Hey everybody, are you happy it’s Friday? I’m still on winter break from university so everyday kind of feels the same right now, but only for one more week! Honestly, I’m glad to be going back to school, I like being busy. Anyways, as always the links to today’s articles will be linked down at the bottom and my goal is to summarize these three articles for you, so you don’t have to take the time to read them yourself, and also to explain the important economic parts of the articles. Today, these articles generally cover the economic global outlook for 2019, but the main focus is on the American and Chinese economies and how these two superpowers (ugh, so cliché) are going to affect the global economy in 2019.
Shelter From the Storm in 2019
This article by Barry Eichengreen, a professor of economics at UC Berkeley focuses on four key areas that he believes will determine global economic, financial, and political stability in 2019; the trade war between the US and China, US economy growth, Chinese financial problems, and finally the results from the European Parliament election in May.
First, for the trade war between the US and China, Eichengreen believes that the trade war should be put on hold. The main reason for this is that trade wars have a negative impact on the market and global growth. Next, he states that the US economy has to grow by at least 2%, if it doesn’t reach that then there will be negative effects on market confidence and stability. Third, China is facing possible slow growth and financial problems in the form of debt that will affect it and it’s neighboring emerging markets. Fourth, Europe is facing integration friction and the need to create a euro-area budget. The outcomes of any of these factors can influence the others, in both positive and negative ways that are impactful to the global economy.
Whither the Chinese Consumer?
What happens in China in 2019 will no doubt have an impact on the global economy as we can see reflected in this article by Jim O’Neill. It also illustrates how influential large companies like Apple are. Because, when Apple released its letter to shareholders about the expected downshift in revenues for the first quarter of 2019 due to slowing Chinese consumption, it generated concern in the market over China’s growth. O’Neill states that a stable decline in Chinese consumption is more worrisome than the current trade war, since the trade war should not have such a profound effect on domestic spending in China. This points to a potential problem in China’s economic model.
O’Neill describes that while Chinese consumer spending has always been less than the US, their dramatic growth of an average 10% per year during the last decade enabled them to have an impact on global brands. A potential slowdown in Chinese consumption would put pressure on American consumers to fill their gap. The global economy in 2019 and onward will be greatly affected by the Chinese market.
Why American Firms and Households Need China
For the last article, Shang-Jin Wei analyzes the benefits from trade with China that often get forgotten, and succinctly explains why a continued trade war with China in 2019 would be detrimental to American consumers. Whereas O’Neill focused on the effect of consumer spending in China, Wei focuses on how the interactions of companies between the two countries affect the economy.
In particular, while the usual argument for trade between the US and China focuses on solely bilateral interactions and the subsequent “losers and winners” from such interactions, Wei takes a broader view on the impact of companies outsourcing to China. He states quite a few benefits that American consumers get from companies outsourcing such as increased spending power and job creation. He does cite however that in order for bilateral trade to be more fair, both countries need to make amendments to their trade policies. For example China should reduce trade barriers and the US should work on lowering tariffs, which can be up to 20% on major imports from China like clothing and textiles.
At this point, I want to break down some of the economic standards and principles these articles bring up. There are more things that I could mention, but all good things in due time, so here are the ones I think are most beneficial to understand.
- Trade wars
- Economic growth
- Spending power
- Job creation
Trade Wars: This doesn’t need much direct explanation, but the economic impacts from trade war do need to be well understood. Trade wars have a global impact on the economy precisely because we depend on global chains of production to enjoy products, including whatever device you’re reading this from. Another impact trade wars have is on confidence; in the last quarter of 2018 whenever negotiations were imminent the market responded well, if the negotiations looked impossible then the market responded negatively, which could affect things such as economic growth. As I mentioned in yesterday’s post, capitalism may not be the best system ever, but it’s better than everything else before it. The current economic system we have needs to have a stable market in order to keep running.
Economic Growth: The articles mentioned economic growth goals for the US and current economic growth trends in China. For the US, a growth goal of 2% was stated. To be clear, developed countries usually aim for 2% growth anyways. Once a country becomes developed, growth does slow down. While this number may seem important, it’s relatively normal, it’s the implications from it being lower than 2% that are important. Reasons for that could be because of, as mentioned before, trade wars.
The economic growth (measured by GDP) slowdown in China could be a potential problem because, even though China’s GDP has grown dramatically especially since 2001, they’re still not a fully developed market, for various reasons that I will make sure to cover for you in another post.
Consumption: In the equation that economists use to calculate GDP, consumption is one of the variables calculated. This means that if consumption decreases, GDP will also decrease. We’re looking at China’s growth potentially slowing down. This could be problematic because since 2008 the Chinese economy kind of took over spending and helped keep the global economy running while the US went into savings mode. If consumption in China really does decrease, then it will most likely be up to the US consumers to try and fill that gap.
Spending Power: How far does your dollar go? Spending power can also be looked at from the point of view of PPP or purchasing power parity. By companies outsourcing to China, consumers in the US PPP increases because they are able to buy more goods for less money. If all companies were forced to move production back to the United States, that means that we’re paying workers more to make the same product and that price gets put on the consumer. If you consider the fact that as of 2017, 78% of Americans reported that they live paycheck to paycheck, that means the lower and middle class consumers will be heavily burdened by an increase in prices for basic and daily products.
Job Creation: In Wei’s article he pointed out that companies who save money by outsourcing to China actually end up creating more jobs here at home precisely because they save money by outsourcing. The money that’s saved goes towards salaries for new workers, and higher salaries, a more liveable wage, than a manufacturing employee would get.
I hope you enjoyed today’s post and that you could learn something new from it. The section below has the links to the articles that inspired this post. The goal is that each of these posts will inspire some sort of discussion or thought, so please, if this made you think about anything or if you learned something new, leave a comment down below. I only ask that we reserve ourselves and not take democratic or republican sides, and leave the bipartisan bickering where it belongs, in D.C.. Also I want to get to know my audience, so even if you don’t want to leave a comment about the post then tell me, do you prefer mountains or oceans? And if you don’t want to tell me that, then just say what you’d like for me to write about.
Have a great weekend!
Project Syndicate, Shelter From the Storm in 2019
Project Syndicate, Whither the Chinese Consumer?
Project Syndicate, Why American Firms and Households Need China