Explain the major causes of the large trade deficits in the United States.

The large and rising trade deficits in the United States have several causes. First, the United States economy expanded more rapidly than the economies of several of its trading partners. This resulted in strong income growth and allowed Americans to greatly increase their purchases of imported products. Another factor is the enormous trade imbalance with China. The United States is China's biggest export market but the standard of living there has not grown sufficiently for its households to afford large quantities of U.S. goods. Additionally, China has pegged its currency (the yuan)to a basket of currencies that includes the U.S. dollar so the large trade surpluses in China have not caused the yuan to appreciate like it would have otherwise. The appreciation of the yuan would have made Chinese products more expensive and reduced U.S. imports from China. Also, the savings rate declined in the United States and the gap between saving and investment was filled by foreign savers that created a surplus on the U.S. capital and financial account. This surplus allowed Americans to save less and consume more and part of the added consumption spending was on imported goods. Finally, many foreigners simply prefer U.S. assets because of the relatively high risk-adjusted rates of return they provide. Their purchases of U.S. assets provide foreign currency for American to buy imports.