Title: Why Is the U.S.’s Trade Deficit with China So Big?
Headings: Why Does the U.S. Have Such a Large Trade Deficit with China?
Why Does the U.S. Have Such a Large Trade Deficit with China?
Why does the U.S. have such a large trade deficit with China?
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Content: More than that, they even lend goods to us by keeping our paper money for a long time. The result is a huge trade deficit with China: For every dollar Americans spend on Chinese goods, Chinese spend 30 or fewer cents on American goods. China currently holds a total of $3.7 trillion in foreign reserves, mostly in U.S. dollars or U.S. government bonds. This means that U.S. consumers have been enjoying huge quantities of low-cost goods by borrowing cheaply from China at negative real interest rates. The question is why Chinese people are willing to lend goods to us when they are still struggling with very low per capita income and consumption levels. One answer from economic theory is that they have a strong need to save for a rainy day. At their current stage of economic development, Chinese workers do not have a well-developed financial market and social safety net, both of which would reduce their need to save and would allow them to borrow when needed. Hence, even though the Chinese economy is growing at a faster rate than the U.S. economy, the rising uncertainty for each individual in both spending needs (such as the rising costs in health care, education and housing) and income prospects (such as unemployment risk) induces them to save excessively to provide the self-insurance that is not available to them from the market. Therefore, for every dollar a Chinese worker makes in trading with the U.S., he or she feels the need to save at least a quarter.