DiligenceChina

We used to say that when the US economy sneezed, other countries caught cold. Or something like that. You know what I mean. Now the US economy is starting to show signs weakening and it will be interesting to see what the impact on US-China relations will be. Housing inventory and Consumer Confidence are both big indicators, and the point data we got this week wasn’t great. Momentary blip or the end of the world? Great question. Let me know if you have an answer.

But the real issue for international owners and managers in China is what impact a distressed US economy will have on China’s economy – and what the political fallout will be in an increasing tense relationship. Olympics and Presidential campaigning during a global recession? Will China boom while the US sputters – and move up the value chain in the process? Or will a weaker US economy spark protectionist wildfire that consumes trade links?

Here’s one way to view US-China relations against the backdrop of US economic growth.

If the US enters a mild or rolling recession, look for a quieting of anti-China rhetoric among mainstream political players and media spokespeople.

If the US economy has a severe downturn, expect a sharp increase in the pitch and frequency of fiery talk and frosty trade restrictions.

The swing variable is Unemployment. If people stay employed but have to get by on less – or are nervous about losing the jobs they have – then belt-tightening and budget worries are going to make China look better. The prospect of paying more for non-China stuff is going to add to people’s worries. Besides, the Democrats will have a new card to play and will try to score points closer to home. They will still keep up pressure on safety issues (toys, food) but will start banging the exchange-rate drum a bit more softly.

If the economy weakens further and starts shedding jobs, then it will be a completely different story. The China/job-loss link never resonated too strongly in the US because the employment picture has been pretty bright even as China was steaming ahead. But if the jobless numbers in the US spike over the next year, expect to see China taking much of the blame. Hillary has already been talking to union leaders about banning certain types of Chinese goods. It’s all just so much posturing and trial-ballooning for now – but it’s a message that always plays well when people are worried about finding work.