China has had a high rate of economic growth within the past decades in GDP terms, higher than any other nation globally. However, recent data indicates the rate of growth has slowed down, and caused mixed reactions among observers. For instance, while some consider that the recent trends in the Chinese economy do not affect the economy of the US, some consider the slowdown as detrimental to the economy. This paper engages in the debate. It argues that the events in China have a substantial impact on the US markets and that to ignore them will mean an ignorance in the manner in which the global economy operates. The paper first sets a picture of the size of the economy of China before arguing as stated since such a move creates an easy understanding of the connection between the two economies. For instance, as this paper reports, a slowdown in the economic growth of China will produce significant reductions in the growth of the economies of both the US and the world. In addition, if a third financial crisis were to occur, a collapse in the labor market would result in massive unemployment in the US. The paper further demonstrates that the US’s balance of trade with China will be affected drastically since the country is a major trading partner of the US.
Data indicates that China is the second largest economy of the world with a nominal Gross Domestic Product (GDP) of approximately 10.36 trillion dollars by 2014; only that of the US is better in GDP terms. Additional data indicates that the Asian giant is the largest economy measured in terms of Purchasing Power Parity (CPP), which means it produces more products in its economy that any other nation worldwide (21.27 trillion dollars as of 2016 compared to only 18.5 trillion in the US) (Amadeo, 2017). However, it is worthwhile noting that the high figures of GDP do not necessarily indicate the wealth of the nation, since China ranked 80th in GDP per capita in 2014 with only 7589 dollars compared to 57300 dollars in the US (Amadeo, 2017). China has relatively low costs of labor and a cheap supply of material, which attracts many global manufacturing firms. For such reasons, firms produce relatively cheap products, which allow them to produce as much in value of domestic goods as the CPP figures indicate. Nevertheless, how exactly does the economy of China affect the US markets?
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Firstly, only Canada and Mexico are larger than China in terms of the volume of exports from the US (Myers and Wise, 2016). In fact, data indicates that as of 2014, the US’s exports to China were valued at 123.67 billion dollars, which meant that the Asian nation accounted for approximately 5.3 per cent of the entire export trade of the US (Myers and Wise, 2016). In addition, China is the biggest partner of the US in import trade that was valued at 466.75 billion dollars as of 2014, which made it approximately 16.4 per cent of the entire value of import trade of the nation (Francis, 2012). An expert analysis, therefore, indicates that the US’s balance of trade with China is negative, and the capital flow from China is the basis of the deficit. These figures also technically highlight that China is the US’s largest creditor since it holds the largest values in terms of the Treasury securities of the US valued at 6134.8 billion as of May 2015 (Francis, 2012). These findings indicate that events within the Chinese economy will influence the US markets and the economy, which the succeeding paragraph highlights.
Secondly, literature reports that a slowdown in the rate of economic growth of the US affects the global economy. For instance, the China’s economy started to grow at a slowed rate since 2010 dropping to 7.4 per cent in 2014 from 9.3 per cent 2011 (Udland, 2016). In fact, recent data projects that the economy of the country will grow at a pace of 6.3 per cent in 2017 (BBC News, 2016). The IMF (International Monetary Fund) projected that the recession would persist until 2018. Several concerns are raised in relation to the slowed growth rates of the economy of China. For instance, it is feared that the slowdown will affect markets that have a close relationship with China such as those of the US. A decrease in the levels of consumer spending in China will negatively affect the exports of the US. It follows, based on the GDP formula, that the GDP figures of the US are likely to decrease in the short-run if the country does not succeed in shifting to other markets (Fox News, 2015). Further implications are likely to follow occasioned by the decrease in the levels of exports while the imports remain constant. For example, experts project that balance of trade disequilibrium between the US and China is likely to widen in favor of the latter (Myers, 2016). Data drawn from the OECD (The Organization for Economic Cooperation and Development) reports that a 0.3 per cent reduction in the rates of growth of the US was produced by a drop of 2 per cent in the domestic demand of China between 2015 and 2016 (OECD, 2016). The effect will also be felt within the Japanese economy because of its stronger association with that of China than the US does. Overall, experts projected that the recession in the economy of China was likely to slow the global economic growth by between 0.5 and 0.6 per cent (OECD, 2016).
The third connection between the Chinese and US economy can be understood from the perspective of the labor market and the effects of a third economic crisis might cause. For instance, as of now, China has the largest number of education professional workers (Myers, 2016). There is a need to note that financial crises result in massive unemployment since most of the firms find it difficult to operate at relatively higher costs of labor than their operations can generate in terms of revenues. If a third financial crisis hit the world, the economy of China will be affected greatly since proponents within the nation are pushing towards a consumer-based economy (BBC News, 2016). It means that the country desires to overcome the dominance of the US through focusing on the CPP aspects of the economy. It further means that a financial crisis would mean that the most of the Chinese workforce will have to flood foreign markets, and the US will be one of the most preferred destinations since it promises better economic empowerment to them than most other markets. There is fear that the situation might cause massive unemployment within the US, as a large portion of the white-collar workforce will lose their jobs. Therefore, the economy of China has a direct effect on that of China in terms of the labor market.
In conclusion, to argue that the economy of China does not affect that of the US is to ignore the manner in which the economy of the world functions. For instance, this paper has demonstrated that an economic slowdown in China will first affect the import and export trade of the US with China. For example, it is already highlighted that China has relatively low costs of labor and inputs than most of the countries, including the US, which has resulted in massive capital flows to the US. It means that export trade of the US has a negative balance with China, which is the third largest export market and largest import market of the US. As the paper has highlighted, a slowdown in the economy of China will widen the trade deficit of the US and increase the public debt figures. Secondly, it has been highlighted within the work that a slowdown in the performance of the Chinese economy will affect both the global and US economy since the nation is the second largest in the world. The country accounts for a significant contribution to GDP of through export-import trade, and as this paper has argued, data projects that a slowdown of 2% will cause a drop of 0.3% in the economy of the US. Lastly, the paper has argued for the significance of the Chinese economy to that of the US through considering the likely effects of a third financial crisis. For instance, the occurrence of another financial crisis might cause a flooding of the US labor markets resulting from massive unemployment in China. Therefore, the three arguments posited in this paper demonstrate the connection between the US and Chinese economies.
References
Amadeo, K. (2017). How Much Does China Really Affect the U.S. Economy? Retrieved 24 May 2017, from https://www.thebalance.com/china-economy-facts-effect-on-us-economy-3306345
BBC News (2016). China economic growth slowest in 25 years - BBC News . Retrieved 24 May 2017, from http://www.bbc.com/news/business-35349576
Fox Business (2015). Chinese Economy Slows - How Chinese News Affects American Investors . Retrieved 24 May 2017, from http://www.foxbusiness.com/markets/2015/11/12/chinese-economy-slows-how-chinese-news-affects-american-investors.html
Francis, D. (2012). Understanding China’s impact on the American Consumer . Retrieved May 24, 2017 from http://money.usnews.com/money/business-economy/articles/2012/10/31/how-chinas-economy-affects-american-consumers
Myers, M., & Wise, C. (Eds.). (2016). The Political Economy of China–Latin America Relations in the New Millennium: Brave New World . Routledge.
The Organization for Economic Cooperation and Development (OECD) (2016). International trade - Trade in goods and services forecast . Retrieved 24 May 2017, from https://data.oecd.org/trade/trade-in-goods-and-services-forecast.htm
Udland, M. (2016). To say that what happens in China doesn't matter to the US is to ignore how the global economy works . Retrieved 24 May 2017, from http://www.businessinsider.com/why-china-matters-to-the-us-economy-2016-1
