Abstract ：
Using a nonlinear cointegration technique, this paper shows that the bilateral U.S. current account balance with China has a U-shaped relationship with the life expectancy gap between the United States and China. A narrowing gap means that the catch-up in Chinese life expectancy initially increases the U.S. deficit. However, the direction of this effect is reversed as the life expectancy gap continues to narrow, so that the increased U.S. deficit with China falls with a further catch-up in Chinese life expectancy. The life expectancy gap has been below its threshold level since 2013, and the United Nations predicts that the gap will fall over the next 60 years. This long-run demographic trend has the potential to improve the U.S. current account balance with China. To provide a theoretical foundation for the empirical results, we develop a simple two-country overlapping generations model and show that the U-shaped relationship can be theoretically reproduced.

Keywords : U.S. current account balance with China; Nonlinear cointegration; Catch-up in life expectancy

JEL code: F32; J11