The costs of rebalancing the China-US co-dependency

The global crisis has revived the growth-rebalancing debate, backing the position of those advocating a fast reduction of the imbalances between the US and China. By means of a two-country two-stage growth model reproducing the main qualitative features of the Sino-American co-dependency, we analyze alternative (medium- and long-term) scenarios for its evolution. We show that altering the Chinese exchange rate policy and down-sizing the US external deficits with a view to moving the production of tradables toward the US may imply relevant costs: the emergence of structural unemployment in the US and a slow-down in the process whereby the Chinese labor force is gradually absorbed in the modern sectors of the economy.