Question

In 2016, the US ran a $347 billion trade deficit in good with China and $65 billion trade deficit with Germany. Meanwhile, the gross national savings to GDP ratio was 46% in China, 28% in Germany, and 18% in the US in 2016. (the average were 42%, 24%, and 19%, respectively during 1980-2016.) President Trump frequently accused both countries of currency manipulation, which, he argued, caused the US trade deficit. a.) In light of this information and based on your understanding of the national income accounting and determinants of current account balances, explain what are the implicit explanations for the US trade deficit with China and Germany here? b.) To improve the US current account balance with China and Germany what would you reccomend?

Answer 1

a) Trade deficit means that there are more of imports and less of exports. In the given problem trade deficits of US with China and Germany are large. Reason behind this is given that the China and Germany have higher savings percentage with respect to their GDP as compared to US. It means that China and Germany are saving more and spending less out of their respective GDP. Because of this low spending their imports are also low whereas in comparison US has higher spending and hence greater amount of imports from these countries, i.e. China & Germany. Higher the difference between the exports and imports value greater the trade deficit.

b) To improve the current account balance with China and Germany, US can either impose import duties on the products that US is importing from China and Germany or can make its domestic products more competitive. It also can make its exports cheaper to tempt the customers of Chinese and German market to purchase products imported from US.