The United States and the PRC: macroeconomic imbalances and economic diplomacy

USDA China

Article Highlights

  • Over the last decade, macroeconomic imbalances between the US and the PRC have grown significantly.

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  • Policy instruments that could potentially bring change have been the subject of intense political debate in US and the PRC

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  • Questions of how to address macroeconomic imbalance between US and PRC seem unlikely to lose prominence

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ABSTRACT

Macroeconomic Imbalances and Economic Diplomacy

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This paper explores the ways in which macroeconomic imbalances have driven policy discussions between the United States (US) and People’s Republic of China (PRC) in the last decade. The PRC’s current account surplus, its growing foreign exchange reserves, and its shifting policies on exchange rate adjustment have become a central preoccupation of US trade policy. The paper considers the evolving political economy of the US policy stance and of the PRC’s response; it assesses the opportunity costs of an approach that has sometimes focused on the exchange rate to the exclusion of other issues; and it explores the ramifications for economic governance in the short- and medium-run. The paper finds that there has been ample mutual misunderstanding between the US and the PRC in their economic arguments; that the momentous debates have the potential to severely impair the institutions of global economic governance; and that there is likely to be an important race between economic and demographic forces that will naturally redress the imbalances and the political imperatives for each country to stand tough and fight.

Philip I. Levy is a resident scholar at AEI.

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