Wednesday, September 16, 2009

US China Economic Relations

The relationship between China and the US reminds you of a couple permanently squabbling with each other - but no matter how much they find fault with their partner, they know they couldn't live without each other.

China and US is a classic love hate relationship. It is an intriguing example of how economic ties can bind in a way that political ideology never could.

Statistics for US China Economic Relations.

  • The US has a large trade deficit with China. In 2008, it stood at $268 billion. (US trade deficit stats)
  • For every $1 China spends on US goods, US citizens spend $4.46 in China.
  • Exports to the United States account for 6 percent of China’s entire economic output.
  • US exports to China account for 0.5% of US GDP. In a trade war, there would be one clear loser. (China US trade at NY Times)
  • Because of this large trade surplus China has substantial foreign currency reserves. With these foreign currency reserves, China has accumulated $2 trillion in foreign reserves, mostly in Treasury bonds (government debt) and other dollar-denominated assets
China keeps buying US assets for two reasons.
  1. Buying US bonds keeps the Chinese currency, the Renminbi, undervalued. This makes Chinese exports more competitive and helps boost Chinese growth.
  2. The Chinese have so many US assets they don't want to see them devalued. In a perverse way, the Chinese have a vested interest in the value of the dollar. Also they need a strong US economy so US consumers will keep buying its goods.

Why China needs the US

China needs the US to keep buying its goods. Without US demand, Chinese exports would fall and the economy would suffer. With unemployment high and social instability increasing, this is something the Chinese government don't want.

Why US needs China

The US need the China, for cheap goods, cheap components and perhaps more importantly for their holdings of US Treasury debt. With the US national debt edging towards 80% of GDP, China remains an important player in buying US debt and keeping US solvent. Forecasts for future US national debt mean this will be a key issue for the US.

Political Reality and Economy Reality.

Both governments face a population which takes a much more nationalistic view of events.

Chinese bloggers are criticising the fact China buys so much US debt and then the US place tariffs on Chinese goods like tyres.

In the US, there is a similar protectionist strand. For a long time, a cross party spectrum (though mostly on the right) have held up China as a major cause of declining US manufacturing. They argue the trade deficit with China is a reflection of an unfair exchange rate and unfair competition. Just recently the Obama administration bowed to this popular sentiment in putting tariffs on some Chinese imports.

It is a dilemma for both governments. China is actually sensitive to their citizens anti American feeling and implicit criticism of Chinese policy. Yet, at the same time, they have to walk that difficult tightrope. - They may not like what the US is doing, they may even regret buying all the US debt. But, they don't like the alternative either. The Chinese government knows it needs the US to keep buying its goods - it couldn't afford a collapse in the dollar.

It is maybe true the Chinese could cause very serious problems for the US economy by selling all its US debt. But, paradoxically, China knows that causing major problems for the US would only cause itself major problems.

China will probably keeping buying US debt. Not out of altruistic desire to help an old friend of course! But because it is reluctant to give up its weak Renminbi policy.

The US will put up a few high profile tariffs to appease protectionist sentiment. But, both countries know they cannot afford a full blown trade war. But, as is always possible, political nationalism may triumph over economic sense.


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