Tuesday 10 January 2017

Does a "financial war" between countries make sense?

Some articles, especially some Chinese articles, believe that there is a "financial war" between China and the US ongoing. Of course, China and the US have different interests and hold different political opinions; these are all acceptable, in fact, no two countries could have the same interests and political opinions; otherwise, these two countries could unite and form one single country. I do not know much about politics or politicians' individual interests; I want to talk about this question from an economic prospect.

China and the US are the largest two economies and it is fair to say these two countries have the two largest markets in the world. There are two goals that could lead to a war: one is to protect oneself, the other is to gain greater profits. From the American point of view, though the president-elect Trump has been arguing China is taking profits from the US, the US is currently in a very good shape that the unemployment rate is historically low, the wage level is increasing and the inflation is expected to pick up. The US economy is nowhere near the point where the US has to protect itself. By attacking the Chinese, could the US gain more profits? The answer is maybe, but the only possible profit would be very short term and immediate. The US needs the Chinese market, as it is the second largest market. Many US companies are making huge profits in the Chinese market and even the whole world economy is benefiting from China joining the world market. Arguably the world economy may have avoided one global economic crisis last century when China opened its economy and lowered the world inflation by its cheap labour force.

From the Chinese point view, maybe the Chinese economy has some problems in its economy, but attacking the American economy is hardly the solution for the endogenous issues. Therefore, attacking the American economy is not going to generate a faster economic growth for the Chinese economy. Moreover, the Chinese economy has been benefiting from entering the world economy, the US economy is the largest market and the Chinese economy makes no sense to give up such a large market. If China destroyed the US economy, it would become the largest market in the world, but many US businesses would be less likely to leave America to China, they would be more likely to leave to Europe as the American economy and the European economy have more similarities, and the cost of destroying the US economy would be extremely high and such strategy definitely would be extremely risky. Therefore, it is too risky for China to make such radical move.

Overall, for both sides, as their economies interact and both countries' companies are doing business in each other's country, starting a "financial war" is too risky and has too limited profits for either side to make such radical and dangerous move. However, such argument is entirely based on economics prospect, politics may make a difference in this problem.

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