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Global ripples from China keeping Fed hike at bay

Fed holds steady on rates with concerns over global trade outlook.

Flags fly at Tian'anmen Square on October 1, 2015 in Beijing.
ChinaFotoPress | Getty Images
Flags fly at Tian'anmen Square on October 1, 2015 in Beijing.

If your new mortgage is still cheap after this week's Federal Reserve meeting, you may owe it to the sufferings of commodities producers in places like Chile, Canada and Indonesia — and the American workers whose jobs depend on exports to nations like those.

Call it the China Diaspora Effect: As China's growth slows down, a slew of other nations are having problems because they sell China commodities, like oil, coal and iron ore, on which the Middle Kingdom's long-running investment miracle has been built. And one reason the Fed is hesitating is uncertainty about whether problems in nations like those will affect exports from U.S. companies — not just to China but to the large part of the world making a living from its boom.

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Strain on US exports

"It would be misleading to focus narrowly on the direct effect of U.S.-Chinese bilateral trade alone," Lael Brainard, a member of the Fed's Open Market Committee, said Oct. 12. "Many commodity-exporting countries that have depended heavily on Chinese demand are adjusting with difficulty to the recent sharp commodity price declines."

And that's not all: Even Asian nations not in the commodities business are seeing growth at about half of their recent pace this year, said Brainard, suggesting that even the renewed recession in Canada is partly related to China.

Exports to China are only 0.7 percent of U.S. gross domestic product, and even if they collapse, it's not enough to explain the trade gap that Barclays economist Michael Gapen expects will have shaved about 0.7 percentage points off the economy's third-quarter growth rate when the Commerce Department releases its initial quarterly GDP estimate on Thursday.

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Through August, U.S. exports to China were down by about $3.2 billion from last year, to $74.6 billion, according to the U.S. Census Bureau.

"One reason the Fed is hesitating is uncertainty about how problems in China and commodity-export countries will affect U.S. exporters."

But China's growth is decelerating so rapidly that even with its economy still growing at a near-7 percent annual clip, it is disrupting business plans all over Asia that were counting on even more, said John Anton, director of steel analytics at consulting firm IHS in Washington.

Prices for metallurgical coal used to make steel have dropped nearly 40 percent since 2014, threatening a recently surging Australian coal industry, Anton said. Iron ore has dropped from about $130 to $140 per metric ton to about $50, he said.

Companies made plans years ago that supposed China would be making more than 1 billion tons of steel a year, Anton said — and with production now expected to be about 830 million tons, suppliers are hurting. Falling prices for copper, cement and other commodities reflect slowdowns in Chinese construction as well as manufacturing, he said.

"It was the Buzz Lightyear theory — growth to infinity and beyond," Anton said. "Any plan based on infinite growth is a bad plan."

That matters to the U.S. because Australia is a big trading partner, taking $27 billion of U.S. imports last year and $17 billion through the first nine months of 2015, according to U.S. government data. Australia's imports of U.S. goods are especially important because the U.S. has a trade surplus with Australia.

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The same story is playing out all over the region and even in parts of North and South America.

"It definitely affects Malaysia, Australia and Indonesia,'' said Alaistair Chan, a Sydney-based economist for Moody's Analytics. "Even the more advanced economies are feeling it.''

The U.S. runs a trade deficit with Korea, but Korea did still take $29.6 billion worth of goods in the first eight months of the year, down less than $1 billion from 2014. U.S. exports to Chile, whose China-dependent copper industry has been hurt by falling prices, are down about 3.4 percent through August. U.S. exports to Brazil, which exports iron ore and oil to China, are down more than $6 billion this year, a 22 percent drop that partly reverses a doubling of exports since 2007. The U.S. runs trade surpluses with both Chile and Brazil, narrowing the overall trade deficit that trims reported U.S. growth.

The five U.S. states most exposed to trade with China and its broader network of top trade partners are Washington, Louisiana, Oregon, Alaska and South Carolina, said Steve Cochrane, director of regional economics at Moody's Analytics in West Chester, Pennsylvania.

States most exposed to China trade

Washington and South Carolina face little near-term risk because their exposure to the region is concentrated in aerospace industries, and Boeing, which has manufacturing facilities in both states, has an unusually strong and globally broad order backlog, Cochrane said. More exposed are Oregon and Louisiana, which exports building materials from the Northwest and chemicals from Gulf Coast-based factories, he added.

"If manufacturing slows in Asia, [chemical exports] would be at risk near-term," Cochrane said.

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Even Canada has been hurt. China is Canada's No. 2 trading partner, behind only the U.S., taking $20.6 billion on Canadian goods and services last year, up 75 percent since 2009, according to Statistics Canada. But since Canada mostly ships oil to China, that surge is at risk — and with it some part of last year's $350 billion in U.S. exports to Canada.

But it's not clear if the fallout on trade will be devastating. A lot of the drop in the dollar value of trade to Brazil, for example, is related to the surge in the value of the dollar, which makes payment in reals less valuable, Cochrane said.

—By Tim Mullaney, special to CNBC.com