Why there won’t be a US-China trade war

There is a lot of panic in the press about American protectionism but one country the US won’t be putting up trade barriers against is China.

As Richard Wachman says in today’s Observer, the relationship between the two countries is an economic parallel with the Cold War. Should either country fire the first shot, mutual destruction will be assured.

When America, not to mention the rest of the developed world, has run up ever larger debts in the wake of the bailout of the banks, China has become ever more important as a potential acquirer of US government bonds. If China stopped funding the US budget deficit, “the system would collapse and the US economy would be toast”, according to David Williams at Capital Economics.

But as its biggest creditor, it is hardly in China’s interest to see the dollar’s value ripped to shreds: one result would be that China’s $1.95 trillion of foreign currency reserves would collapse in value, wrecking the Chinese economy. And, with exports accounting for 40% of China’s GDP, the stability of world markets is as vital for Beijing as for Washington. In other words, the economic balance of power is such that each side can rely on mutually assured destruction.

Economic historian Niall Ferguson said more or less the same thing a couple of weeks ago. In an interview full of gloomy predictions, he was relatively upbeat about the trade partnership between the two countries: 

As you know, Chimerica – the fusion of China and America – is one of my big ideas. It’s really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that’s really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.

The line is very clear from China. They’ve consistently made their position clear. They want the status quo. They do not want this thing to break down.

The Chinese believe in Chimerica maybe even more than Americans do.

So mutual self-interest will keep the two giants doing business with each other for a while yet.

And if the US isn’t going to introduce protectionist policies against its main source of imports, is there really any point in putting up trade barriers against anyone else?

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3 Responses to Why there won’t be a US-China trade war

  1. Jo Jordan says:

    Yep, barriers are not the point. It’s defining our position in the value chain.

    I’ve also seen predictions that in 5 years, Africa will be competing with China for routine manufacturing. The game is on!

  2. B says:

    Little spilling mistook on your link to the Niall Ferguson article (its Niall not Naill.)

  3. Rick says:

    By Jove, B, you’re right. I thought it didn’t look right but I couldn’t work out why.

    I’ve corrected it now.

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