Research the balance of trade in the United States and China and relate how hist

Question

Research the balance of trade in the United States and China and relate how historical changes in exchange and interest rates have affected imports and exports between the two countries. Specifically address the following: Explain how trade balance, interest rates, and exchange rates are related, and cite an example of how a rise or fall in one changes the others. Does a deficit in China or the United States change the overall advantage or disadvantage of trade? Why? Explore how the cost and quantity of imports and exports, such as electronic equipment, may be challenged by the rise and fall of these rates. Incorporate the fluctuations of supply and demand into the costs incurred and decide ways management calculates estimations for further product needs. Explain the philosophy of “international crowding out,” citing an example of how this may occur, and describe how excessive borrowing in one country has affected interest rates in the United States.

Explanation / Answer

The balance of trade forms part of the current account, which includes other transactions such as income from the net international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it factor in the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, it is likely the transaction statistics are accurate.

Factors that can affect the balance of trade include:

In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.

Monetary balance of trade is different from physical balance of trade (which is expressed in amount of raw materials, known also as Total Material Consumption). Developed countries usually import a lot of raw materials from developing countries. Typically, these imported materials are transformed into finished products, and might be exported after adding value. Financial trade balance statistics conceal material flow. Most developed countries have a large physical trade deficit, because they have a large ecological footprint. Civil society organisations point out the predatory nature of this imbalance, and campaign for ecological debt repayment.

Since the mid-1980s, the United States has had a growing deficit in tradeable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption. The U.S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.

Economies such as Japan and Germany which have savings surpluses, typically run trade surpluses. China, a high-growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate has tended to run high trade deficits, especially with Asian nations.

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