Vince Dhimos answered a question at Quora:
With the deteriorating US and China relations, how will the US economy be affected?
Westerners ignore a key fact, namely, that China does not depend on the US for its income. It has very significant sources of income all over the globe and basically, cannot be stopped by anything the US may do.
While the US relies in large part on China, for cheap goods and for key roles in the supply chain, China can go on forever without the failed state of America,
The US is losing not because of deteriorating relations with China. It is losing because of chronic mismanagement of its resources and because it chooses politics over real world solutions.
It will be that way in Trump wins in November and it will be that way if Biden wins. Biden has promised to be “tougher” on China than Trump. That makes two failed leaders with no strategy to solve the economic and health crises. If they had had a strategy they would not be spending all their time bashing China. Nothing can save America now.
END OF MY RESPONSE
Anthony Han commented because my answer was short. I was low on time and I omitted important details. My intra-textual notes are [in brackets].
What is missing in your answer is that the world is still very much reliant economically and financially on US dollars (USD) as the global currency. So for China to import crude oil by millions of barrels per day and grain and meat as it cannot feed itself, it needs USD.
[Prior to the pandemic, Russia was exporting a lot of food to China, and China did not need USD to buy. The deal was settled in yuan. Russia has, however, temporarily suspended wheat exports]
Those countries that want to sell oil and food wants to get paid in USD so they can buy what they need from other countries (who also want to get paid in USD). [Not true, as shown above- It’s not Anthony’s fault that he does not know this because Western media are mum about the intensive dedollarization efforts in Asia and Europe and elsewhere.]
Where do countries get US dollars? Why selling stuff to Americans.
The stuff America buys from China can eventually move to another country as they don’t involve anything proprietary to China. I am not saying that there won’t be a period of adjustment and dislocation. And this is already happening as wage rates in China has risen and low value manufacturing is moving to lower cost countries.
But China must still earn USD in order to survive and prosper. This is why China cannot live without the US but we don’t need China. China needs to move up the value chain by selling more advanced products in order to remain solvent. [Actually, economists credit China with saving the world economy during the 2008-9 Great Depression that the US caused with its incompetence, so yes, the US needs China]
Why can’t China’s currency, the RMB, replace the USD? Couple of key reasons. China has flooded its domestic economy with RMB to keep it from collapsing and as the result it has become worthless as an international currency. How worthless? They have to restrict its convertibility to USD to avoid every Chinese from dumping their RMB for USD and bankrupt the country. Remember USD for every country in the world except the Eurozone is like having gold in the old days. Except for the US and the Eurozone (and the Yen) your own currency is no good outside of your own country. [absolutely false, see below]
The other reason has to do with the fact that the country that provides the global currency (aka reserve currency) has to run a huge trade deficit forever. The reasons are complicated but you can look it up. China is an exporting economy and does not want that to happen. US can afford it better because it is so blessed that it really does not need to export to maintain full employment [unemployment is dangerously high now in the US]. But it has cost jobs in our industrial sector but not in the entire economy as a whole. Obviously having our currency be the global currency gives the US huge advantages because we print the stuff. Imagine all those hard working Chinese folks selling us real things in exchange for USD that we can create out of thin air! [Top economists are now saying this magic is wearing off during this pandemic because the Fed has overprinted and investors are turning to alternatives to the USD]
That is the REAL power of America. [Actually, it is fake power]
The fact that you believe that America needs China more than China needs America suggests that you may want to learn more about the true nature of how the world works. [It is dangerous to get your news by reading all Western sources]
Vince Dhimos Origial Author
I am not talking about the world’s temporary reliance on the USD because it is a TEMPORARY situation. You admit that when you say “the world is STILL reliant on the USD.” If this were a permanent situation, you would not have used the word “still.” What you do not see are the road signs all around you. Russia and China signed a $400 billion deal for pipeline-delivered gas — the famous Power of Siberia — and they did not make the deal in dollars at all. Iran signed a major deal with China for supply of oil, and the deal is denominated in yuan (China-Iran Oil Deal Undermines the Dollar). Europe has developed a work-around to the once all-powerful SWIFT system. The new system is called INSTEX. It will enable Europe to trade with Iran and other pariah countries in euros. Iran just sent millions of gallons of gasoline to Venezuela. Did you think Venezuela paid in dollars? It would have been impossible because the US would have forced SWIFT to refuse the transaction. And what about the Nord Stream 2 deal? Did you think Russia will be selling its gas in dollars? No, the deal is to be settled in euros. And now that the pandemic is upon us, the many countries interested in the de-dollarization of world trade will use the pandemic to leverage their efforts and edge out the dollar in as many transactions as possible. They have the wind at their back. Deutsche Bank economist Shameer Goel predicts that this pandemic will dethrone the dollar, which he says could be replaced by the rmb as the world’s primary reserve currency. After all, the digital rmb is on the way. I don’t blame you if you did not know these things, because most Western media covering these international transactions do not mention the currencies used. They are trying desperately to cover up the danger to the USD.
