BBC News - Who loses out in the US-China trade war?

[TaiShang]

You have to understand that the US economy is predominantly domestic driven. Domestically produced for domestic consumption. It's trade share of GDP is one of the lowest in the world despite being the 2nd largest trading country.

China is world's largest trading country. Yet, trade makes up about 23% of the GDP. As @Chinese-Dragon says, over 75% of GDP comes from domestic consumption.

It is not that China relies as much on exports for growth as Japan, Korea or even Germany, which is a larger trading nations than the US.

 

[Mista]

Yes and a consumption-driven economy wants a strong currency to keep the prices of consumer goods low right?

If the dollar is massively devalued then consumer spending will fall, since the dollars in their pockets won't be able to buy as much as before, and the prices of consumer goods will go up right?

A weaker dollar means they won't be able to buy as much as before, which will have a huge negative impact on growth in a consumption-driven economy.

In the first place the spending you mean here isn't accrued to the US economy but to the exporter's country.

P.S. From the numbers I saw, consumption makes up 76.2% of China's GDP growth? In comparison, consumption makes up around 70% of US GDP growth.

https://www.cnbc.com/2019/01/20/reu...of-chinas-2018-gdp-growth-exports-a-drag.html

Uh huh?

As @Chinese-Dragon says, over 75% of GDP comes from domestic consumption.

75% of GDP growth, not GDP.

 

[Chinese-Dragon]

In the first place the spending you mean here isn't accrued to the US economy but to the exporter's country.

Increased consumer spending leads to increased demand for imports.

To reduce prices of consumer goods you need imports (or imported components for "domestically produced" goods).

Even China needs to import, China is the 2nd largest importer on Earth. And others need components and rare earths from China too.

Even if foreign exporters do earn the money, it's generally accepted in economics that specialization and international trade benefits everyone overall, compared to countries trying to do everything themselves. You produce that in which you have a competitive advantage, and you trade it with other countries which produce goods in which they have a competitive advantage.

 

[Mista]

That's some very shadow understanding on the surface.
Even a country of 90% relying on consumption is hugely subject to foreign trade fluctuations.
You talk as if domestic part and the trade part are completely separated.

What shadow?

Of course all countries today are subjected to foreign trade fluctuations, the question is how much? Indonesia's currency drop by 70% when the AFC struck and they made a real GDP growth in the following year.

How much will the USD drop? How much imports will be affected?

 

[TaiShang]

75% of GDP growth, not GDP.

That's true for all countries.

So, consumption is taking over as the most important component for GDP. This is an important aspect of China's economic transition.

Once consumption takes over as the engine of economic growth, then, dependency on overseas markets is reduced.

 

[Mista]

Increased consumer spending leads to increased demand for imports.

To reduce prices of consumer goods you need imports (or imported components for "domestically produced" goods).

Even China needs to import, China is the 2nd largest importer on Earth. And others need components and rare earths from China too.

Even if foreign exporters do earn the money, it's generally accepted in economics that specialization and international trade benefits everyone overall, compared to countries trying to do everything themselves. You produce that in which you have a competitive advantage, and you trade it with other countries which produce goods in which they have a competitive advantage.

Err yes? I don't disagree here. Which of my point are you addressing here again?

 

[Chinese-Dragon]

Err yes? I don't disagree here. Which of my point are you addressing here again?

I don't necessarily disagree with your idea of devaluing the US dollar (to help with the Current Account and to reduce a bit of the debt burden)... but in the end it still results in what I said, people will have to tighten their belts and live with the fact that the dollars in their pocket won't buy as much as before. Resulting in less spending and more saving.

Also the US is currently engaged in multiple trade wars across the globe, notably with China and the European Union. Don't you think that they will devalue along with the US, ending up with a "race to the bottom" like the current trade wars?

For example, in the current trade negotiations, the US is trying to get China to agree not to devalue the Yuan. If the US devalues won't it escalate the trade war? Does the US want to race China in who can devalue faster?

 

[TaiShang]

I don't necessarily disagree with your idea of devaluing the US dollar (to help with the Current Account and to reduce a bit of the debt burden)... but in the end it still results in what I said, people will have to tighten their belts and live with the fact that the dollars in their pocket won't buy as much as before. Resulting in less spending and more saving.

Also the US is currently engaged in multiple trade wars across the globe, notably with China and the European Union. Don't you think that they will devalue along with the US, ending up with a "race to the bottom" like the current trade wars?

Previous trade wars the US engaged in (with Europe, Japan, Mexico etc) were all very targeted and limited. The US had some technical arguments to make. Never in their protectionist history did they make such sweeping arguments and used such strong demanding language as this one.

