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How does trade deficit for a prolonged period(say 10-15 years) affect a country's economy? I have read that it should affect it adversely, but the US trade deficit has been negative since the mid 1960's and still the economy is going strong as compared to others. In the case regarding China US trade, how does this affect considering the fact that there is a huge trade deficit year on year, then shouldn't the Chinese Yuan value rise steadily as compared to the US dollar?

Am I correct in assuming that the net trade deficit of all the countries should sum up to zero?

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up vote 2 down vote accepted

Here is a good explanation by the SF Fed.

In a nutshell, there is the current account (trade deficit/ surplus) financial account (asset bought/ sold overseas) and the capital account (intangible assets, usually negligible). The sum of the three for each country is zero by definition.

Therefore the trade deficit must be accompanied by a financial account surplus of the same magnitude (ignoring capital account). Essentially this puts in the national account tables the conventional wisdom that 'the US consumption is financed by borrowing money from abroad'. This was due to a global increasing 'savings glut' from the 70s onwards.

Regarding the second question, the Yuan is 'pegged' or 'managed' by the Bank of China, therefore its appreciation is perhaps slower than what it should have been. This also acted as a catalyst for the inreasing US trade deficit, as the automatic stabiliser (i.e. the FX rate) was impeded.

Regarding your third question, the answer is yes. All current accounts globally will add up to zero. Same for all financial accounts and capital accounts.

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