U.S. trade deficit and China export

Trade deficit jumped 9.3% to $63.1B in November, 2007, the widest in 14 months. The increase was driven by a 16.3 percent surge in America's foreign oil bill, which climbed to an all-time high of $34.4 billion as the per barrel price of imported crude reached new records. With oil prices last week touching $100 per barrel, analysts are forecasting higher oil bills in future months.

On the other hand, The November deficit with China dipped slightly to $24 billion, but that was down from a record high of $25.9 billion set in October, when retailers were boosting orders for toys, games and video equipment to stock their shelves for Christmas.

Congress has been pressing Chinese government to rise its currency. The Yuan is indeed climbing recently. But it has limited effect on U.S. deficit. Chinese government, although implicitly under joint pressure from U.S. and EU, tried to lower their surplus with other partners since 2007(no wonder the Yuan has appreciated more that 10% since 2007), has little compliment thus far.

If Chinese government allows the surplus unchecked, it would further rise Yuan's value and eventually hurt its export engine. Considering the dominance of export in its economy, it would be more efficient to control its export. No matter how thin the profit is, firms exporting goods can obtain refunds in China. This is a large incentive for export, including firms that have large export overhead. To put a brake on the Chinese side, eliminate or reduce refund can effectively reduce export motivation so that the surplus pressure can be reduced. Consequently, less Yuan appreciation pressure too.