The US economy is passing through one of the most challenging period, since the time US started dominating the world economy. As per US Bureau of Economic Analysis, the US economy grew by 2.0 percent in the second quarter of current year and the estimated growth for third quarter of 2010 is 1.7 percent. This is quite low compared to the average quarterly growth rate of 3.31 percent that US economy has recorded since 1947 to 2010 first quarter. US Bureau of Labour Statistics, the unemployment rate in US in the month of Oct, 2010 was 9.6 percent. Added to this is the fact that US trade deficit was $44 billion for the month of September, 2010, which makes the annual deficit close to $ 500 billion. While US have several issues to handle on economy front, the handling of trade deficit with China is the most challenging task that US faces as of now.
Why is China such a big issue with US and why US want China to revalue Yuan? Let us look at some of the interesting facts. The trade deficit in US-China trade for first nine months of current year i.e. 2010 was $ 201 billion. This means that China has exported $201 billion more than what it has imported from US. This is higher value compared to 2009 when the trade deficit was $227 billion for the entire year.
The high trade deficit means that Chinese economy is growing at the cost of US because it is able to produce goods and services at cheap rate compared to US and export the same to US. However, apart from the low cost advantage that China has in terms of cost of production, it has also kept its currency deliberately undervalued to give its exporters advantage.US believes that undervalued Yuan is the reason for this high level of trade deficit.
Let us understand how such a high trade deficit has got built in US-China trade. China does not follow a floating currency rate mechanism and sets the value of its currency, the yuan, to always equal a set amount of a basket of currencies which includes the dollar. When the value of dollar starts decreasing China starts buying dollar to maintain the value of a dollar at a particular level. This is the reason China is the largest investor in US treasuries. In 2009, China had done around 33% of US treasury investment and it held US treasury worth $789 billion, the highest in the world. This investment of China in US treasury is one of the reasons that US was able to keep rate of interest low in the pre-crisis era till 2008.
Since the trade deficit against China is very high, US is worried as the domestic production is US is going down and this is fuelling unemployment. As per opinion of two leading economists, Paul Krugman and Fred Bergsten, the undervalued Yuan is costing $200 billion to US economy every year and also depriving US of 10 million job opportunities every year. China has gradually started to hold influence on the US economy by owning high value of US treasuries. The US wants China to revalue Yuan which it believes is having an artificial depreciated value of around 17 to 20 percent against US dollar. If Yuan is revalued, the US exports will turn competitive and this may increase the production in US which in turn will affect US GDP positively. Mr. Obama had mentioned in G 20 submit in Seoul this year that other economies cannot thrive on US consumption which goes on show that US is worried about the influence that China is commanding on US economy.
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