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US Hegemony, China, and the US Current Account Deficit
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US Hegemony, China, and the US Current Account Deficit
Carmel Davis8/25/06
16
China has contributed to this relationship, but it has been a contribution within the context of UShegemony. China has promoted its economic growth by providing a national form of vendorfinancing to the US through its capital account deficit in the form of acquisition of dollar-denominated foreign reserves. China has had little choice but to accumulate such assets to peg theyuan to the dollar, which has enhanced its ability to export to the US and recently enhanced itsability to export to Europe as the dollar has fallen against the euro. However, this vendorfinancing has required US willingness to accept it. The US could have refused to allow China tojoin the liberal trading order to the extent or at the pace it did. For example, higher US tariffs onChinese goods would have slowed Chinese economic growth. Or, the US could have run asmaller fiscal deficit, so reducing the opportunity for vendor financing and reducing consumption.Or the US could have promoted personal saving rather than consumption.
The current account deficit has served the interests of the US as a hegemon by helping to create acongenial international order and China by maximizing economic and social growth anddevelopment while minimizing political and social instability. US purchases of Chinese exportshave employed Chinese labor and have provided China with strong incentives to engage inpeaceful trade, and China has leveraged this process by lending capital to the US to allow the USto buy Chinese exports. Thus, the current account deficit has helped integrate China into the UShegemonic order, so helping to perpetuate US hegemony, while helping China develop and makean economic and social transition.
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US Hegemony, China, and the US Current Account Deficit
Carmel Davis
8/25/06
16
China has contributed to this relationship, but it has been a contribution within the context of US
hegemony. China has promoted its economic growth by providing a national form of vendor
financing to the US through its capital account deficit in the form of acquisition of dollar-
denominated foreign reserves. China has had little choice but to accumulate such assets to peg the
yuan to the dollar, which has enhanced its ability to export to the US and recently enhanced its
ability to export to Europe as the dollar has fallen against the euro. However, this vendor
financing has required US willingness to accept it. The US could have refused to allow China to
join the liberal trading order to the extent or at the pace it did. For example, higher US tariffs on
Chinese goods would have slowed Chinese economic growth. Or, the US could have run a
smaller fiscal deficit, so reducing the opportunity for vendor financing and reducing consumption.
Or the US could have promoted personal saving rather than consumption.
The current account deficit has served the interests of the US as a hegemon by helping to create a
congenial international order and China by maximizing economic and social growth and
development while minimizing political and social instability. US purchases of Chinese exports
have employed Chinese labor and have provided China with strong incentives to engage in
peaceful trade, and China has leveraged this process by lending capital to the US to allow the US
to buy Chinese exports. Thus, the current account deficit has helped integrate China into the US
hegemonic order, so helping to perpetuate US hegemony, while helping China develop and make
an economic and social transition.
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