Why Chinese Yuan (RMB) is not the solution to US Trade Deficit?

Photo by Sam Getliffe. Original

Although currency war is looming, I have every reason to believe that it is not the solution. In particular, appreciation of Chinese Yuan, or Remenbi (RMB) is not the solution to the huge trade deficit of the United States.

You do not need any complex econometric models. Just consider what GDP is comprised of:

Y = C + I + G + NX

Y: GDP, C: Consumption, I: Investment, G: Public Sector Spending, NX: Net export

The other way to look at GDP is that all the money collectively earned by a country is either spent, saved, or taxed:

Y = C + S + T

C: Consumption, S: savings, T: Taxation

Thus here comes:

C + S + T = C + I + G + NX

A bit of algebraic manipulations turn this equation into:

NX = (S – I )+ (T-G)

So net export equals to private sector saving minus investment and taxation minus public sector spending, which is government surplus or deficit.

So the simple answer to why the trade deficit is so high is that both the private and public sectors are spending too much and saving too little. So do not blame the Chinese, because if Americans keep spending much and saving little, they will have trade deficit. The only problem is from where to import: China, or elsewhere?

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.