By Sanuj Shah

“The love-hate relationship between two economic giants”

Tom put a chunk of cheese and a mouse trap in front of Jerry’s mouse hole in order to trap him. When Jerry fell for the trap, Tom laughed at him for a while but then helped Jerry out of the trap only to set him free.

We have grown up watching the love-hate relationship of Tom and Jerry. They always want to outdo the other, make the other suffer and set traps for each other but they can never live without each other. Who would have thought that two of the leading economies of the world were so inspired by a cat and a mouse that they decided to get become the Tom and Jerry of the International Economy.

The United States of America (they prefer being called the “Big Daddy”) and the People’s Republic of China have always teased each other and chased each other but their economy simply refuses to let go of the other. The world thinks that these two countries have always battled it out to show their economic supremacy, however, their growth story is like that of a married Indian couple – they fight like cats and dogs but can’t deny their underlying love for the other.

The United States of America, like the egoistic husband, has always claimed that it is China who needs them. Whether a patient of Alzheimer or not they seem to have conveniently forgotten that China is USA’s biggest banker. The US economy depends heavily on foreign capital flows from countries with a high rate of savings (like China) to meet its domestic investment needs and fund the federal budget deficit. The purchase of USA’s private and public securities including Treasury bonds by China has ensured a low real interest rate in the U.S economy. As of December 2013, China was the largest creditor to the United States with a holding of $1.305 trillion. This raises questions like “Can Beijing use US treasury bills to dictate terms on Washington?”

To apply the simple concept of excess supply, if China chooses to dump its US debt, the unsinkable dollar, like the Titanic, will crash. The investor confidence will weaken, the rate of inflation will start heading towards the sky and Washington will fail to finance its budget deficits. So then why doesn’t China dump its US debt?

A budget surplus economy like China needs the dollars to reduce the fluctuation of the Renminbi and at the same time it cannot depress the value of its national wealth (Yes. The American treasury bills constitute a great part of China’s national wealth). Dampening the US dollar would also mean affecting the global economy, as a result of which the demand of Chinese goods in the international market, especially America, will decline and an export driven economy like China can hardly afford this.

As second largest exporter in the world, 17% of Chinese exports find their way into the United States. This makes the USA, China’s largest trading partner. If China chooses to weaken the American dollar, Chinese exports will show a sharp fall further adding to the problem of increased unemployment in the Chinese economy.

The United States of America is one of the largest investors in the Chinese economy. With over $3.5 billion worth of investment, US companies have been largely responsible in maintaining a sustained consumption pattern amongst the Chinese population. China’s GDP when adjusted to purchasing power only produces $9,100 per person compared to USA’s per capita GDP of $49,800. This low standard of living in China, allows the Chinese workers to be paid less, thereby, making Chinese goods cheaper and luring foreign companies to outsource jobs there. If the American investments were to dry out, the already low consumption patterns in China would show a downward trend, lowering the already dismal standard of living and increasing poverty in China.

There is a common perception in the Chinese population that the USA is trying to contain China’s rise in the international community not just by the means of diplomatic and military tools but also economically through the excessive use of the World Trade Centre’s (WTO) dispute-settlement mechanisms and domestic trade remedies like antidumping and countervailing-duty actions. The Trans Pacific Partnership (TPP) championed by Washington is seen as excluding China and many in China perceive the investment climate in the US as hostile to Chinese firms. The United States on the other hand is concerned about the market access and regulatory barriers in China. They feel that there is an uneven playing field with favoured Chinese state-owned enterprises and US firms. The inadequate enforcement of intellectual property rights in China and the anxiety over the safety of Chinese products has long been the areas of concern for the American population. They, therefore, feel that China is not playing ‘by the rules’ and undermining America’s economic might and, in some areas, even the national security.

Economic supremacy is the foundation for political dominance in this highly globalized world. Just like Tom never misses a single chance to catch Jerry and Jerry never gives up on any opportunity to trouble Tom, both these countries have always held onto every single opportunity to outdo each other. They have fought in the World Trade Centre and the World Bank, taken economic measures to curtail each other and used their diplomatic ties to achieve economic superiority. The irony is that neither can become an economic superpower without the other. Now it is up to them to realize whether they “love to hate each other or hate to love each other.”

You should know:

  1. China’s average tariff rate is 4.1 percent. The prevalence of state-owned enterprises and government subsidies continues to distort the economy. The state continues its tight control of the financial system as its primary means for managing the rest of the economy. The government owns all large financial institutions, which lend according to state priorities and directives and favour large state enterprises.

 

Sanuj Shah is an undergraduate student at the Shri Ram College of Commerce. An avid cricket fan and health freak, he fell in love with writing at an early age. He is currently associated with the Research and Editorial wing of the Economics Society at SRCC and a volunteer at Teach India. His areas of interest include political economics, psychology and philosophy. His dream is to travel the world, try different cuisines and meet new people. A true Aries, he can spend hours arguing with people, even at times when he knows he could possibly be wrong. 

Posted by The Indian Economist | For the Curious Mind