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Reality always trumps theory. We saw this when aftershocks from the American stockmarket tremors put to rest the theory of ‘decoupling’, which held that the rise of China and India has created an Asian sphere independent of global demand trends. Asia’s high growth rates and growing intra-regional trade, the theory postulated, would help it ride out any downturn in the debt-ridden US economy. It worked well, until the fear of US recession hit home.
The stockmarket jitters from Tokyo to Shanghai to Mumbai and traders’ growing anxiety about the impact of a looming US recession now show Asian growth as very much linked, in fact dependent upon, the rest of the world. Seen from the perspective of long history, the turmoil emerging out of the slowing American economy and the recent subprime mortgage crisis was only to be expected. A closer look at the ever-tightening global economic integration, and the nature and composition of Asian trade as well as its investment pattern, would have demonstrated the fallacy of ‘decoupling’ Asian and western economies.
At every phase of history, the export-driven prosperity of countries — whether the Gupta and Mughal India or Tang or Qing China — suffered when their major customers faced a setback. The fall of the luxury-loving Roman Empire or trade championing Mongol Empire affected all the countries that prospered from commerce. Those global impacts of foreign trade — minuscule in volume — touched very few and were felt over a long period. Now, not only does trade comprise an increasingly greater proportion of Asia’s gross domestic product, goods move faster in giant container ships and aircraft, and capital moves at the speed of light across fibre optic networks. To think that such a hyper-connected and trade-dependent world could be decoupled was always wishful thinking.
The world’s first near-simultaneous stockmarket tumble occurred in October 1987, after the deregulation of capital markets and electronic banking set the stage for a global domino effect. In the past two decades, this electronic nerve system has grown. In a world girdled by Bloomberg, Reuters, CNN and CNBC, the only barrier to the simultaneous rise and fall of global equity prices is the sunset that shutters the exchanges for the day.
A key assumption underpinning the decoupling theory collapses under scrutiny. Declining US trade with other parts of Asia (excluding Japan) — Taiwan, Hong Kong, South Korea and South-east Asia — and the corresponding rise of its trade with China was supposed to prove the emergence of an autonomous zone. China recently surpassed the US as Japan’s biggest export destination, which many see as further proof of this decoupling process. Yet, booming trade with China was and is linked to its emergence as the world’s factory. Instead of exporting assembled goods to the US and Europe, Asian countries are now exporting components to China for assembly and export to the same destinations. The same is true of raw material and commodities imports that feed China’s own export machine. While US trade with other Asian countries has declined, Chinese exports to the US have risen to one fifth of its total. More than 70 per cent of intra-Asian trade comprises components of which half are bound for export outside the region. The Asian Development Bank calculated that about 61 per cent of total Asian exports are eventually consumed in the US, Japan and Europe.
Even foreign direct investment (FDI) flows to Asia are geared more towards companies, often foreign affiliates, engaged in export to the wider world. Although domestic growth in China and India has been strong, FDI and portfolio investment have nonetheless favoured firms with rich export markets. Even intra-Asian investments have flowed to companies that are part of global production networks. Any number of products appearing in western shopping malls with ‘Made in China’ labels — from DVD players to electric toothbrushes — are actually made in Asia (a simple electric toothbrush may be made from components from 10 countries). And if recession in the US and Europe dampens demand for such goods, the ripple effect will be felt in China and across all of its suppliers whose booming trade with Beijing was seen as proof of decoupling. With factories losing orders, foreign investors, too, could start heading for the door.
In a globalised world you can run, but you can’t hide.
Nayan Chanda is Director of Publications at the Yale Center for the Study of Globalization and Editor of YaleGlobal Online.