This either shows strength, or desperation.

 

[Mista]

I don't necessarily disagree with your idea of devaluing the US dollar (to help with the Current Account and to reduce a bit of the debt burden)... but in the end it still results in what I said, people will have to tighten their belts and live with the fact that the dollars in their pocket won't buy as much as before. Resulting in less spending and more saving.

Well, I was addressing your point on US leaders asking their people to cut spending which will lead to recession.

In an ideal free market the currency will automatically devalue if there's a current account deficit, whatever your saving rates, and appreciate with a surplus.

But of course in reality we don't live in an ideal free market world. We recycle the USD back to the US economy making the USD artificially strong so that they can buy more of our goods.

We have to ask ourselves, what's the point of it ultimately. Like the point of earning money is to spend, we export to earn foreign currency so that we can import. If we keep on exporting without importing, we are just earning the paper money, not tangible improvements in living standards. And that paper money's value diminishes if your customer devalues.

 

[Chinese-Dragon]

Well, I was addressing your point on US leaders asking their people to cut spending which will lead to recession.

I do think they need to eat bitterness for a while, so their future generations can benefit. Stop with the trillions in spending plans and tax cuts that they can't afford, let the economy cool a bit.

The alternative is the current route of borrowing more and "passing the buck" down to the next generation. This can't go on forever, even with the US dollar still being the world's primary reserve currency their daily debt maintenance is through the roof.

 

[Mista]

Stop with the trillions in spending plans and tax cuts that they can't afford, let the economy cool a bit.

That's right. Unemployment rate is low and wages are high. There isn't a need for fiscal stimulus which just overheats the economy, and the Fed had to hike rates to cool the economy because of the tax cuts. Then Trump blames the Fed when it's actually his tax cuts at fault.

 

[Chinese-Dragon]

That's right. Unemployment rate is low and wages are high. There isn't a need for fiscal stimulus which just overheats the economy, and the Fed had to hike rates to cool the economy because of the tax cuts. Then Trump blames the Fed when it's actually his tax cuts at fault.

Trump is trying to time it so that he can win the 2020 election. He also wants the boost from a China trade deal to help with the election.

Not that he needs it. I can't see anyone beating Trump in 2020.

 

[Brainsucker]

Cutting spending will get them into a recession.

If the US wants to cut the deficit, they should cut interest rates and let the dollar devalue massively. Exports will be cheaper and imports more expensive, two birds with one stone.

Because at the end of the day they are exchanging paper money for tangible improvement in standards of living, and they can simply print the USD. It's like playing monopoly and the banker has unlimited supply of money.

Sure, it will cause inflation but the cost will be shared with the rest of the world who holds USD.

And ironically the larger the US current account deficit, the more USD the rest of the world holds.
The more USD the rest of the world holds, the more the rest of the world has vested interest in the USD.
The more the vested interest in USD, the stronger the USD as the rest of the world buys US debt.
The stronger the USD, the larger the US current account deficit.

Hey, Mista. Once again thanks for your explanation here. It's very clear, easily to understand, and tickle our hunger of knowledge about finance.

Trade War in the long run is good for both countries.

For China, it will fastening the innovation.

While for USA, it will bring back manufacturing to USA.

But if we see it in the way USA want to stop or slowdown China technological and scientific advancement, it won't.

How can USA bring back manufacturing to their country, when their unemployment is at the lowest at the moment? Who will open the new business? Who will apply for the new job?

This trade war is not about bringing back manufacturing to USA. As their manufacturing capability (high tech) one still one of the best in our planet. They just want to destroy China economy, and then China themselves.

 

[Nike]

Hey, Mista. Once again thanks for your explanation here. It's very clear, easily to understand, and tickle our hunger of knowledge about finance.



How can USA bring back manufacturing to their country, when their unemployment is at the lowest at the moment? Who will open the new business? Who will apply for the new job?

This trade war is not about bringing back manufacturing to USA. As their manufacturing capability (high tech) one still one of the best in our planet. They just want to destroy China economy, and then China themselves.

They got "Mexican " oh "Venezuelan " refugees at their door step, it is easy to get hundred thousands if not millions cheap labor in US of A , actually as long as they opened their long border

Remember most of "those" refugees actually well educated, capable to use new tech, and skilled person in their original country and they willing to do dirts job for meager sum of US dollar

 

[Brainsucker]

They got "Mexican " oh "Venezuelan " refugees at their door step, it is easy to get hundred thousands if not millions cheap labor in US of A , actually as long as they opened their long border

Ah yes. You're right.