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The United States and China are now the two largest economies in the world. For the last decade, the United States has been an important net source of demand for the world economy, running persistent large current account deficits. China has been an increasingly important net source of supply for the world economy, running persistent large current account surpluses.

The relationship between the two countries is multifaceted and goes well beyond economic relations, but questions of macroeconomic imbalances have remained at the heart of bilateral discussions between the two. Given their importance to the world economy, these imbalances have also become central to multilateral discussions about global economic governance. In fact, the issues surrounding China's trading relationships have been sufficiently important to help prompt a restructuring of the institutions of global economic governance. The Group of 8 countries (G8), which did not include China, has been largely set aside in favor of the Group of 20 (G20), precisely because that group does include China and is therefore deemed more relevant.

Despite the centrality of U.S.-China macroeconomic imbalances, there has been an unhealthy tendency to oversimplify the issue by seeing the countries as unitary actors. When the role of interest groups is acknowledged, it may be only to declare one such interest group predominant and responsible for whatever wayward policy the country has adopted.

This study examines the two countries' macroeconomic imbalances of the last decade and the diplomacy surrounding them through the lens of political economy, positing that there are significant internal divisions within each country and that the policy outcomes that emerge may differ significantly from those that a powerful, unitary actor might impose. Such a decomposition of the forces shaping national policies is substantially easier to perform when the subject polities are transparent and public in their debates over policy formation. When they are not, one is left to rely on suggestive signs and inferences, which can be far short of dispositive. One central thesis of the paper, however, is that the acknowledgement of heterogeneity among important interest groups can suggest very different approaches to economic diplomacy than those that might be optimal for a homogeneous counterparty.

Philip I. Levy is a resident scholar at AEI.