Trade Deficit of the Us and the Undervaluation of the Rmb

Topics: Balance of trade, International trade, International economics Pages: 11 (3511 words) Published: May 4, 2013
The causes of the large trade deficit of the US

The undervaluation of the RMB

The causes of the large trade deficit of the US
A trade deficit is when a country imports more than it exports. As a matter of fact, in 2012, the US trade is preoccupied by a deficit reaching 539.514 billion. According to Robert E. Scott, the Director of Trade and Manufacturing Policy Research at the Economic Policy Institute in the US, there are three main factors that explain this phenomenon. He confirms that “China accounted for three-fourths of rise in non-oil goods trade deficit” found in Economic Indicators, category Trade and Globalization. The three factors, Robert E.Scott is talking about are:

-The increase in net imports of crude oil and refined petroleum products. -The growth in deficit in non-oil goods, dominated by trade in manufactured products. -The China’s illegal manipulation of its currency.

Why are the causes quoted in the article relevant?
a.The trade deficit is driven by the petroleum imports:
As a matter of fact, America is dependent on foreign oil, which leads to the trade deficit. In 2010, the imported petroleum-related products, such as crude oil, natural gas, fuel oil, were $252 billion. In spite of high oil prices that constantly increased, this import raised to $313 billion in 2012. This increase is considered responsible for two-thirds of the growth of the trade deficit in goods. As a consequence, the recovery was slowed down while domestic job creation was suppressed. Moreover, the exporters, especially in China, and in oil-exporting nations, took up the domestic demand for goods.

b.Consumer products are large contributors to the trade deficit: In 2012, the US imported $516 billion of these products, such as clothing, consumer electronics, furniture, household goods, and drugs. At the same time, it only exported $181 billion, which results to $335 billion deficit in consumer products. Furthermore, the US deficit reached $152 billion in automotive. Indeed, regarding the trucks, cars and auto parts, the US imported $298 billion, while only exporting $146 billion. The product-life cycle theory can explain this phenomenon. In fact, during the standardized product (the third step), the US became an importer by producing in developing countries, such as China, because of the low production cost. Basically, after having invented and launched a new product, the inventor’s country (the US) becomes an importer of its own invention, and emerging countries (like China) become exporters of a product that they imported before. Trade in non-oil manufactured goods is one of the major factor of the US trade deficit. Because it increased of 8.2% between 2010 and 2011, it is charged for three-fourths of the growth in the trade deficit in non-oil goods.

c.Comparison with the second largest global economy: China
According to the US, the undervaluation of the RMB accounts for its large trade deficit. Indeed, China controls its money by not putting it on the financial market in order to keep a low currency value. Thus, the products are cheaper and therefore more attractive. The US blames China because the money has an unfair advantage in the international market, and China is obviously taking over the US market. But is the devaluation of the USD would help the US to decrease their trade deficit? In accordance with the J-curve theory, with both the producer currency pricing and the dollar pricing, the US’s trade balance will improve in the long term. In fact, a revaluation of RMB makes a devaluation of USD, and it increases the imports of China while reducing its exports. Thanks to that, the exports of the US rise. Basically, China will not have the price advantage anymore.

However, China doesn’t share this point of view. It gives other explanations to the large trade deficit of the US. According China, the US deficit is a national problem and it is not related to the undervaluation of the RMB.

So we can...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Trade Deficit Essay
  • Understanding the Us Trade Deficit Essay
  • Essay on Trade deficits
  • Us China Trade Dispute Essay
  • Essay on History of U.S. Trade Deficit
  • Essay about Us
  • International Trade and Us Economy Essay
  • Essay about Currency analysis of US dollar and RMB

Become a StudyMode Member

Sign Up - It's Free