Have you ever wondered how much influence can one country actually have on the world? Let’s see how much influence the United States has on the workings of foreign countries. This influence gets stronger by the day due to globalization. I talked about globalization in one of my previous blog post, but I’ll recap in a paragraph.
So, what is globalization you might ask? According to Merriam Webster, globalization is the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor markets. So, it’s due to globalization why the clothes that are made in China are cheaper than those made in the United States. Due to globalization, Apple can set up manufacturing factories in China, and Cisco can outsource its IT services to India. In short, the world got a lot smaller due to globalization. Now that we have knocked globalization out of the park, let’s see who works for whom.
Let me say something that might not be obvious to some of you. Developing countries work for the United States. For illustration purposes, I am going to use China as the developing country. China is a manufacturing hub – everything ranging from your coffee mug to the pen you have in your pocket and the t-shirt you are wearing is all made in China. Why would China make all these things if there was no one on the other end to buy these products? That’s where United States steps in. United States is willing to import all these products and people would buy them simply because they are cheaper than the ones made domestically (reason why US factories move off-shore). So, usually the developing countries (few exceptions) are net exporters, and developed countries (few exceptions) are net importers. In other words, China is manufacturing these products for the United States to consume. If there was no one to consume, why make products? Hence, developing countries work for the United States.
I remember when I was in India, I was given the example of China’s economy – Trade Surplus (value of exports is more than value of imports) is essential for a country to prosper. Now that I am in the United States, I see the other picture. United States runs on a large Trade Deficit (value of imports more than value of exports). One country has to be in a deficit for another country to be in a surplus. Export based economies (like China and Indonesia) run trade surplus, and import based economies (like United States) run trade deficit. The question I would like to ask you is who has the upper hand? Is it the countries that run on trade surplus or those that run on trade deficit? Leave a comment below and tell me why!
It’s time to address the question we have all been waiting for. How the US Economy affects the world economy? Since I’ve been talking about globalization and trade surplus/deficit, you might already know where I am going with this. The world is getting smaller and one country can have a tremendous impact on another country. United States has the largest trade deficit in the world. This means that the United States will consume just about anything and everything from the rest of the world. In 2016, United States imported $2.13 trillion worth of goods from other countries. The Center of International Development at Harvard came up with this Geo and Product Tree Maps (below), which shows where did the United States import from in 2016. The different shades of color in the Geo map corresponds with the dollar amount of imports.
This is great news for the rest of the world since they have a loyal customer. However, what happens when there is a recession in the United States? People are no longer going to buy those coffee mugs, pens, or t-shirts since people don’t need those products to survive. In short, when the US economy contracts, the world suffers. When the US economy expands, the world prospers. It’s as easy as that.
Let me digress here for a second. So, when you hear countries like Japan and China buying lots of US government bonds, they are accomplishing 3 goals by doing so. First, it’s a safe investment whose return is guaranteed by the US government. Seconds, they are making dollar stronger, which devalues their currency (I talked about this in my previous blog). A devalued currency ensures that goods that are exported stay cheap. Third, by lending money to the US government (who spends a lot), they are trying to make sure US economy stays running.
Coming back to topic, you can see how US Economy is this big ship that has the potential to bring the entire world economy down with it. As I mentioned in the previous paragraph, multiple countries, like China and Japan, buy US government bonds. If they don’t invest in the United States by buying these bonds (government debt), how would the US government going to run? If the US government can’t finance its debt, there is a potential for the government to default. If that happens, then the government drastically decreases spending (so, little to no imports). In short, if the US debt is not financed by other countries, their economy would suffer. Consequently, in order to keep the United States alive, these countries with export based economies buy every bond that the US government has to offer.
Now, I am not stating that US economy is the best and its way is the right way. Every country runs differently. The ideals and workings of an export based economy are completely different from that of an import based economy. The important point I want you to understand is that the United States is a very big net importer, who has to be taken seriously. Hundreds of millions of people across the world would lose their jobs if this importer stops importing. All made possible due to globalization.
Hope you learned a little and found this blog post helpful. We talked about globalization, trade surplus, trade deficit, and how an import based economy like US can affect the world economy. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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