US-China Rivalry: The Macro Policy Choices

Abstract

Stylized representations of recent US and Chinese tax reforms, tariffs against imports and alternative Chinese monetary targeting are examined using a calibrated global macro model that embodies both trade and financial interdependencies. For both countries, unilateral capital tax relief and bilateral tariffs are shown to be "beggar thy neighbor" in consequence with tariffs most advantageous for the US if revenue finances consumption tax relief. China is nonetheless a net loser when these policies are implemented unilaterally by the US, irrespective of its policy response, though a currency float is shown to cushion the effects on its GDP in the short run. Equilibria in normal form non-cooperative tariff games exhibit spill-overs that are substantial but insufficient to deter dominant strategies. The US imposes tariffs while China liberalizes, sustaining fiscal balance via consumption tax relief in the US and expenditure restraint in China.

China’s Transition to a New Phase of Development

“…What does a financially integrated Chinese market mean for the global economy? Tyers and Zhou (2020) show that China's financial openness, as measured by crossborder flows and asset ownership, peaked during its growth surge in the 2000s, as did downward pressure on global interest rates and prices. Globally, China's growth surge raised asset prices, reduced yields and bolstered deflationary pressures, while improving aggregate economic welfare.…”