China decided to once again devalue the yuan on Tuesday August 11 due to disappointing trade figures. The decision will be bad news for the U.S., which is facing down a growing trade deficit with its Asian trading partner. The latest figures on the U.S. – China deficit show a gap of $43.8 billion between exports and imports. The strength of the dollar compared to other world currencies has meant a jump in American consumers buying foreign goods, while U.S. exports have become less competitive. Additionally, the trade deficit is politically sensitive, with the Obama administration criticizing Beijing’s policy to keep the yuan undervalued, saying it gives the second-largest world economy “an unfair trade advantage.”
Economists are divided on how big of an impact the trade deficit will have. Back in December, when the deficit reached $46.6 billion, some economists said it could trim as much as 0.5% from GDP growth, while others simply dismissed its importance completely. The U.S.’s deficit with China is its biggest, followed by the European Union and Mexico. In fat, the deficit with Mexico also increased in June, while the trade balance with Canada moved from a surplus to a deficit of $3.1 billion.
One way of shrinking the trade deficit with China is obviously to increase exports to the country. According to Forbes, the key to this lies with SMEs, or small and medium-sized businesses. SMEs already account for around 34% of U.S. exports, up from 27% at the end of 2009. Importantly, China is the third biggest market for these exports. However, without action, the deficit is set to widen even further. If you think the U.S. should take immediate action to resolve the trade deficit issue with China and other trading partners, please Like & Share this post.