Home .Globalization Coupled -- for better or worse
Coupled -- for better or worse
Wednesday, 24 December 2008 06:50

Recent years have shown how linked we all are in the global economy.  Rising demand for energy in China and other parts of the emerging world pushed oil prices momentarily over $150 a barrel, something which affected everyone in every corner of the world, but greatly benefited oil producers.  China had a similar effect on other commodity prices to the joy of Brazil, some African countries and Australia, but to the dismay of commodity importers.

So it was somewhat curious when earlier this year the "uncoupling myth" developed in East Asia.  Panda-huggers (Westerners who are blindly in love with China) and others believed that the East Asian economies were so strong that they could survive the US financial crisis.  China and other Asian economies have a very strong domestic growth dynamic.  Also, intra-regional trade has been growing very strongly in East Asia.  These were the arguments used by those who believed that East Asia would ride out the financial crisis storm.

The 2008 Asian Development Outlook, published some months ago, takes a more serious look at this issue.  Its conclusions are now being borne out in the slowing in China's economic growth and the Chinese government's massive fiscal package.

Notwithstanding all the hype, a good part of East Asia's trade is still a supply chain that delivers the G3 markets (US, EU and Japan).  China is not yet a significant market for final goods exports from other Asian countries.  Strongly growing intra-regional trade mainly takes the form of trade in intermediate goods (parts and components). 

In China, MNEs are overwhleming concentrated in the final assembly stage of production, which is the most labour-intensive stage of production.  Basic research, product design, and physical capital- and human capital-intensive stages of the production proces tend to be carried out in the MNEs' home countries or in other Asian countries that are in a more advanced stage of industrial development than China.   

Through this vertically integrated network, changes in global final demand register first in China and then cascade back through the region.  As it happens, Asia's exports of cyclically sensitive manufactured exports (like garments and textiles, footwear, toys, and computers and office equipment) are quickly decelerating.  In most of these product areas, almost all of US consumption is imported.      

In short, despite all the hype about East Asian economic development, the US and other G3 countries are still the locomotive for East Asia.  Uncoupling is a myth.  In today's global economy, we are all coupled, more and more, for better or worse.   

Reference: Asian Development Outlook 2008, Asian Development Bank 

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