U.S. Hegemony, China, and the U.S. Current Account Deficit

Abstract

The U.S. runs a large current account deficit, much of which is with China. I argue that this is the action of a liberal hegemon supporting and integrating a potential challenger and so preserving its hegemony. The U.S. current account deficit supports China in two ways. First, it increases demand for Chinese exports. The Chinese economy has grown faster than it would have if the U.S. had not had a current account deficit with China. Second, and more speculatively, this accelerated U.S. demand for Chinese exports has helped China integrate its large population of un‐ and underemployed labor and so reduced political instability in the context of rapid economic growth. It has benefited U.S. hegemony in two political ways. First, it has accelerated the rate at which China has integrated into the U.S.‐led liberal trading order created in the mid‐1940s and so enhances U.S. hegemony: China is the plausible peer competitor whose economic size might allow it to challenge the existing liberal trading order or even challenge the U.S. militarily; increasing integration makes it much more costly for China to challenge the U.S. and the liberal trading order. The cost for China to challenge the order reduces U.S. costs to preserve its position as hegemon and the congenial environment it created for itself in the second‐half of the twentieth century. Second, and more speculatively, a China that is domestically tranquil poses less of a threat to its neighbors and so further reduces U.S. costs to preserve its position.I first discuss the U.S. as a liberal hegemon. I then consider China and its economic and political challenges. I conclude by discussing how China benefits from the U.S. acting as a hegemon and how U.S. hegemony preserves itself by addressing these Chinese issues.