Global trade no longer hostage to US consumers
New Zealand Herald, Auckland
Global trade no longer hostage to US consumers
27 September 2006
By Shobhana Chandra and Matthew Benjamin
Europe, Japan and emerging economies are weaning themselves from dependence on the American consumer, and economists say it’s just in time.
Demand in the world’s largest economy is slowing as the US housing market falters, a development that the International Monetary Fund said this month was a key risk to global expansion.
It’s a risk that the biggest exporting nations are better prepared to weather now than five years ago.
"Domestic demand in so many other parts of the world is picking up," said Jim O’Neill, head of global economic research at Goldman Sachs Group in London.
"If there ever was a good time for the US to slow, this is it."
The share of global exports bought by US consumers and businesses fell to 17.9 per cent last year from 21.8 per cent in 2000 as demand increased in the European Union, Japan and emerging markets in Asia and Eastern Europe. Exporting nations in Europe and Asia are poised to grab a larger share of world markets with trade agreements that don’t include the US.
The European Union plans to seek bilateral trade deals with China and South Korea.
In August, Japan proposed a 16-nation economic bloc, including 10 Southeast Asian nations, China, Japan, South Korea, India, Australia and New Zealand.
"That will expand trade among these countries at the expense of trade with the US," said Michael Mussa, a former International Monetary Fund chief economist who is now with the Institute for International Economics in Washington.
Of course the world was nowhere near becoming immune to the ups and downs of the US economy, said Jay Bryson, global economist at Wachovia in North Carolina.
"The US is still one of the largest drivers of growth," he said. "We’re probably decades away from people saying the US won’t matter."
The US remains the biggest importer by far, buying US$1.7 trillion ($2.54 trillion) in goods and services from the rest of the world last year, more than double the amount that second-placed Germany took, said the Economist Intelligence Unit, a London-based research company.
Still, said Joseph Stiglitz, a Nobel laureate economist who teaches at Columbia University in New York, "The US is no longer the single pivotal player to world trade that it was, because China and India and other nations have become a major part of the engine of global growth the past five years".
The 2001 US recession struck a blow to the rest of the world. Taiwan’s economy contracted 2.2 per cent that year, its worst slump on record, as exports tumbled. Japan, Singapore, Malaysia and Thailand were hurt too.
Recessions in Argentina and Mexico deepened, while growth in Germany and Italy slowed.
Now, as the US decelerates, other economies are expanding. US economic growth is expected to slow to 2.6 per cent in the final three months of 2006 from 5.6 per cent in the first quarter.
Growth in consumer spending, representing more than two-thirds of the US economy, will slow to 2.7 per cent from the first quarter’s 4.8 per cent gain.
The euro region is on track this year for the fastest growth since 2000, led by Germany.
Domestic demand in Japan is reviving after seven years of deflation, and China’s economy grew in the second quarter at the fastest rate in more than a decade.
"It is better for the US not to be in a dominating position, and to have other countries rising faster," said Robert Kuhn, a senior adviser to Citigroup in New York and the author of The Man Who Changed China: The Life and Legacy of Jiang Zemin. "Diversification will make the system more robust."
China, including Hong Kong, has in the past three years overtaken the US to become Japan’s and South Korea’s biggest trading partner. The share of Japanese exports bought by the US dropped to 22.9 per cent last year from 30.1 per cent in 2000.
Some Japanese shipments to China, though, were unfinished goods ultimately destined for US consumption.
Similarly, the proportion of European Union exports going to the US declined to 7.9 per cent last year from 9.1 per cent in 2000.
While important to trade for the 25-nation EU, the US had lost its pre-eminence there, said European Central Bank President Jean-Claude Trichet.
"As regards trade links, the United Kingdom is more important for the euro area than the United States," Trichet said last month. "It also means that for the United Kingdom, the euro area is much more important than the United States."
The picture is similar in Asia. The US share of Asia’s exports fell to 19.7 per cent last year, from 24.5 per cent in 2000.
"Intra-Asia trade for sure is expanding rapidly and Europe-China trade is booming," said Fred Bergsten, director of the Institute for International Economics in Washington.
The stalemate in world trade talks may lead to an even faster proliferation of bilateral and regional free-trade agreements. A new World Trade Organisation deal to lower tariffs and open markets would have pumped at least US$96 billion into the world economy, according to World Bank estimates. Its July collapse meant a major pact among the 149 WTO members was unlikely before 2009, said Carlos Braga, senior trade adviser with the World Bank in Geneva.
The US has signed deals with several countries, including Morocco, Nicaragua and El Salvador, in an attempt to pressure WTO members into a worldwide agreement, a strategy former US Trade Representative Robert Zoellick termed "competitive liberalisation".
But it hadn’t worked, said Jagdish Bhagwati, a Columbia University economics professor and former WTO adviser.
While the US was lining up "piffling little bilateral agreements," he said, "Asian free-trade agreements are breaking out rapidly, and the US is not part of it".
A major Asian trade deal excluding the US would divert US$25 billion from US trade in the first year and more over time as investment patterns changed, said Bergsten.
"That is already motivating the US to beef up its own free-trade agreements and perhaps try to go back to the WTO with a better offer."
Demand building in developing nations is a major driver behind changing trade routes.
The so-called Brics economies - Brazil, Russia, India and China - accounted for about 30 per cent of world growth in the past five years, said O’Neill.
"Domestic demand in so many parts of the world is picking up, and that’s the biggest driver of world trade. As the Brics become bigger, the world’s exporters export more to them and less to the US."
Shrinking giant
* The share of global exports bought by US consumers and businesses fell to 17.9 per cent in 2005 from 21.8 per cent in 2000.
* Export nations are looking to get a bigger share of emerging markets with trade agreements that don’t include the US.
* US economic growth is expected to slow to 2.6 per cent in the final three months of this year from 5.6 per cent in the first quarter.
– BLOOMBERG
