China’s receding economic tide will ground all boats, including the US’
- Aside from the domino effect of a Chinese economic slowdown, the US has several deeply vulnerable sectors, from tech and drugs to agriculture and rare earths. A belief that US has little exposure to China’s problems is misguided
Current thinking downplays China’s economic threats to the United States. Nobel Prize winner Paul Krugman, for example, asserts that “America has remarkably little financial or trade exposure to China’s problems”. Treasury Secretary Janet Yellen concurs.
To determine how a slowdown in China could harm the US economy, the bank Wells Fargo simulated a “hard landing” where China’s economy grows annually by just 4.5 per cent over the next three years, having averaged 8.95 per cent since 1989. “Despite the severity of our simulated Chinese growth shock, the effects on real GDP growth in the United States, the Eurozone and Japan are rather modest,” it said. For the US economy, the impact was just 0.1 per cent off its inflation-adjusted growth in 2024 and 0.2 per cent in 2025.
A strong case? To the contrary, no.
The Apple example spotlights a key weakness in Krugman’s thesis: the vulnerabilities that China poses for the US economy come from critical interdependencies whose effect far exceeds the value of the goods or services involved.
Further, the interdependencies are concentrated in sectors with either the greatest growth opportunities or the largest roles in geostrategic ambitions, from national security to sustainable energy development.
When companies lose revenue from China, there’s a domino effect on equity markets. Investors demand higher premiums to risk their capital when returns look dismal. More costly capital hamstrings companies. That slows the economy.
Pharmaceuticals is another sector with lopsided vulnerabilities. The US imported US$6.95 billion worth of pharmaceuticals from China last year, up more than eightfold from US$820 million the year before. In one year, China’s share of US drug imports by value rose from 1 per cent to 9.6 per cent in 2022. Those imports meet critical shortages.
These fears flow into the “risk sentiment channel”, which is probably the most significant means through which China’s woes spill over into the US economy, according to Federal Reserve economists. Krugman’s argument ignores this point. Risk appetites weaken during recessions or abrupt changes in trends anchoring prosperity. These worries feed into the general economy, creating an ever-declining spiral that pulls down equity values, undermines growth and cuts demand.
In a scenario developed in 2019 by eight Federal Reserve economists, if China’s growth falls by 4 percentage points, the global flight to safety would fuel a 7 per cent increase in the dollar’s value and cause equities to fall, with US GDP dropping by more than 1 percentage point. This year, the International Monetary Fund expects China to contribute to 34.9 per cent of global growth.
Finally, the “no worries about China” perspective doesn’t take into account the extent to which China is interwoven into the global economy and the phenomena of synchronicity, where events in one country’s economy – changes in the cost of credit, inflation and equity values – can reverberate rapidly worldwide. Coordinated actions by central banks add to the dynamic, as we’ve seen over the past year with interest rate raises to fight inflation.
History tells us a receding tide grounds all boats. Contrary to Krugman’s contention, the adage that when China sneezes, the world catches a cold, remains true.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC