If China disappeared…

A question from Yahoo! Answers:

What would happen to the American people and Businesses if China all of a sudden didn’t exist anymore?

I’m totally aware that we depend on import goods from China for most of our materialistic needs, but my question is how well would we get along if the plug was pulled on us.

Clothing, toys, and electronics prices would go up (more in the short run than in the long run; eventually, new production lines would be deployed in India, Indonesia, Vietnam, etc., to replace the capacity lost in China). All in all, affected goods would account for about 2% of U.S. GDP.

Interest rates would definitely go up, as there would be no Bank of China willing to hold hundreds of billions of dollars worth of U.S. Treasury securities. Holders of adjustable rate mortgages would immediately feel the pinch.

Exports to China would no longer exist, which would result in GDP loss (and potentially unemployment increase) of about 0.4%.

Another round of complications would occur when Japan, which is the largest exporter into China, would face the same problems and cut their imports from everywhere, including the U.S.

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