"Effects of a widening trade deficit and the necessary government policy"
"Trade Gap Widens, Fuels Calls for Tougher Stance on China" WSJ, 4/13/05, A2.
The U.S. current account (trade deficit) hit a monthly high rising 4.3% in February to $61.04 billion. The increased deficit reflects the rising costs of imported oil and increased consumer demand for foreign goods. Imports rose by $2.58 billion from January to February as Exports remained constant.
The widening trade deficit over the past two years has economists concerned about the longevity of attracting foreign capital. This is especially true between China and the U.S. where the deficit has increased 50% from 2004, making it the largest deficit of any single country.
As a result, there is pressure from industry officials to consider stronger trade guidelines to correct for this widening deficit. The U.S. cites the fixed yuan-dollar exchange rate for keeping China's currency relatively weak and therefore encouraging the consumption of Chinese goods in world markets.
The U.S. government is considering a 27.5% tariff on all Chinese products entering the U.S. if Beijing refuses to raise the value of their currency. This purpose of this tariff would be to offset China's currency advantage, but critics argue it may increase the price of Chinese-made goods more than a currency adjustment.
To assess the validity the proposed policies for this scenario, we will analyze this issue using intermediate economic theory as a framework.
The current account is of great concern to U.S. policymakers as a long-run surplus or deficit may h ...