Question

QUESTION 1 (a) How has the bilateral trade between the US and China made the two economies intertwined and interdependent? Provide a well-substantiated discussion.

(b) Did the value of the dollar influence the US trade deficit with China? Provide a well substantiated answer.

Answer 1

1. The bilateral trade between US and China is the world's largest exchange of goods and services which has made them highly interdependent on each other. US cannot survive without importing electronic goods from China which are cheap and as the US companies have already set up factories to import finished goods from China. At the same time China has bought US bonds which makes them indirectly control the fiscal situation which also impacts the borrowings and US becoming more so dependent on China. China at the same time also needs to import goods and services from US to maintain the advantage it has.

2. Rather than the value of the dollar, the value of yuan as compared to the dollar influences the trade deficit. It occurs because America imports more goods and services than it exports to China, and imports are more because the yuan has depreciated further against the US dollar, dollar value increases as less number of dollars equals more yuan, which makes Chinese citizens earn more as they get more money for $1 worth of goods exported. Implementation of tariffs also leads to increased trade deficit as consumers need to shell out more money for the imported products.