Q&A of the Day – The Potential Impact to You If There’s Conflict with China
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Today’s Entry: Today’s note was submitted via talkback inquiring about the impact a potential conflict with China would have on this country.
Bottom Line: As I’ve recently discussed... Our current conflict with Iran isn’t just about Iran. It’s about all of the countries it’s allied with in what’s been coined by some as the new “Axis” powers. At the top of that Axis power food chain is China. As you’ve heard me say many times over the years... China isn’t just China and Russia isn’t just Russia. China is Russia, is Iran, is North Korea (with Little Rocket Man), is Cuba, is Venezuela, is Nicaragua. They’re all bad actors aligned with a common mission of knocking the United States and our allies out of world superpower status. And as I highlighted last week, it’s not just Iran that’s stepped up its aggression against the United States... China has been too. In case you missed it (because it basically was ignored in news reporting in this country)... China has stepped up its direct provocation with the US by harassing our forces in the Pacific. And that’s come at a time in which Chinese forces blocked and collided with two Pilipino military vessels in the South China Sea which prompted US officials to state that the US will defend the Philippines against China which is necessary under a 1951 treaty.
The bottom line is that the world is a powder keg right now, a situation that’s as volatile as it’s been since the peak of the Cold War. At worst, that could mean World War III but among the many implications in between, there’s the potential impact for essentially a complete decoupling of the US economy from the Chinese economy due to China’s hostilities. For example, how realistic is it to still expect that there’d be a bunch of cheap “made in China” trinkets flowing from China if the United States is militarily involved in defending Taiwan and/or the Philippians from China the way we have aided Ukraine against Russia and Israel against Iranian backed terrorists? Just as the US completely decoupled from Russia’s economy, and this side of OPEC production, has from Iran as well, the only realistic expectation at that point would be to do the same with China – which of course is a much bigger deal economically to the United States than the impact of Russia and Iran combined. So, what might decoupling mean to you?
Preceding current hostilities, there’s been a great deal of research in recent years on this topic for one very big reason...the ‘vid. China’s zero COVID policy is largely what led to the massive supply chain disruptions around the world as major manufacturing factories shut down for months at a time during the peak of the pandemic. That provided a real-world view of the possible for what the impact might look and feel like to the United States and Americans generally. Independent of the other potential impacts of a conflict arising to the level where the US and China completely decouple from each other, the way it would impact everyday life at the onset would likely be similar to what we experienced three years ago. With that said, a lot has been changing in corporate America over the past couple of years.
Earlier this year the annual WTW study on world-wide political risk found the following...
- 40% of American companies with direct business interests in China had taken or were planning to take action to reduce their businesses exposure from China
That was notable because only 15% of American companies had done so post the pandemic. One of the most notable and visible examples of this happening this year is Apple’s decision to move much of its Chinese production out of the country. Apple is transitioning manufacturing of iPhones out of China and into India. MacBook manufacturing is being shifted to Vietnam. The result of these actions throughout the year have become noticeable. According to the most recent monthly trade report, US imports from China were down 25% year-over-year. Still, with most American companies not having taken significant steps to shift away from China, the impact would still be significant.
Many American multi-nationals have not wanted to take action to decouple from China, not just because of the cheap manufacturing labor costs but also because they wanted access to sell their products and expand business within the country which is by far the most populous in the world. That decision and that calculation is likely to lead to what would be a major impact on the US and world economy if we arrive at the point where decoupling is no longer a choice.
China is currently the third largest trade partner with the United States accounting for 20% of all goods in this country. The immediate shock, without additional decoupling by companies that import these goods, would be that about a fifth of everything currently available to buy would potentially be no longer available. You can imagine the inflation impact on certain goods. China also represents over 18% of the entire world economy which means there’s no doubt there would be a ripple effect felt on economic growth. That might not necessarily be all bad news as it’s possible that some manufactures may opt to bring manufacturing to the United States from China which might offset some of the directly negative economic effects of the decoupling. Here’s to hoping companies continue to de-lever from China and that this conversation remains theoretical.