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: 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. The remaining part of the dollar is not even spent entirely on U.S. goods because Chinese workers (firms) also need dollars to buy raw materials from other countries to produce consumption goods, as China is a resource-poor country. This implies that the total imports of China from us will be substantially less than its total exports to us, leading to the U.S.-China trade imbalance. Additional Resources
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