Is the World Economy Dependent on America?

America is undoubtedly the largest economy in the world as of now. However, countries like China are quickly bridging the gap. If we look into the distant future, there is a good chance that America may lose some of its economic clout. However, for the moment, it seems like America is literally running the global economy by itself. Economic events in other parts of the world do not seem to affect America as much. However, economic events in America have long-lasting effects on the entire world.

American Share in the World Economy

The American economy is a major player on the world economic forum. Since the 1970’s, America’s integration with the world market has increased by a factor of three! This means that at the present moment, the American economy contributes to about 30% of the world economy. This is because most of the major multinational companies across the world are from America. Also, America has significant gold and oil reserves which make it a force to reckon with.

In this article, we will have a closer look at some American policies which tend to impact the entire world.

American Consumerism

Since America accounts for more than 30% of the world’s economy, its consumers are very important. America is the biggest market in the entire world. Even Chinese companies plan to grow their economy by selling to American consumers.

Hence, a period of boom in America translates to a period of boom all across the globe. This is because when American consumers start buying, companies all over the world start selling. This creates a bullish trend in the countries where these companies are originally from. Hence, when Donald Trump cut interest rates for America, he not only stoked bullish sentiments for American producers. Producers all over the world were able to take advantage of the increased disposable income in the hands of the American consumers.

Chinese companies are finding it difficult to grow ever since the trade war has started and their access to American consumer markets has been jeopardized. As a stakeholder group, American consumers have much more clout than any other consumer group in the world.

American Currency

Since America’s consumer markets are so important to other countries, they want to give the American customers the best deal. Many great companies such as Toyota, Honda, and Nissan, etc. have grown and developed extensively because of their sales to the American region.

However, in their bid to provide the best deal to American consumers, a lot of these countries resort to currency manipulation. This is what the American President Donald Trump has been alleging all along. However, there is no denying the fact that countries like China and Japan have managed their currency to maintain the same exchange rate with the American dollar.

Also, it is important to realize that the strength of the American currency is a detriment to the rest of the world. American can simply produce dollars when it needs to. However, the rest of the world has to exchange their currency for the dollar. This is the reason that when American currency becomes more expensive, commodities like gold and oil become expensive in emerging markets.

Since oil is a vital input in almost all products, the general inflation level increases when American currency becomes stronger. Once again, no other currency in the world has as much influence as the American dollar. It appears like the entire world is dependent upon America’s actions.

American Interest Rates

The benchmark rates in America decide what the interest rates in the rest of the world will be. For instance, when the Fed raises interest rates, the other economies are forced to raise interest rates in order to stay competitive. This is because a large chunk of the capital floating around in the entire world is from America.

Hence, when America raises interest rates, the returns at home become more attractive. As a result, investment funds begin liquidating their investments forcing other countries to raise their interest rates if they want to stay competitive.

Since America literally controls the interest rates around the world, it has the power to bring about a recession if these interest rate movements are not managed well.

America’s Trade Wars

America’s bilateral trade wars are also affecting a lot of countries. For instance, America and China are involved in a full-fledged trade war. As a result, other countries like Australia are suffering.

Australia is the biggest supplier of raw material to China. Since China is selling fewer goods to America, it is also buying fewer raw materials from Australia. Hence, indirectly the Australian economy is also affected.

Also, since America has issued sanctions on Iran, the rest of the world cannot buy oil from Iran. Here too, decisions made by America are making oil expensive for the entire world by artificially restricting supply.

The bottom line is that the American economy is pivotal to the world. The decisions taken by American politicians and financial leaders have a huge impact on the financial well-being of rest of the world.