I am aware of these attempts. But those are exceptions that prove the rule. Outside of the Eurozone, the USD is still 90% of the medium of exchange. Barter deals will continue but they are not efficient.
I agree that it’s not entirely good for any country including the US to be chosen by others as the reserve currency. It forces account deficit and trade deficit on the chosen country. So it isn’t the US that has chosen the USD, but the world. It is actually a burden though with benefits.
I don’t believe that you have a grasp of the economic disaster happening in China that makes it impossible for the RMB to serve as the reserve currency [I note that you provide no details on this “economic disaster.” But if there is such a disaster, how is it possible that China has been averaging 6-7% economic growth for decades vs less than half that for the US? And how is it that China is the only industrialized country that has reported positive growth this year, while the US has shown disastrous negative growth, like the rest of the West?]. And the PRC also do NOT want the burden that come with it since it’s economy is still only at a middle income stage. Perhaps in another 20 years who knows but that time has not yet arrived.
Germany relies on exports for 50% of its GDP, and has used its influence to prevent the Euro from replacing the USD outside the Eurozone. As that would make it impossible for Germany to remain an export oriented economy. It is not an exaggeration to state that Germany holds the dominant voice in these matters within the EU.
The Japanese Yen can play a role but its economy is too small and the Japanese government has resisted all efforts by other countries holding the Yen as a reserve currency as well.
One of the negative consequences of being used by other countries as a reserve currency is that it appreciates against all others. Other countries sell their currency to buy the reserve currency. This is really bad if you want your country’s companies to sell abroad.
So what you are talking about is not a significant factor in the broad picture. China will continue to need to earn USD in order to survive let alone prosper. In fact as PRC become more aggressive and heavy handed as has happened recently, even the EU will begin to work to balance against that aggression and these alternative options to the USD will go away.
“In fact as PRC become more aggressive and heavy handed as has happened recently, even the EU will begin to work to balance against that aggression and these alternative options to the USD will go away.”
The narrative that the PRC is heavy handed is part of the pre-election propaganda and is not an established fact. “Heavy handed” is a relative term and must be measured against the degree of heavy handedness of the US and its puppet states, because these are the parties bringing these charges in their non-stop anti-China propaganda. The US has so far slaughtered over 10 MILLION mostly civilians and has killed with its sanctions an unknown number of civilians in countries with leaders that refuse to bow to the Washington bully. THAT is heavy handedness and China has never committed, and will never commit anything close to these atrocities, so it is hypocritical of a pro-American commentator to criticize China for heavy handedness. But the main thing is that other countries, including very powerful ones, have not fallen for this propaganda and oppose it strongly. The contention is between the pro-American countries on the one hand and, on the other hand, these powerful non-US-aligned Eastern countries — and also countries like Germany which vehemently oppose the HEAVY HANDED US sanctions on Nord Stream 2, as well as Venezuela, which no longer uses the dollar in its foreign trade. Whether you agree or disagree with their viewpoint, you can’t afford to underestimate these opponents of US hegemony — or their ability to gradually de-dollarize world trade. Nor can you afford to underestimate the damage the US, especially the Fed, is doing to its own position in the world and its own economy. This pandemic era has changed everything. The US has so far proven woefully incapable of coping. That is why US politicians must rely on anti-China, anti-Russia, anti-Iran, anti-Venezuela etc rhetoric to get votes — they have no strategy to overcome the economic and health crisis. Printing unbacked dollars is not a strategy, it is an admission of defeat and impotence.