China (officially People's Republic of China), ruled by a communist government, experienced abnormal Gross Domestic Product (GDP) growth rate over the past decades.
Data from 2018, however, signaled an economic growth slowdown of the Asian giant. But what impact would this have on the U.S. economy and the global economy? To 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, had the second largest economy ranked just below the United States with a nominal GDP of $12 trillion in 2018. However, this high GDP did not necessarily indicate the wealth of the country. The country ranked 20 for GDP per capita, which was only $15,308 as of 2017.
Many global manufacturing companies attracted by low labor costs and cheap supply materials in China located 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 US Economy
China is the third largest export partner (the first and the second being Canada and Mexico, respectively) of the United States, with export goods and services valued at $129.9 billion in 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's largest creditor in 2018.
China is also the United State's largest import partner whose imports were valued at $505.5 billion as of 2017 or about 21.6% of the total imports of the United States. Thus, the trade balance of the U.S. with 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 held the largest part of the US Treasury securities with an amount of $1.18 trillion as of 2018. According to April 2018 figures from the U.S. Treasury, this was just over 21% 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’s largest economy, The United States.
The Chinese Slowdown
Source: Trading Economics
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 these negative developments, the deficit in the U.S. balance of trade with China widened further in the short run.
Effect on Unemployment Rates
U.S. companies that generate an important portion of their revenues from China are likely to be negatively affected by lower domestic demand in China. This is bad news for both shareholders and employees of such companies. When cost-cutting is necessary to remain profitable, layoffs are usually one of the first options to consider, which increases the unemployment rate.
The Silver Lining
A Chinese economic slowdown had some positive effects on the U.S. economy. One reason oil prices decreased from high levels was pessimistic expectations for the GDP growth rate in China, the biggest oil importer, with imports of around 8.4 million barrels per day in 2017.
One of the biggest beneficiaries of low oil prices is the United States; it was the second biggest oil importer with about 7.9 million barrels in 2017. Lower oil prices positively affected the U.S. trade balance deficit as the cost of the country’s oil imports 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 adversely impact the world economy and slow down global economic growth. The United States is one of the countries that is likely to be affected by a slowdown in the Chinese economy because of the expected decrease in the export of goods and services to China. However, the negative effects of the economic slowdown can be temporarily mitigated from normalized oil prices.