Economics Working Paper 18105
Abstract: Eleven years after the breakout of the global financial crisis, large trade imbalances between the world’s two biggest economies, the U.S. and China, still exist. This symbiotic bilateral economic relationship, which we termed “Chimerica” in 2007, seemed likely to end as a result of the global financial crisis. Yet this did not happen. In this paper we examine the evolution of Chimerica in the aftermath of the global financial crisis, and explain how the stimulus policies of both the U.S. and China have contributed to its survival against all odds. We show how stimulus policies helped change Chimerica from a marriage of opposites to a marriage of equals. We then explain why this marriage is destined for strife, in the form of a trade war between the U.S. and China. The consequences of such a trade war would deeply impact the global economy. We believe constructive negotiations on trade rebalancing and policy coordination are therefore needed to avoid a devastating end to Chimerica.
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