Trade Wars

Let's see here... China and the USA are playing this little dance. China makes stuff and sells it to people in the USA. People in the USA can afford to buy the stuff from China because they borrowed the money, from China...

We could look at it this way: China, as the world's largest emerging market and also the world's manufacturing centre is pretty well set. At any point, they can just stop buying US debt, double or triple their internal financial support (either through infrastructure projects or direct welfare), and let their own people be their own manufacturer's market. Of course, they would have to prevent their now-rich people from buying non-Chinese products, but a nice trade-war would accomplish this fairly easily.

Or, we could look at it this way: China has been busily manufacturing all this stuff and selling it to a counterfeiter. The US is, after all, just printing money to buy this stuff. What is this money actually suppose to be worth? Thus, the people in the US have all this Chinese stuff and the debt accrued while paying for it will simply disappear with hyper-inflation. Hyper-inflation will happen when people realize that US money is worthless, which will happen as soon as China stops buying it. China will be left with a pile of worthless money, polluted rivers, and air they can't breath. The US, not being able to import anything, will have to ramp-up local manufacturing and, in the process, create local jobs. It's not like there isn't the know-how available to do this. US businessmen have been setting up factories all over the world and staffing them with unskilled labour. Doing it at home will be easy.

So, who wins?

Well, I say China. If they had let things go, contented themselves with just being the world's biggest emerging market, then they would be the ones with debt right now. Instead, they played with the currency such that the majority of their people never really got to the point of being consumers. They exploited their impoverished people, US manufacturing competition, and global trade liberalization such that China became the world's manufacturing centre instead. Yes, all that money they bought to keep their own people poor will become worthless. However, worthless money is still better than debt. The old China could not have ramped up internal production to meet the needs of their people that had become spoilt on imports. Now, they already have the manufacturing. They don't really need an export market because they already have a billion people emerging from poverty. Those people have a lot of things to buy.

I don't think it will be all that bad in the USA, certainly not as bad as the doom-sayers expect. There will be some turmoil, and the embarrassment of no longer being the economic powerhouse of the world. Britain survived this, and the British people seem fine. The US is still a military superpower, and this isn't likely to go away, not when their arms manufacturing is mostly internal anyway. Manufacturing will return and jobs along with it. Really, as all things economic are relative, when China bows out, goes internal as in the Middle Kingdom days of old, the rest of the world will probably get back to normal. Again, after the turmoil subsides.

Really, all that happened is that China screwed the world out of being able to exploit it as the world's biggest emerging economy. They industrialized without being exploited. It's a pretty neat trick when you think about it that way.