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Rebalancing the US-China Economic Relationship

CAMBRIDGE – As the global economy stabilizes, there is a growing danger that the United States and China will slip back into their pre-crisis economic patterns, placing themselves and the rest of the world at risk. Despite Chinese official rhetoric about the need for a new global currency to replace the dollar, and US lawmakers’ flirtation with “Buy American” clauses (which scares everyone, not just the Chinese), no one will want to rock a boat that has almost capsized. So China continues to run a giant trade surplus, and the US continues to spend and borrow.

Short-run stability certainly seems attractive right now. But if the US-China trade and debt relationship merely picks up where it left off, what will prevent recurrence of the same unsustainable dynamic that we just witnessed? After all, huge US foreign borrowing was clearly a key factor in creating the recent financial mess, while China’s excessive reliance on export-driven growth has made it extraordinarily vulnerable to a sudden drop in global demand.