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China Slowdown? Don't Worry About It

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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An increasing number of people are afraid that the economic slowdown in China is bad news for the rich economies of the West. Lord Turner, the former head of the U.K.'s Financial Services Agency, calls the slowdown the "biggest risk to the global economy." Hedge-fund billionaire George Soros agrees. In an age where we're always on the lookout for the next big macroeconomic risk or black swan, a China slowdown seems like an obvious candidate for Next Big Thing to Worry About.

But would a China slowdown really be that bad for the U.S.? The answer isn't obvious.

The direct effect of reduced trade would clearly have some impact. In 2012, U.S. exports to China were worth $141 billion, and imports totaled $439 billion. Together, that's more than 3 percent of the U.S. economy. A China slowdown would hit U.S. exporters, especially agribusiness. But because China is also in the process of rebalancing, the blow might not be so bad. Chinese investment probably would plunge, but consumption -- which includes consumption of U.S. exports such as food -- would probably hold up better. Put another way, a large amount of the growth in the Chinese economy now consists of building forests of apartment buildings and massive networks of freeways, activities that involve relatively little value-added by U.S. companies.

And what about those imports? A slowdown in China would put a lot of Chinese producers out of business, but it would force the survivors to cut their prices to stay alive. In addition, China's government, in an attempt to stop a slowdown from becoming a depression, would probably use every tool in its toolkit, including exchange rate depreciation (although economist Stephen Roach thinks that this is unlikely). Cheaper Chinese goods would mean less expensive imports for U.S. producers, cheaper costs for the many U.S. companies that produce in China, and cheaper imports for American consumers. A temporary glut of cheap Chinese stuff would, of course, work against the rebalancing mentioned above, but this means that U.S. business as a whole is, to some degree, naturally hedged against a Chinese slowdown.

There is another way in which a China slowdown would give our economy a boost -- commodity prices. Global commodity prices have been falling recently. That is good news for most U.S. companies and consumers. The one exception is if oil prices fall so much that they strangle the U.S. shale boom in its infancy.

A Chinese slowdown will, of course, have negative demand-side effects on the U.S. just as we seem to be recovering from our long recession. But that would probably push the Fed to ease, delaying the end of quantitative easing. Again, not a big danger.

Given our recent history with financial contagion from the U.S. in 2008 and the euro zone in the years afterward, one might be afraid that the spillovers from a China slump would wreck our still-fragile banking system. Fortunately, American banks have much less exposure to the Chinese banking system than, say, U.K. banks.

History also tells us not to worry too much. The Japanese economy slowed dramatically in the 1990s, at a time when Japan's economy was about 17 percent of world output (China is now around 12 percent, at market exchange rates). But the U.S. economy boomed in the '90s, ignoring the Japanese slowdown. Japan then isn't a perfect analog for China now, but some of the basics -- a surplus nation with heavy energy consumption -- are similar.

Not only that, but we've already seen a Chinese slowdown, just a couple of years ago. Since 2010, China's trend growth rate has fallen from about 10 percent to about 7.5 percent, with very little consequence for the U.S. economy. Would a fall to 5 percent really be so much worse?

So although a Chinese slowdown probably isn't a good thing for the U.S. economy, it's probably not a disaster, either.

Some countries, on the other hand, might be in big trouble. Australia, in particular, is seeing the end of its historic commodity export boom. The Aussies almost certainly knew that had to happen, but they can't be very happy about it either. Meanwhile, South Korea, Brazil and Japan have seen their exports to China skyrocket far more than other big economies in recent years, and a China slowdown will hit them hard.

In fact, the biggest danger to the U.S. economy could be the second-order effects. If Chinese growth collapses, that means lower U.S. exports to Brazil, South Korea, Japan and other trade partners and reduced profits or losses for U.S. companies that are invested in these countries.

In any case, a big bad black swan event might be lurking right over the horizon. But my instinct tells me that a China slowdown isn't it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net