External imbalances between China and the US: a dynamic analysis with a life-cycle model

Abstract

This paper uses a life-cycle model to study the role of population ageing and the low level of pension income in retirement as drivers of China's persistent trade surplus vis-a-vis the United States. In the model, the fast increase in life expectancy coupled with the relatively low pension expenditures can help to explain its high savings, the persistent trade surplus and the accumulation of a sizeable net foreign asset position. The model predicts a positive net foreign asset position and trade balance for China for most years in the simulation period even though China's high productivity growth has a strong negative impact on its trade balance.