The role of yuan devaluation
Trade ties between China and the US have expanded substantially over past three decades. Total trade between the US and China trade rose from $2 billion in 1979 to $347 billion in 2016.
In 2016, China was the largest trading partner and exporter to the US. China is also one of the US’s biggest source of imports, ranking at the third place in its list of importers.
The US now has the highest trade deficit with China among trading partners. The US trade deficit with China was down by 5.5%, at $347 billion in 2016, as compared to $367 million in 2015. But it’s still more than three-fifths of the overall deficit.
Such a trade deficit arises due to more imports than exports. The trade deficit in 2016 was due to US exports to China at $2.2 trillion, while imports from China totaled $2.7 trillion.
The value chain
For the US (IVV) (VOO), the value chain includes exports by US-based companies sending raw materials to China for low-cost assembly and then importing the finished goods back to the US. Several US corporations rely heavily on this value chain for their profits.
China is a ~$400-billion market for US firms and includes US services exports to China, sales by US foreign affiliates in China, and re-exports of US products to China. Many US companies consider China a critical part in staying competitive globally.
A trade deficit is seen to weaken the currency, but it also results from a weak currency. China has meanwhile been blamed for manipulating the value of its currency, even though Chinese authorities have aimed to keep the rate market driven.
The constant devaluation of Chinese yuan, in any case, has led to the appreciation of the US dollar, making its exports more expensive. The appreciating dollar is also expected to impact the bottom line of big multinational companies like Apple (AAPL), Microsoft (MSFT), International Business Machine (IBM), and General Electric (GE).
China’s devaluation of the yuan has affected the US, thus, by increasing the US trade deficit with China, due to falling exports. We’ll explore the impact of China’s yuan devaluation on the US economy further in the next part of this series.