Magazine article Regional Economist

Reader Exchange

Magazine article Regional Economist

Reader Exchange

Article excerpt

ASK AN ECONOMIST

Yi Wen is an economist and assistant vice president in the Research division at the Federal Reserve Bank of St. Louis. He joined the St. Louis Fed in 2005 after teaching at Cornell University for six years as an assistant professor. His research field is in macroeconomics with a focus primarily on the business cycle. His hobbies include walking, swimming and playing badminton. To read more on his work, see http://research.stlouisfed.org/econ/wen/

Yi Wen in Leshan, China.

Q. Why does the U.S. have such a large trade deficit with China?

Prices of consumer goods in the United States have been remarkably low and stable for decades. One of the most important reasons for this, besides sound monetary policies conducted by the Fed, is international trade with developing countries, such as China.

Each year, China sells goods to us at very low prices. For example, Chinese workers need to use 16 million T-shirts to exchange for one Boeing 737-800 airplane from us (at about $5 per T-shirt). More than that, they even lend goods to us by keeping our paper money for a long time.

The result is a huge trade deficit with China: For every dollar Americans spend on Chinese goods, Chinese spend 30 or fewer cents on American goods. China currently holds a total of $3 trillion in foreign reserves, mostly in U.S. dollars or U.S. government bonds. This means that U.S. consumers have been enjoying huge quantities of low-cost goods by borrowing cheaply from China at negative real interest rates. …

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