Unexpectedly Intriguing!
November 27, 2007

Earlier this year, we speculated that with the rate of growth of the U.S.' exports to China consistently growing faster than the rate of China's exports to the United States, we might see the U.S. trade "deficit" with China peak and begin declining.

Since that time, that trend in the relative growth rates of each nation's exports to the other has continued:

Rolling One-Year Trade Growth Rates, U.S. and China, January 1985 to September 2007

And the value of goods and services the U.S. exports to China now appears to have fully doubled for the second time since January 2001:

Doubling Rate of U.S. Exports to China, January 1985 to September 2007

Looking specifically at the U.S.' trade balance with China, it appears very possible that the so-called U.S. trade "deficit" with China may not pass its previous peak of $24.4 billion USD that it reached in October 2006:

U.S. Trade Deficit with China, September 1987 to September 2007

We think this situation is very possible for two main reasons:

  1. The value of the U.S. dollar has been declining steadily. Even though the Chinese yuan has been pegged to the value of the dollar, China has moved to loosen that connection somewhat. As a result the Chinese yuan has slightly increased in value, making U.S. exports to China relatively less expensive by comparison.

  2. The U.S. economy is expected to slow, while China's economy will continue to grow at a faster pace. This state of affairs benefits the U.S. trade balance since a slower economy typically demands fewer imported goods, while a growing economy demands more.

We'll know for sure if this is the case on December 12, 2007, when the U.S. Census Bureau releases the U.S.' trade data for the month of October 2007. As October typically represents the annual peak of China's exports to the U.S., coming ahead of the Christmas shopping season, the data will decide if the so-called U.S. trade deficit has pretty much well peaked for the foreseeable future!

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