Yu-Feng, Chao 6/27/11 Dr. Lartey The U.S. trade deficit: Made in China? I.

The main issue Countries that open up free trade can benefit from other countries goods and services. Open trade allows the nations to focus on the comparative advantage which they can specialize on the trade they are dominate in and help increase the overall economic standers. However, countries that open up free trade do not always benefit, it can be a trade surplus or deficit, depending on the macroeconomic condition. In these recent years, U.S. had faced a large trade deficit from China and other countries due to the large amount of imports and less amount of exports. Furthermore, the appreciation of the yuan and the U.S. trade policies imposed on China gave China more pressure to adopt the new foreign exchange rate policy. II. Motivation for the study The motivation for the author to study this issue is that China is the largest supplier for the U.S. and is about one-fifth of U.S. total imports. Raising Chinas exporting power also made China gain the largest trade surplus from the U.S. Many economists worried that if U.S. continues to rely on other countries imports especially China, its domestic production will start to decrease and fewer jobs will be required in the U.S. On the other hand, China had faced numerous amounts of pressure on the appreciation of the Yuan and trade regulations due to the U.S. policies on protecting U.S. imports of textile and apparel products. In addictions, U.S. tried to limit the imports of textile and apparel product from China by creating Sectoral trade policies. This policy limits the certain types of apparel that U.S. can import from China and hopes that it can shift U.S. demand towards the other foreign suppliers. With the huge demand of yuan from other countries, China worries that the appreciation of Yuan will results in less of a return on their investment in U.S. securities and assets that they had previously bought. III. Main contribution

The argument of this article is that U.S. should not limit its imports from China because it can have a significant effect on the U.S. market. The author also tries to point out why there are huge trade deficits in U..S by looking through the macroeconomic factor that shapes the trade balance. Although limit the imports from China and impose tariffs and quotas can help reduce the U.S. trade deficit. However, if domestic expenditure exceeds domestic production the trade deficit will still be there. Another contribution of the article is that the policies and restrictions that U.S. imposes on Chinas imports should be loosened because China will eventually retaliate with their trade policy. In 2005, China adopted its own exchange rate policy so they can export their goods at a cheaper price and maintain their trade surplus in the world. With the restrictions on Chinese imports it does not really improve economy because it will shift U.S. demand to other nations where the goods are still cheaper relative to domestic prices. The author believes that the appreciation of yuan can reduce the trade deficit in U.S. and benefit Chinas economy. To reduce the trade deficit, higher international value of the yuan is passed through to U.S. consumers in the form of higher dollar prices of Chinese goods(P14). In addition, the consumers expenditures have to reduce and the domestic production have to increase. With the appreciation of yuan, consumers will buy less of Chinese goods because they are relatively more expensive. However, many companies will start to invest in China because the yuan is getting stronger. IV. Main findings Even though most of the U.S. trade deficit is from China, there is some trade deficits owed from other countries. The restrictions on Chinas imports only reduce parts of U.S. trade deficits because other countries also shares U.S. trade deficits. The main causes of U.S. trade imbalance still occurs at home. Therefore, if the U.S. reduces their imports from China, they can only reduce a portion of the trade deficit because there are other industrialized countries that hold a smaller portion of the U.S. trade deficit such as Japan, Korea, and the European Union. Other significant parts of the main findings explain that the yuan appreciation can also mean lower Chinese official purchases of U.S. dollars, which would likely put upward pressure

on U.S interest rates and thus moderate domestic spending. Similar findings are China advancing into the exports of steel and auto parts. This has a significant impact on the U.S. exports of steel and auto parts because the U.S. had been dominate in the auto parts and steel exports throughout the world. In 2005, China imposed a tariff on their exports and caused the volume of trade to decrease and the price of goods to increase in the United States. However, it did not really effect and harm the Chinese economy because the Chinese government would collect tax revenue equal to the size of the tax multiplied by the volume of exports (P 13). Similar to China, the U.S. government can collect tax revenue on imports. V. Personal assessment My personal assessment on this Case Study is that I agree with the author's main conclusion that the U.S. trade deficit is not solely based on China and China's exports. Other countries such as the European Union and Japan have a considerable amount of impact of the trade deficit. Reducing the bilateral trade deficit with China will not significantly affect the U.S. overall trade deficit. Rather, underlying macroeconomic conditions must change. When the U.S. demand for imports is greater than exports, the deficit will always exist. The better way to reduce the U.S. trade deficit is to increase the domestic productions and exports more goods and services to other countries so the exports will greater than imports which will create a trade surplus. With the appreciation of the yuan, it will cause the U.S. dollar to depreciate. Once the dollar depreciates, it will cause the inflation to the U.S dollar because the U.S now needs more dollars to exchange for other countries currency. If the depreciation of the dollar did not occurred and the appreciation of the Yuan did not happened, the U.S. trade deficit with China will still be larger.