NCPA - National Center for Policy Analysis


September 25, 2009

The United States and China are two of the dominant economies in the world today, and the nature of their relationship has far-reaching implications for the global trade and financial systems, says the Cato Institute.

The rising linkages between the two economies now stretch beyond just trade and finance, to a variety of geographical and global security issues, says Cato.  The global financial crisis has brought this relationship under the spotlight of international attention.  Getting this relationship right has become considerably important.

Eswar Prasad, writing for the Cato Journal, proposed what he termed a "grand bargain" between the two countries that would cover two areas -- macroeconomic policies and international economic affair:

  • The two countries commit to using fiscal and monetary policy to the best extent possible to stimulate domestic demand in their own economies in the short run.
  • The Chinese allow their currency to become more flexible and responsive to market forces while the United States articulates a plan that commits it to taming its budget deficit once the economy begins to recover.
  • The United States supports an expanded role for China in multilateral financial institutions, including significantly greater voting rights at the IMF and a key role in the Financial Stability Forum.

With these steps the United States could show that it is willing to enter into a genuine economic partnership with China that can benefit both sides.  The United States also needs to demonstrate true leadership by accepting China's expanded role on the global stage, says Prasad.

The Chinese could reaffirm to their restive citizens their commitment to restoring growth and jobs, and also be seen as getting the respect they deserve as a world power while doing their bit for global economic and financial stability.  The political leadership on both sides has to step up to get beyond nationalistic sentiments and convince their people that, in this interconnected world, China and the United States will sink or swim together, says Prasad.

Source:  Eswar S. Prasad, "The Effects of the Financial Crisis on the United States -- China Economic Relationship," Cato Institute, Spring/Summer 2009.

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