Despite the record unemployment rate, widespread hardship for businesses, strain on the healthcare system, political turmoil and general disruption to daily life in 2020, American consumers have managed to strengthen their habit of buying things. .
Demand for physical goods replaced some of the earlier demand for in-person service experiences, and much of that demand was met by increased imports from China as domestic production slowed due to measures lock.
Until recently, global supply chains have managed to find their niche and may meet demand, but news has emerged that reveals tensions on global shipping infrastructure and reveals clues to the economic outlook.
Shortage of containers and Chinese exports
Global logistics networks have recently started to suffer from a shortage of shipping containers as demand has suddenly increased.
Freight rates from China to the United States have jumped 300%.
The container situation has become so extreme that hundreds of thousands of containers have been shipped empty from US ports, mainly to China, with exporters increasingly demanding empty containers.
An estimated 177,938 containers were discarded from the loading of US export items at the ports of Los Angeles and New York / New Jersey alone, and then shipped across the Pacific.
The recent shipping container imbalance illustrates the current state of affairs for the US and Chinese economies.
While exports of consumer goods from Asia eclipse the predominantly commodity and commodity exports from the United States – in this case, preventing even American agricultural exports from having shipping containers to reach foreign markets – the trade deficit between the two countries could become more important for them. highly competitive economies.
When trade deficits matter
The Austrian perspective on the US trade deficit has long been that, given the continued relative productivity of the US economy, foreign desires to invest in the United States, and the demand for dollars abroad, the trade deficit is a “Pseudo-problem”.
The competitive advantage of the United States over other countries over the past decades has made a trade deficit highly likely and even favorable for Americans as they benefit from consuming cheaper imports.
So far, the parties involved have been happy with this arrangement, as American consumers bring goods in at favorable prices and producers receive a reliable and stable global reserve currency: the US dollar.
However, the underlying conditions specific to the US economy vis-à-vis China may change.
There are two aspects of the US-China trade deficit that deserve attention. The first is the effect of US net consumption coupled with accommodating monetary and fiscal policies, while the second is what China plans to do with the US dollars accumulated through exports.
On the US side of the equation, easy central bank money, coupled with a fiscal stimulus extended to consumers, has boosted buying activity, as lockdowns have forced people to stay home and spend.
It is no wonder that sea containers are rushing back to China.
As the United States suffers major blows in production and foreign investment in 2020, alongside explosive increases in the money supply, critical questions arise regarding the nature of this trade deficit and the duration of the status quo as the country pushes the limits of its exorbitant. privilege.
Indeed, the health of the dollar itself in relation to trade deficits would be an indicator to watch in the years to come.
In achieving a trade surplus with the United States, China has traditionally exchanged its US dollars for US Treasuries in order to add to its balance sheet and maintain its export advantage.
In recent years, however, China has reduced its holdings of Treasuries.
This trend has also coincided with massive spending by China over the past decade for the Belt and Road Initiative (BRI) infrastructure and trade corridor project which involves 71 countries across Eurasia and Africa which encompasses two-thirds of the world’s population and one-third of global GDP.
Given the continued global demand for dollars, it would make sense for China to use the accumulated dollars to acquire foreign assets and invest in projects with the potential to generate future income.
The trade war with the United States in recent years has pushed China to deepen its trade flow to surpluses with other emerging markets and to forge strategic global relationships.
As containers move goods from China to the United States and rush back empty to bring in more, the moment gives a glimpse of a potentially precarious arrangement between the two countries.
As the United States is now consumed with debt and liabilities, China has leveraged its surplus production from this relationship to turn them into increasingly influential assets that could strengthen its position and further challenge states. -United, and maybe even the dollar itself.
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