Trade Balances of the United States with China, Mexico and Japan

Abstract

Exports, imports, nominal exchange rates and disposable incomes are important factors affecting trade balances. Given that the major sources of U.S. trade deficits are related to China, Mexico and Japan, the purpose of this study is to examine empirically the impact of five variables, namely, export; import; nominal exchange rate; disposable income in China/Mexico/Japan and in the U.S. and the Sino-U.S., Mexico-U.S. and Japan-U.S. trade balances. The empirical samples were annual data from 1980 to 2018. The research methods included the unit root test and the Johansen cointegration test. Results showed that exports, nominal exchange rates and the real GDP of the U.S. had a significant positive impact on the Sino-U.S. trade balance, whereas imports had a negative impact on the Sino-U.S. trade balance. The Mexican-U.S. trade balance was significantly affected by these five variables, but the nominal exchange rate was not consistent with theoretical expectations. Although thesefive variables also significantly affected the Japan-U.S. trade balance, the impacts of the real GDP of Japan and the real GDP of the U.S. on this trade balance were not consistent with theoretical expectations. On the basis of the empirical results, the following tactics could avoid or reduce trade disputes with the U.S. if the Trump administration triggered international trade disputes in East Asia and North America. (1) China, Mexico and Japan could expand the number of domestic markets that to accommodate imports from the U.S. and search for additional international markets to reduce exports to the U.S. (2) The appreciation of the Renminbi and the Japanese yen could help alleviate trade surplus with the U.S., as China and Japan had been accused by President Trump of manipulating currencies in favour of their economies. (3) The U.S. should make its products more competitive in the Chinese, Mexican and Japanese markets to improve its trade deficit.

Keywords:  Japan-U.S. trade balance, Johansen cointegration test, Mexico-U.S. trade balance, Sino-U.S. trade balance