Wednesday, October 3, 2012

Economy: US/China - Don`t Bite The Hand That Is Feeding You

The US election campaign is getting more and more heated and noisy. Some of the election pledges are irritating, to say it at least. If we believe the media then the Republican candidate Mitt Romney utters an anti-China rhetoric which could lead to severe economic disturbances if he would win and would stick to that.

The Republican contender tries "to brand himself the most protectionist or biggest China basher in the presidential race", writes Forbes ( Romney labels China as a "currency manipulator" and accuses the second largest economy of the world of stealing American technology and intellectual property", reports NPR (

Even some of Romney`s business friends fear that his anti-China talk could escalate into trade sanctions, including punitive tariffs on Chinese goods, and also could lead to blocking government purchases of Chinese goods ( The worst case scenario would be a full blown trade war with China.

This conflict would be insane and could lead to a kind of economic suicide because both nations are benefitting a lot from trading with each other:

1. For years China has been financing a large part of the US public deficit  ( China is now the largest foreign creditor of the US and the Chinese government (including their central bank) owns more than a trillion dollar of US government bonds (wikipedia). A trade war could provoke the Chinese to get rid of these bonds or to dump at least a large part of them. This could trigger turbulences on the financial markets, putting bond prices and dollar exchange rate under pressure and raise the US interest rates significantly.

Higher interest rates would endanger the already fragile economic upswing. Furthermore: If the US government has to pay higher interest rates for its debts than it would need more tax money to service them or to sell more bonds which would translate into an even higher debt.

2. US consumers are enjoying now relatively low prices for clothes and other goods which are imported from China including smart phones and many other electronic devices. A trade war would trigger price hikes for many goods hurting especially Americans with a low income. If US consumers have to spend more money for a lot of goods they would have less money to spend for other goods and services, for instance restaurants. This (negative) income effect could slow down the whole US economy  and destroy American jobs.

3. Many US companies like Caterpillar (construction equipment), General Motors, Starbucks (already 700 stores in China) and McDonald´s have been exporting large parts of their products to China or doing business there. In a full blown trade war they could loose their Chinese markets which would reduce their revenues & profits drastically and could destroy many jobs in the US.

4. Another large part of the US economy, including shops, hotels, restaurants, have been benefiting from the fledging tourism from China. A trade war could erase those incomes and could ban the US from the fast growing market of the expanding Chinese middle class tourists and shoppers.

But there is hope. I don´t really believe that Romney would stick to his anti-China announcements if he would win in November. During election campaigns contenders usually use strong words to get the attention from prospective voters, in the China case from labor unions and some nationalists. Romney`s anti-China rhetoric might be just the result of the fire that the nominees are feeding now. Very often a winner of an election gets milder and more pragmatic when he tries to implement his election program.

And the power of any president is limited by the highly complicated political structure in the U.S., called "checks and balances ". Whatever a  president intends, he has to deal with the Congress and the Senate. The political process gives the opposition a lot of possibilities to intervene and weaken his policy.  I also hope that Romney´s business friends and counselors are warning him about the serous consequences of a trade war.  And being a politician he also could realize that the mess he would create could seriously hamper his chances to govern more than one election period.

No comments:

Post a Comment