Widening of US Trade Balance in August

Monday, 18 October 2010

New statistics out of the US economy show that the trade balance for the month of August widened yet again. Figures illustrate the exact position that the economy currently finds itself in, and they are extremely interesting - given that the US economy is fast losing ground in the race for the biggest economy in the world.

In August, the US imported $35.3 billion US dollars worth of goods from China alone - which astute investors realize means a huge inflow to the Chinese economy. Current estimates show that in about 4 to 5 years, the Chinese economy will surpass the US economy in terms of trade size and value.

However, 5 years is a long time to wait for this to happen. There are a number of issues which must be resolved in the nearer term before any "overtaking" can validly take place.

One of these issues of course is the value of the Chinese currency. The Yuan - which many say is undervalued by as much as 40% - has been allowed to appreciate only very slightly in the last few months, much to the horror of China's major trading partners. And, furthermore - it seems that the Chinese authorities are not easing up on their stance on the currency any time soon.

These days, the issue of course is that because of the artificially low currency, exports from China are favoured over domestic production - because of the cheap labour and raw materials which can be taken advantage of in the Asian economy.

Therefore - by making it cheaper to actually develop and ship goods from China to America, domestic production suffers by the amount that was brought in from abroad.

This is a tricky spot that the US government finds itself in. Do they directly intervene in the currency markets themselves to do something about the Chinese situation? Do they force China to move the currency peg and thereby open the door to trade sanctions and other political nasties along the way? Or, alternatively, do they do nothing and simply hope that the Chinese currency will eventually catch up based on real supply and demand in the long term.

This last option really does seem to be the most unlikely option of them all. Doing nothing - which is a valid option in economics - is not likely to help the US to solve the ongoing problem that it faces. And with the announcement that the trade balance has widened - a close look might be in check for the balance of the USD and Yuan reserves in the weeks and months ahead.