According to Niall Ferguson, the relationship between China and the United States is symbiotic or mutual. While China saves, the United States spends almost indefinitely. In 2003 alone, US-debt to China amounted to more than 700 billion dollars – representing 21% of US public debt (Lucarelli, 2007). Last year, US trade deficit to China amounted to 200 billion dollars. At face, this relationship seems to be true. But this is not entirely the case. The United States filed a complaint against China before the World Trade Organization.
The US accused China of allowing the Chinese currency to depreciate indefinitely to increase the value of its exports. Now, because the United States imports huge quantities of imports from China, this represents an indefinite increase in spending. To say that the United States accepts the status quo is ‘a slap in the face. ’ The United States has requested China to allow the appreciation of the Chinese Yuan to reduce the country’s trade deficit.
According to Ferguson, the state of stable disequilibrium exists between China and the United States. This is true. The US public debt increases with respect to increases in aggregate Chinese savings (private and public). An increase in US public debt spurs spending while an increase in aggregate Chinese savings increases domestic reserves. An increase in consumption results to an increase in potential investment while an increase in aggregate savings results to a decrease in public investment (Morrison and Labonte, 2008).
In short, the economies of China and the United States are not in danger. One should note that the current relationship between China and the United States (in the state of disequilibrium) is beneficial for both countries. For one, China expects a rise in foreign direct investments. The United States also expects a rise in domestic investment. A multinational company may find it attractive to invest in China due to its high reserve and huge domestic market.
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Topic: International Financial Markets: Video Critique
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