Footing the Bill for Dependence on China

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In earlier articles we have pointed out that China’s economy is headed downwards, with major problems facing government and people.  History shows that such situations, if serious enough, have led to the breakdown of the Chinese state

As the United States and China are intimately tied on many levels, what would the consequences of such a breakdown be for America?

There are four major ways a Chinese collapse, even incomplete, would affect our nation and our lives.

The first impact, already palpable, is the uncertainty, and eventually panic, that such a possibility generates. This would occur primarily in the financial area, which by now is thoroughly globalized. World finance is a multi-national web of loans, payments, trades, currency speculation and central bank policies where no component can be dissociated from the whole and impacts in one location or area are transmitted instantaneously through the system being further amplified by a multi-layered network of derivative contracts.

China occupies a large portion of this global network, and its problems already are having substantial effect, particularly on stock markets. Future shocks could be somewhat reduced by massive central bank intervention, but the resulting instability would last years.

The second impact from a Chinese crisis would be on its suppliers. To feed its economy China has imported massive amount of goods, including:

  • Raw materials (metals, ores, foodstuffs) from Latin America, Australia, Indonesia and others. As these are curtailed the economies of the suppliers are hit.
  • Components: China does not produce all that goes into its exports (think cell phones, for example). Many components are sourced from its neighbors, including Japan, Taiwan, South Korea or Singapore. Now these economies are beginning to suffer just like those of the raw material suppliers.
  • Machinery and technical goods needed for expanding the production base and infrastructure (machine tools, construction equipment, cars, trucks, aircraft) coming from Europe, Japan and the U.S.

Cutbacks in Chinese imports in all above categories have a widespread negative impact on the global economy, as shown in in the general business outlook and stock markets – which, in the world’s 10 largest economies, have fallen substantially since this summer, when China’s problems first became generally known.

The above could be termed “indirect” impacts. Their consequences are severe, but they take time to develop and are spread throughout the global economy.

The third and fourth impacts are “direct” and more immediate:

  • The U.S. population daily consumes many products imported from China, from food and common drugs to furniture and shoes. Any disturbance preventing the production or shipment of such goods would have a nearly immediate effect in term of shortages of essential or desired items – even in the midst of an apparently prosperous economy. Such shortages would be extremely disruptive – particularly in an election year as 2016.
  • Shortages will be further exacerbated by the complexity of current supply chains. For example, crab caught today in Alaskan waters now goes to China for processing, instead of to an onshore cannery as in the past. If something goes wrong “over there”, both U.S. fishermen and consumers are up the creek. This can happen to a huge variety of goods.

Shortages as described above are disruptive because (1) they are unpredictable; (2) they can be long-lasting; and (3) they are very difficult to explain away. In addition they will translate immediately into price increases, black markets and other misery.

There is no quick fix. Once production has been shipped somewhere else the skills associated with it (procurement, engineering, manufacturing, and quality control) disappear, and bringing the operation back to domestic soil becomes a major (and expensive) undertaking.

Americans are by nature an enterprising people, and to many the above difficulties will present a welcome challenge. But to the great majority of the populace they will also be proof of the shortsightedness and incompetence of the corporate and political leaders who allowed the situation to develop. These may find out that, for all the wonders of globalization, its ultimate consequences are not trivial, and that the final bill may end up being too large for their purse.

Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.

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