External imbalances between China and the United States: A dynamic analysis with a life-cycle model

Abstract

In this paper I use a life-cycle model to study the role of population aging and pension income as drivers of China's persistent trade surplus vis-à-vis the United States. China's rapid increase in life expectancy coupled with its relatively low pension expenditures may help to explain the country's high savings rate, persistent trade surpluses and accumulation of a sizable net foreign asset position. Although China's high productivity growth has a strong negative impact on its trade balance, the model predicts a positive net foreign asset position and trade balance for China for most years in the simulation period.