US (trade) war with China

Posted: January 12, 2017 in Uncategorized

One of the mainstay policy of Trump is the idea that China pillaged US.

While this is true – specially at the low end of manufacturing and assembly – a real trade war is close to a Mutual Assured Destruction as it can.

On the surface the strategy is atteinable as the US imports just 12.5% of GDP from China (and China stands at 22.5% ). Also at trading partner level the idea repeats as US trade with China represents 3.8% of Chinese  GDP – while on the other way it is just 0.65%.

But digging in the numbers shows a more scary picture for the US

Most of the Chinese exports are concentrated in consumer level electronics (eg Apple phone, television etc), toys and cheap clothing. A trade war would significantly increase the prices of these items and, in the US, consumption represents 68% of GDP. In China consumption is only 37% of GDP…but rapidly growing and interesting just as sheer size of population.

Also China would suffer greatly.

Already, under the surface, has a lot of stresses. Even if it is less consumption directed a trade war would make the Yuan fall through 7 (Yuan vs USD) and accelerate capital outflow that even draconian capital control could hardly stem.

As the Chinese reserves are already officially USD3 trillion (and probably under) and the “limit” for the economy is approximately USD2.6 trillion…a trade war could lead to a full crisis.

In the history of humankind governments in crisis usually create a bogeyman when confronted with an existential crisis. For China this bogeyman would be the US and tension will escalate in the South China Sea with the potential of a real world war 3 between US and China.

 

 

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