Question

What major Economic issues are dominating the U.S. – China relationship currently?

Answer 1

The U.S. and China are two of the dominant economies in the world today and the nature of their relationship has far-reaching implications for the smooth functioning of the global trade and financial systems. These two economies are becoming increasingly integrated with each other through the flows of goods, financial capital and people. These rising linkages of course now stretch far beyond just trade and finance, to a variety of geopolitical and global security issues. Getting this relationship right is therefore of considerable importance.

The global financial crisis has brought this relationship under the spotlight of international attention. Indeed, the U.S. and China together epitomize the sources and dangers of global macroeconomic imbalances. U.S. regulatory and macroeconomic policies may well bear a lion’s share of the blame for the current crisis. But there is a deep irony in the fact that Chinese virtue—its high national saving rate—and its policy of tightly managing the external value of its currency abetted U.S. profligacy by providing cheap goods and cheap financing for those goods, setting the stage for a cataclysmic crisis rather than a bubble. The consequences of those policies are now rebounding on the Chinese economy itself.

On the economic front, China’s exchange rate policy has become a flashpoint for these tensions between the two countries. With the U.S. trade deficit and, in particular, the bilateral trade deficit with China swelling in recent years, China’s tightly managed exchange rate regime has come under increasing scrutiny. China’s rising overall trade surplus and its rapid accumulation of foreign exchange reserves have revived accusations of currency manipulation. There have been calls by U.S. legislators for imposing large tariffs on U.S. imports from China or taking other retaliatory measures if there isn’t rapid progress on exchange rate reform. Meanwhile, the U.S. is falling prey to its own protectionist tendencies. The “Buy American” clause in the stimulus bill, which will impact imports from China and other emerging market countries, will be seen by China as a harbinger of rising trade tensions.

There is a great deal of commonality of economic interests between the two countries and it is these shared interests that should be the basis for a mutually beneficial economic relationship.