China (officially聽People's Republic of聽China), ruled by a communist government, has experienced an abnormal Gross Domestic Product (GDP)聽growth rate over the past聽decades.
Data from 2018, however, signaled an聽economic growth聽slowdown of the Asian giant. But what impact would this have on the U.S. economy and the global economy? To聽answer this question, you need to first assess the economic position of China within the world economy.
The Size of China's Economy
China, the most populous country in the world,聽had the second-largest economy ranked just below the United States聽with a聽nominal GDP聽of $12聽trillion in 2018. However, this high GDP did not necessarily indicate the wealth of the country. The country ranked 20聽for GDP per capita, which was only $15,308聽as of 2017.
Many global manufacturing companies attracted by low labor costs and cheap supply materials in China located聽their manufacturing units in China. This allowed companies to produce goods cheaply, and it explains why many of the products we use in our daily lives are made in China.
Relationship With the U.S. Economy
China is the third-largest export partner (the first and second being Canada and Mexico, respectively) of the United States,聽with export goods and services valued at聽$129.9聽billion in聽2017, according to the Office of the United States Trade Representative. That made up about 8.4% of the total exports of the United States during that time period.
- The economies of the United States and China are intricately linked, due to the two nations sharing the second-largest trading partnership of goods and services.
- Low production costs and cheap labor are negatively impacting the export market of the United States.
- China's impact on oil prices can benefit the United States in the short term, as the States can enjoy decreased oil import prices.
- China was the United States' largest creditor in 2018.
China is also the United States'聽largest import partner whose imports were聽valued at $505.5聽billion as of 2017聽or about 21.6% of the total imports of the United States. Thus, the trade balance聽of the U.S. with聽China was negative, and this deficit is financed partly by capital flows from China.
China was also the largest creditor of the United States and聽held聽the largest part of the U.S. Treasury securities with an amount of $1.18聽trillion as of 2018. According to April 2018 figures from the U.S. Treasury, this was just over 21%聽of U.S. overseas debt.
All of these statistics show the importance of the Chinese economy and why any developments in China, be they negative or positive, can influence the world鈥檚 largest economy, the United States.
The Chinese Slowdown
Concerns raised include the possibility that the slowdown in the economy of China will have negative impacts on the markets that are closely related to this economy, one of them being the United States.
GDP = Consumption + Investment + Government expenditure + (Export-Import)
With exports decreasing and imports less affected by聽these negative developments, the deficit in the U.S.聽balance of trade聽with China widened further in the short run.聽
Effect on Unemployment Rates
U.S. companies that generate an important portion of their revenues from China are聽likely to be negatively affected by lower domestic demand in China. This is bad news for both shareholders and employees of such companies.聽When聽cost-cutting聽is necessary to remain profitable, layoffs are聽usually one of the first options to consider, which increases the聽unemployment rate.
The Silver Lining
A Chinese economic slowdown had some positive effects on the U.S. economy. One reason聽oil prices decreased from high levels was pessimistic expectations for聽the GDP growth rate in China, the biggest oil importer, with imports of around聽8.4聽million barrels per day聽in 2017.
One of the biggest beneficiaries of聽low oil prices is the United States; it was聽the second-largest oil importer with about 7.9聽million barrels聽in 2017. Lower oil prices positively affected the U.S. trade balance deficit as the cost of the country鈥檚 oil imports聽decrease.
The Bottom Line
China, with its giant economy, has a huge influence on world economies, particularly those related to China. A decrease in domestic demand in China can聽adversely impact the world economy and slow down global economic growth. The United States聽is one of the countries likely to be affected by a聽slowdown in聽the Chinese economy because of the expected decrease in the export of goods and services to China.聽However, the negative effects of the economic slowdown can be temporarily mitigated from normalized oil prices.