The Trade Deficit with China is a Problem of U.S. Consumption

From: Federal Reserve Bank of Cleveland

On June 19, the People's Bank of China indicated–once again–that it would loosen its grip on the renminbi-dollar exchange rate and allow the renminbi to appreciate against the dollar. Since then, the renminbi has appreciated a meager 0.7 percent against the dollar.

All else constant, a renminbi appreciation should raise the dollar price of Chinese goods, lower the renminbi price of U.S. goods, and whittle away at our trade deficit with that country.

Still, unless the exchange rate moves by a substantial amount, we probably will not see much of an effect.

Between mid 2005 and mid 2009, when the People's Bank of China previously loosened its grip on the renminbi-dollar exchange rate, the renminbi appreciated approximately 20 percent on both a nominal and a real basis against the dollar. (The real basis is what matters for assessing competitive patterns, because it accounts for price pressures in both the United States and China.)

If this appreciation had any effect on the U.S. merchandise trade deficit, it is imperceptible in the data. The U.S. merchandise trade deficit with China continued to grow from $17.6 billion in June 2005 to around $21 billion as the global economic slump settled in and dampened worldwide trade.