducated take:
    the US has a lot of wealthy people who like stuff, so they buy that stuff, most of which has to be imported from China. The US government does not pay for any of that stuff--as a matter of fact the US governement gets to charge tariffs, duties, etc... on all the stuff and should be coming out ahead here. So why the fuss?
    Go ahead, snicker first and then blast away!


  2. #2

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    Well, I know absolutely nothing about economics but I guess the problem is that the US plays both consumer and borrower to the world. It imports huge amounts of cheap products from say, China at the expense of home-grown products. This means US factory closures and job lay-offs. At the same time, the US has always been so rich in terms of assets it has always been able to borrow huge amounts of cash from other countries because the US has always been seen a safe haven. However, the US Dollar has been weak for some time now and other currencies such as the Euro are stronger and offer more attractive returns for Central Banks. This makes it difficult for the US administration to finance its ballooning current account deficit. With a weak US Dollar, central banks are more likely to invest outside of the US.

    I remember reading somewhere that in 2004 China increased dollar reserves by $207bn, financing nearly a third of the US current account deficit, estimated at $650bn.

    Subsequently, China reduced its exposure to Dollars and bought Asian currencies in readiness to switch the RMB/USD dollar peg to a basket arrangement. This is one reason the value of the USD remains low.

    There also appears to be considerable concern at present in the US about the state of the housing market - especially the sub-prime mortgage sector. Again, I know diddly-squat about this (other than it is not good and leads to foreclosures) but many analysts (including George Soros) are getting nervous about this and are saying that by 2008 we could have a slump as US consumers reign in their spending. A few years ago US interest rates were as low as 1%. People borrowed heavily and mortgaged to the hilt. Now interest rates are 5.25% and repayments are starting to bite. This twin problem of a burgeoning trade deficit and a potential housing bubble is worrying some analysts who predict large volumes of defaults and a bumpy road ahead for the US economy.

    Like I said, I know nothing about this but am involved in selling China-made goods to the US and to world markets (from HK) and I just try to follow what's going on.

    Someone else may come along and tell you what I've written is complete bullsh*t and they are probably right. But I felt bad that you had not had a reply to your post so thought I?d try. At least someone more knowledgeable may be able to give you a better answer.


  3. #3

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    Post has only been out for 3 hours or so.....
    And here is where I show my complete comand of the subject--
    US current account deficit is exports minus imports? As opposed to US budget deficit which is taxes minus spending?
    I understand the uproar about the US budget deficit; if we all ran our houses like the US Congress we'd be in trouble.


  4. #4

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    Mind numbing economics here ..

    http://www.newyorkfed.org/education/fx/free.html


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    Quote Originally Posted by KnowItAll:
    "Mind numbing" and "economics" are synonyms. I have read this, more than once, and still don't have an answer.
    The US government does not pay for anything (or hardly anything) coming into the US. Wal-Mart probably pays for it. Wal-Mart certainly isn't having profit issues, so who cares that Wal-Mart imports more than Boeing exports??
    And I don't see how the balance of payments can be out of whack, because nobody ships anything to the US on a hope that someone will eventually pay for it.
    Perhaps I am hopeless.

  6. #6

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    Quote Originally Posted by Sleuth:
    "Mind numbing" and "economics" are synonyms. I have read this, more than once, and still don't have an answer.
    The US government does not pay for anything (or hardly anything) coming into the US. Wal-Mart probably pays for it. Wal-Mart certainly isn't having profit issues, so who cares that Wal-Mart imports more than Boeing exports??
    And I don't see how the balance of payments can be out of whack, because nobody ships anything to the US on a hope that someone will eventually pay for it.
    Perhaps I am hopeless.

    both public and private payments are factored into the current account deficit. A deficit occurs when you spend/buy (import) more than you sell (export) for goods and services.

  7. #7

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    Hi Bli,

    So what happens with this debt? Does someone have to pay interest on it, or is it just an abstract construction?

    Is it funded by e.g. US treasury bonds, or is it just something calculated by economists?

    Does it really matter that there is a huge debt? Can't we just let it drive down the price of the USD so that their imports become more expensive and they curb their bad spending habits?


  8. #8

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    The fuss is all politics.

    The point is, the US has consumers that wants to buy and they don't really care where they buy their stuff from as long as its cheap.

    China is currently the cheapest manufacurer so they're selling a lot to the US.

    The Chinese are regarded as the bad guys (the political bit) so its cheap and easy to make a fuss over the issue.

    Thats why you hardly hear anything about the US deficit with Japan or Europe (The good guys) which is pretty sizable too.

    In layman terms, its like there is a shop keeper (China) who is selling really cheap stuff. And a shopping addict (United States) who keeps buying and keeps complaining that the prices are too cheap because they know the shop keeper won't put up the prices.


  9. #9

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    Sorry, guys but i just cant help myself. :P
    I have an intermediate macro economics final on thursday.
    well basically its not really that big of a deal. The way it works is China is on a fixed exchange rate and the U.S is on a floating exchange rate.
    As more U.S consumers buy and demand goods to China, they have to exchange dollars for Yuan. Which should drive up the Yuan price, but CHina is on a fixed exchange rate. This upward pressure has to be relieved somehow. So China has to inturn fixes the problem by buying the excess u.s dollars that puts an upward pressure on its own currency.


    This puts a downward pressure on the u.S currency, but China fixes it for us by pegging their currency to ours.Theoretically speaking, in the models that we are constructing, an increase in imports should eventually even out to a balanced rate, since increased imports creates a lower exchange rate, thus making it more appealing for other people to invest in your country, so eventually it should stable out.
    The problem arises when China has an excess supply of u.s dollars. What are they going to do with all the money? They will use it to buy U.S Bonds to get somekind of return on the extra u.s dollar supply. The biggest problem is the fact that there is an extreme upward pressure on its currency. If they continue buying u.s debt and bonds it will cause the Chinese government to lose money, as the Yuan drifts and drifts higher against the dollar.

    It only becomes a problem for us if the Chinese stops buying our u.s bonds. Infact, over the past couple of years, chinese purchases of U.S bonds has been one of the reasons why the U.S inflation rates are so low. As there is more and more pressure on the yuan to apperciate, the Chinese government might stop buying U.S bonds or start diversifying which could drive up interest rates in the U.S. There is only so much money in the world.


  10. #10

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    Someone in my office just explained that to me this morning. It has more to do with the US having to turn USD into RMB in order to buy Chinese product than anything else.
    Although I still think politics plays more than its share.


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