China as America’s banker

The direction of capital flow across the world historically has headed from West to East, but with the rapid rise of the Chinese economy, it started flowing heavily in the opposite direction.

In 2007, amidst the beginnings of the financial crisis, the United States needed to borrow around $800 billion from the rest of the world; more than $4bn every day. In contrast, China ran a current account surplus of $262bn, equivalent to over a quarter of the U.S. deficit. An extraordinarily large percentage of that surplus ended up being lent to the United States. In effect, the People’s Republic of China became the banker to the United States of America.

The topic of the trade balance between the two countries is highly sensitive politically, and ever more so since a President with an eye to enforcing protectionist policies took office.

One of President Trumps key aims is to address the U.S.-China trade deficit, which increased to an 11-month high in July. Representatives of his cabinet (including Rex Tillerson, pictured) have been holding meetings with their Chinese counterparts throughout 2017 to attempt to tackle the issue.

Though the aims may seem fair to Republicans in Washington, U.S./China relations are not without strain and this stance on trading arrangements may rock them further. China has long been antagonising the U.S. over its disputed claims to territory in the South China Sea, where it is building military outposts, some say to disrupt Americas ‘pivot to Asia’. To the U.S. this represents a challenge to their dominance in the pacific region, where American military bases stretch from The Marshall Islands and Guam to Australia and Japan.

There has never been a more vital economic relationship between two countries in the history of the world, so developing a more unified front on both financial and military issues should be at the forefront of the minds of those in government both in Beijing and Washington.

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