Question

Will the impact of changes in the balance of trade between the US and China be enough to impact US Treasury bond yields, and therefore have a negative impact on U.S. fiscal policy? Explain.

Answer 1

The United States has been running a trade deficit with China for the past many years. The trade deficit is also high in the country especially with China which exports significant amount of goods and services to the United States. Since the deficit is high, it will have an impact on the US Treasury bond yields because this will impact overall BoP deficit in the country. Thus, fiscal deficit can seen and there will be negative impact on U.S. fiscal policy as government spending will have to increase to cover this deficit in the BoP. Thus, when the trade deficit is high, there will be negative impact on U.S. fiscal policy.