Quora: Cutting Trade Ties to China Would be Catastrophic

Brokerage house in Shanghai, China
An investor looks at an electronic board showing stock information at a brokerage house, Shanghai, China, January 3. Aly Song/Reuters

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Answer from Taylor Griffin, Former U.S. Treasury and White House staff:

If the U.S. suddenly stopped trading with China, the consequences would be devastating for both countries.

The U.S. and China are so substantially intertwined that they are in some sense part of a single economic system. An abrupt end to that relationship would result in a major recession in both countries. The U.S. economy would eventually recover, but China would likely enter a depression that could result in its economic and political collapse. The consequences would extend far beyond the U.S.-China import/export relationship.

The biggest potential impact would be a macroeconomic meltdown. The loss of trade with the U.S. would send the value of China's currency into freefall. This would force a fire sale of China's massive dollar-denominated foreign exchange reserves, principally held in U.S. Treasury securities. Yields on U.S. government debt would likely spike.

A massive dollar shortage in China would result from the halting of dollar payments to Chinese exporters. This would restrict China's ability to import oil, which is traded in dollars, and increase pressure to move away from the dollar as the international currency standard.

If that happened it would have a disastrous effect on U.S. Treasury yields and interest rates. Interest rates on everything from mortgages to auto loans would rise suddenly. The net effect would be like slamming the brakes on the U.S. economy.

The cost to borrow for the U.S. government would rise too, increasing federal interest payments and worsening the already terrible U.S. fiscal problem.

China might confiscate financial assets of U.S. banks, of which there are over $100 billion, and the foreign direct investments of U.S. firms, which total about $65 billion.

The first thing you'd notice directly would be widespread shortages of the vast array of consumer goods made in China.

Eventually supply chains would adjust as other low-cost producers like Vietnam and Cambodia ramp up production to fill the gap. But, in the meantime, WalMart's shelves would be all but empty. The broader retail sector would be hit hard with business closures and job losses.

China is also America's third largest export market. They would presumably cut off trade with the U.S. in retaliation, or simply because they lack dollars to buy U.S. products. U.S. exports to China were $113 billion last year. [2] So, you could expect some layoffs and business closures at businesses reliant on exports to China.

It would hit the U.S. hard. But, the impact on China's economy would, of course, be substantially more devastating.

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Quora: Cutting Trade Ties to China Would be Catastrophic | Opinion