What is the U.S. Trade Deficit with China?:
In 2008 (most recent annual statistics), the U.S. trade deficit with China was a record-setting $268 billion, the largest in the world between any two countries. This means that the U.S. exported $69.7 billion in goods and services to China, while it imported over $337.8 billion. (Source: U.S. Census, Foreign Trade Statistics)
Why Is There a U.S. Trade Deficit with China?:
China is able to produce low-cost goods that Americans want. Most economists agree that China's competitive pricing is a result of two factors:
- A lower standard of living, which allows them to pay lower wages to workers.
- An exchange rate that is partially set to be always priced lower than the dollar.
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. 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?:
As China buys U.S. Treasuries to support the value of the dollar, and keep its exports cheap, it becomes a large lender to the U.S. Government. In July 2009, China owned $800 billion in U.S. Treasuries, 23% of the total $3.4 trillion outstanding. This makes it the largest owner. Many are concerned that it gives China political leverage over U.S. fiscal policy, since it could theoretically 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 any recovery from the recession.
China is, in effect, loaning the U.S. money to buy its products. If China called in its loan, the U.S. economy would slow further, and consumers would not be able to afford Chinese exports. For this reason, China will keep the situation going as long as possible. There is no reason for China to stop buying Treasuries.
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 to India and China, causing higher unemployment in the U.S. Other industries have simply dried up. U.S. manufacturing, as measured by the number of jobs, declined 21% between 1998 and 2008. 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 2006, former Goldman Sachs CEO Henry Paulson was named U.S. Treasury Secretary to start a Strategic Economic Dialogue with China to pressure them to loosen their peg against the dollar and raise the price of Chinese exports to lower the trade deficit. In response, China allowed the yuan to rise 14% and opened many Chinese markets to U.S. industries. (Source: Foreign Affairs, A Strategic Economic Engagement, Sept/Oct 2008)
In 2009, Treasury Secretary Tim Geithner continues pressuring China to raise yuan's value. The U.S.-China Strategic Economic Dialogue resumes July 2009.
Updated October 13, 2009
