In November 2007, the American trade deficit grew 9.3 percent, to $63.12 billion

Question

In November 2007, the American trade deficit grew 9.3 percent, to $63.12 billion, the biggest deficit in 14 months. Imported oil accounted for more than half of total imports. The November deficit with China dipped slightly to $24 billion, down from a record $25.9 billion. Questions:

1. The trade deficit with China accounts for over one-third of the U.S. trade deficit. Does this mean that the U.S. trade deficit will be reduced significantly if the U.S. stops importing from China? Explain why or why not.

2. The gulf nations and China are among the biggest investors of the U.S. Treasury Bonds. How do they end up accumulating such large dollar reserves? (Hint: their currencies are more or less pegged to the U.S. dollar.)

Explanation / Answer

1) No, If US stops importing from China, the big importers like Walmart will find some other country to procure goods from, This will increase the trade deficit as new country may not sell goods as cheap as china sells.

2) China was the no.1 investor in US treasury bonds, What they did was simple, To keep Yuan value low they have to buy US dollars, They bought those dollars in the form on treasury bonds that have state guarentees. China had no other choice at that time,

Right now China has diversified its investments and trying to invest more of its money in Africa and other Asian countries.

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