In 2010, China’s ordinary-trade balance recorded a $71 billion deficit with East Asia and surpluses of $44 billion and $23 billion with the US and Europe, respectively. Europe’s ordinary exports to China increased from $85 billion in 2009 to $115 billion in 2010. By contrast, America’s ordinary exports to China increased more slowly, from $50 billion in 2009 to $64 billion in 2010. Thus, firms in East Asia and Europe are benefiting more than firms in the US from increasing demand in China.
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If imbalances between the US and China are thus unsustainable, it makes sense for policymakers to pursue a soft landing. In the case of the US, this requires recognizing that the government faces a budget constraint. For China, it means redirecting saving away from reserve accumulation towards cash-strapped small and medium-size enterprises, as well as much-needed investments in education, health care, and affordable housing.