Since the US dollar is weakened, does it imply that the trade deficit of US has been improved? If yes, to what extents it is? If no, what are the reasons behind it?
Compare the US balance of trade data of the recent year, the answer is very clear: the trade deficit does not appear to be decreased, instead of getting smaller its keeps increasing.
Fall in exchange rate will generate a positive impact to the balance of trade of one country. If the US dollar has been devalued, by the theory, US goods will be more valuable because the interest-bearing assets will become more attractive, it will attract more investors. US will have buy less of the foreign goods which indicated that imports will be decreased. But the fact is, it doesnât seem to be happening. Does it violate the economic theory?
Perhaps, it may be too assertive to say so. By looking at the trading partner of the US, it will give us the insight to the problems of the huge trade deficit.
The major trading partners of US are Canada, Mexico, Japan and China, therefore the exchange rate is the major factors against these countries. Although US dollar depreciates against Yen and Canadian dollar, it still remains strong against Mexican and Chinese currencies. Evidence shows that the imports from Japan decrease significantly while the imports from Canada increase as the exchange rate decreases. This is due to the fact that most of the Canadian goods are necessities, also as there are a series of firms in America are having long-term contracts with firms in Canada, thus the lock-in contracts will restrict them to decrease the order size that they placed.
Because the US dollar only depreciates against some major foreign currencies like Yen and Euro, but not against the major trading partners. Overall, only the imports of Japanese products had decreased, while the imports from other three major trading partners remain very high or even keep rising, so the US trade deficit is still very large without any incentive to decrease.
Compare the US balance of trade data of the recent year, the answer is very clear: the trade deficit does not appear to be decreased, instead of getting smaller its keeps increasing.
Fall in exchange rate will generate a positive impact to the balance of trade of one country. If the US dollar has been devalued, by the theory, US goods will be more valuable because the interest-bearing assets will become more attractive, it will attract more investors. US will have buy less of the foreign goods which indicated that imports will be decreased. But the fact is, it doesnât seem to be happening. Does it violate the economic theory?
Perhaps, it may be too assertive to say so. By looking at the trading partner of the US, it will give us the insight to the problems of the huge trade deficit.
The major trading partners of US are Canada, Mexico, Japan and China, therefore the exchange rate is the major factors against these countries. Although US dollar depreciates against Yen and Canadian dollar, it still remains strong against Mexican and Chinese currencies. Evidence shows that the imports from Japan decrease significantly while the imports from Canada increase as the exchange rate decreases. This is due to the fact that most of the Canadian goods are necessities, also as there are a series of firms in America are having long-term contracts with firms in Canada, thus the lock-in contracts will restrict them to decrease the order size that they placed.
Because the US dollar only depreciates against some major foreign currencies like Yen and Euro, but not against the major trading partners. Overall, only the imports of Japanese products had decreased, while the imports from other three major trading partners remain very high or even keep rising, so the US trade deficit is still very large without any incentive to decrease.
