…For years the U.S. and China traded freely. Both economies grew in both size and influence but the trade war between the two nations [has] brought fear to global markets. How much and where will the trade war impact?
The U.S. and China currently dominate the world stage for economic power. They literally control almost half of the world’s GDP. While China focuses on transforming its economy from manufacturing to services and consumption, the U.S. derives most of its GDP from services. When you talk about a trade war between these countries, you’re talking about half the economic globe fighting!
This didn’t just happen overnight. Over 30 years China grew more and more to rely on the U.S. to buy their goods and grow their economy. While they initially started out closer, the U.S. quickly grew to import far more than China. However, the last decade has seen this begin to decrease some in percentage terms.
China happens to be one of the largest consumers of soybeans the U.S. exports. In 2018 they purchased over 35.6M tonnes of soybeans, over 8x the closest country so it should come as no surprise that states like Illinois, who happen to be one of the top producers of soybeans, rely economically on China for trade…[and] states like Texas rely extensively on trade (though mainly petroleum) but you don’t have to look far to find places in the U.S. hurt by the trade war.
As the U.S. continues to impose tariffs on goods from China, and vice versa, both countries are raising the stakes of the ongoing trade war.
In the map above,
- the color of each state represents the impact that export tariffs could have on the state, with
- lighter shades of pink representing lower impact and
- darker shades of red or brown representing greater impact.
- In addition, yellow circles illustrate how much each state’s economy relies on exports;
- larger circles correspond to a higher percentage of exports as a percentage of GDP.
- In absolute numbers,
- states on the West Coast, Gulf Coast, and Mid-Atlantic region stand to lose the most money as a result of these export tariffs. By contrast,
- states in the Midwest and Great Plains stand to lose the least amount of money.
- Some state economies rely more on exports than others. For example,
- exports comprise 26.7% of Louisiana’s economy, compared to only 0.7% of Hawaii’s economy…
Consumers will note the effect of the new tariffs, since many everyday products will increase in price. Economists predict that American households will spend an extra $1,000 a year as a result of these tariffs.
For decades the U.S. Dollar has stood as the standard for doing trade. China’s recent growth required it to hold large amounts of foreign currencies to facilitate business. Conversely, most of the partners the U.S. trades with hold U.S. dollars.
One of the biggest fears for U.S. economists in the trade war is the U.S. debt held by China. If China unloaded their debt holdings, it would primarily hurt China yet, it would eventually drive up U.S. interest rates over time. However, we’ve seen the start of currencies being used in the trade war. China has allowed its currency to weaken in an effort to make it’s outputs more competitively priced with market, and offset tariff costs.
A country’s total reserves can have a dramatic impact on its economic policies [so the question is: [How should that]…impact China’s trade wars with the U.S.?
Liquid reserves allow countries significant leverage in economic policies and trade wars and China currently holds over $3 trillion in reserves, far higher than Japan’s second-place $1.24 trillion in reserves. China also holds a significant amount of U.S. debt, forcing them to walk a tight rope with the U.S.; they don’t want to rock the boat too much, but they have tremendous leverage to use if necessary. If China were to sell off its reserves, it would have cascading effects on the economy, including driving up U.S. interest rates…[and] massive economic consequences for the globe.
As the trade war heats up, the final impact remains unknown.