What Is the U.S. Trade Deficit with China?:
The trade deficit exists despite the fact that U.S. exports to China were the highest in history. In 2012, the U.S. exported $110.6 billion in goods, an all-time record. Exports in 2011 were only $103.9 billion. However, imports from China also set a record -- $425.6 billion, more than the $399.3 billion imported in 2011.
The U.S. imports consumer electronics, clothing and machinery from China. A lot of the imports are from U.S.-based companies that send raw materials to China for cheap assembly. When they are shipped back to the U.S., they are called imports even though they are profiting American-owned companies. (Source: U.S. Census, U.S. Trade in Goods With China)
Why Is There a U.S. Trade Deficit with China?:
Quite simply, China is able to produce goods that Americans want at the lowest cost. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:
- A lower standard of living, which allows companies in China to pay lower wages to workers.
- An exchange rate that is partially set to be always priced lower than the dollar.
How Is China's Standard of Living Measured?:
China's economy is the third largest in the world. In 2012, its Gross Domestic Product (GDP) was $12.38 trillion in goods and services. However, China has more people than any other country. It has to divide this production up among nearly 1.4 billion residents. This means that its GDP per capita is $9,100. Imagine trying to live in the United States on less than $10,000 a year. No wonder China's leaders are desperately trying to get the economy to grow faster. They remember the Chinese Revolution all too well, and know that the Chinese people won't accept a lower standard of living forever.
How Can China Set Its Exchange Rate Lower than the Dollar?:
China sets the value of its currency, the yuan, to always equal a set amount of a basket of currencies which includes the dollar. In other words, China pegs its currency to the dollar using a fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasuries to support it. In this way, the yuan's value is always within its targeted range. As long as the yuan's value is lower than the dollar, China's goods are cheaper in comparison.
How Does the U.S. Trade Deficit with China Affect the U.S. Economy?:
China must continually buy so many U.S. Treasury notes that it is now the largest lender to the U.S. Government. As of January 2013, the U.S. debt to China was $1.264 trillion, 23% of the total public debt. Many are concerned that this gives China political leverage over U.S. fiscal policy, since it could call in its loan. (Source: U.S. Treasury, Major Foreign Holdings of Treasury Securities)
By buying Treasuries, China helped keep U.S. interest rates low. Until the Subprime Mortgage Crisis, this helped fuel the U.S. housing boom. If China were to stop buying Treasuries, interest rates would rise, delaying the recovery from the recession. This isn't in China's best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying more Treasuries than ever.
The U.S. trade deficit with China means that U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. To lower their costs, many companies have started outsourcing jobs to India and China, adding to U.S. unemployment. Other industries have simply dried up. U.S. manufacturing, as measured by the number of jobs, declined 34% between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace. (Source: BLS, Employees by Industry)
What Is Being Done to Improve the U.S. Trade Deficit with China?:
In 2009, former Treasury Secretary Tim Geithner continued the U.S.-China Strategic Economic Dialogue, which pressures China to loosen its peg against the dollar and raise the price of Chinese exports, lowering the trade deficit. The Dialogue also opens up to U.S. companies China's domestic market. This was begun in 2006, by former Treasury Secretary Henry Paulson. Since the Dialogue was begun, China has allowed the yuan to rise 16% and opened many Chinese markets to U.S. industries. (Source: Foreign Affairs, A Strategic Economic Engagement, Sept/Oct 2008) (Article updated November 20, 2013)
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