The Impact and Implications of the Financial Crisis on Trade in the United States and China

Excerpt:America’s subprime mortgage crisis started off a massive butterfly effect around the world, triggering a global financial hurricane. Markets everywhere were affected, with serious implications for export oriented economies such as China. Entering the 21st century, the interdependence of trade between the U.S. and China (two of the biggest economies in the world) has increased by more than 20% annually. Average export dependence by China on the United States between 2001 and 2007 has been 6.72%. With such a tight interdependence there’s no doubt that the U.S. experiencing a recession will have repercussions in the Chinese economy. It is estimated that for every 1% decline in U.S. economic growth, China’s exports to the U.S. will experience a decline of 5%-6%.

Meanwhile a falling U.S. dollar and the appreciation of the RMB will be most strongly felt in southern China, particularly in the Guangdong, Jiangsu and Zhejiang areas where manufacturers have been closing down or cutting production at a rapid pace. The small and medium sized businesses, SME’s, have been especially hard hit being largely reliant on the cheap RMB as an engine for export growth. Bankruptcy has been a frequent result leading to increased unemployment and social instability.