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Saturday, February 19, 2011

Some perspective on China’s impact on US

Let’s think of the following scenario… CNY goes up by 20% (similar to the 2007 move) and that inflation pressures in wages and commodities make up for another 10% increase in total costs of manufacturing in China… what would happen in the US? A sure catastrophe?
Let’s look…
The GDP of the US is about $15 trillion. Every year we import goods worth about USD2 trillion, so imports are only 14% of our economy. In other words, despite the rhetoric, our country is a relatively closed economy.  Compare this figure to 48% in Denmark, 41% in Germany or 89% in Ireland. Which countries are more likely to suffer from Currency wars?
You may think that everything we buy comes from China, but in 2010 we imported only (I guess this is a relative word) 365 billion. So imports from China represent around 2.5% of GDP. 
A 30% increase in costs from China would surely impact us. However, if this increase is limited to China alone, MNCs will likely shift manufacturing to other low cost locations such as Vietnam, Thailand or Malaysia, or even Africa or Latin America.

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