<p>The &quot;US-China trade deficit&quot; isn't a real thing. Yes, there are some transactions classified as &quot;exports from US to China&quot; and others classified as &quot;exports from China to the US&quot;, and you can subtract the latter from the former and get a negative number, but that doesn't represent anything fundamental about the world economy. Suppose that the US were to stop buying widgets from China and buy them from Taiwan instead, and the country that was buying them from Taiwan were to start buying them from China. Everyone would end up buying/selling the exact same amount of widgets, yet the &quot;US-China trade deficit&quot; would go down despite absolutely nothing fundamental about the world economy changing.</p>
<p>The <em>overall</em> trade deficit of the US does have an effect on the USD, but higher trade deficits make a currency go down in value, not up. Of course, a decrease in currency value tends to decrease trade deficits, which means that this effect tends to be cancelled out.</p>

CC BY-SA 4.0
2020-10-07T22:58:33.563Z
2020-10-07T22:58:33.563Z
Acccumulation
<p>Both the exchange rate and the trade balance are equilibrium outcomes. One does not cause the other. Whether they comove depends on the source of the shock. Two hypothetical examples:</p>
<ol>
<li>The shock is an increase in the productivity of US investment. The result is (could be) capital inflows as domestic investment exceeds domestic saving. The dollar appreciates and we get a trade deficit (the flip side of capital inflows: the US is selling assets, so it gets goods in return).</li>
<li>The shock is a reduction in U.S. tradeable output. Consumer demand for foreign goods may increase. The dollar depreciates and we get a trade deficit.</li>
</ol>

CC BY-SA 4.0
2020-09-07T21:42:33.807Z
2020-09-07T21:42:33.807Z
LutzHendricks
<p>I'm curious to see how broadening or narrowing a trade deficit would affect a currency pair.</p>

CC BY-SA 4.0
2020-09-03T21:31:55.757Z
If one consults an economics/financial time series database, it is safe to say that currencies can either go up or down in response to a change in the trade deficit. A currency market is a market, and like other markets, does not follow simple rules. As such, I don’t see how this question can get a good answer.
Brian Romanchuk
CC BY-SA 4.0
2020-10-07T23:03:18.173Z
@BrianRomanchuk There is a clear correlation. See here: http://katchum.blogspot.com/2013/09/correlation-trade-deficit-vs-currency.html
Acccumulation
<foreign-exchange>
Since the US-China Trade Deficit grew, would the USD be valued more now compared to the RMB?
Sean Taylor
# Since the US-China Trade Deficit grew, would the USD be valued more now compared to the RMB?

(Asked by: username_0 on 2020-09-03)

I'm curious to see how broadening or narrowing a trade deficit would affect a currency pair.

**Tags:** foreign-exchange
> **Comments:**
> **username_1**: If one consults an economics/financial time series database, it is safe to say that currencies can either go up or down in response to a change in the trade deficit. A currency market is a market, and like other markets, does not follow simple rules. As such, I don’t see how this question can get a good answer.  
> **username_2**: @BrianRomanchuk There is a clear correlation. See here: http://katchum.blogspot.com/2013/09/correlation-trade-deficit-vs-currency.html  

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## 2 answers

### Answer by username_2 on 2020-10-07. Score: 1

The "US-China trade deficit" isn't a real thing. Yes, there are some transactions classified as "exports from US to China" and others classified as "exports from China to the US", and you can subtract the latter from the former and get a negative number, but that doesn't represent anything fundamental about the world economy. Suppose that the US were to stop buying widgets from China and buy them from Taiwan instead, and the country that was buying them from Taiwan were to start buying them from China. Everyone would end up buying/selling the exact same amount of widgets, yet the "US-China trade deficit" would go down despite absolutely nothing fundamental about the world economy changing.

The *overall* trade deficit of the US does have an effect on the USD, but higher trade deficits make a currency go down in value, not up. Of course, a decrease in currency value tends to decrease trade deficits, which means that this effect tends to be cancelled out.


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### Answer by username_3 on 2020-09-07. Score: 0

Both the exchange rate and the trade balance are equilibrium outcomes. One does not cause the other. Whether they comove depends on the source of the shock. Two hypothetical examples:

1. The shock is an increase in the productivity of US investment. The result is (could be) capital inflows as domestic investment exceeds domestic saving. The dollar appreciates and we get a trade deficit (the flip side of capital inflows: the US is selling assets, so it gets goods in return).
2. The shock is a reduction in U.S. tradeable output. Consumer demand for foreign goods may increase. The dollar depreciates and we get a trade deficit.


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