Is India a New Asian Tiger?

In the wake of the Presidential Election as well as the State of the Union address, most Americans are undoubtedly equating Asian economies and trade in Asia to China. This is a fair comparison given the amount of discussion that the American people have listened to or read in the past few months, let alone the past few years. But a new market is on the rise in Asia that has not yet received as much attention by the former presidential candidates or the American public and that is the economy of India. According to an article from The Economist titled "India's Surprising Economic Miracle" the private industry in India has experienced rapid growth and their economy "is expected to grow 8.5% this year...and its growth rate could overtake China's by 2013, if not before,". This is an extraordinary amount of growth for a country that remains to have a low grade infrastructure that includes poor highways and bridges. According to themes we discussed in our class there are three major criteria that the Asian Tigers have in common: free trade, be export oriented, and be allies with the United States. Going one by one through these criteria we can discern if India can be qualified as an Asian Tiger. 

First, does India employ liberal economic policies? Yes, reforms in the early 1990's stripped the Indian economy of high tariffs that once encompassed it and allowed firms to trade and participate in the world economy in a much easier fashion (Business in India). Second, is India's economy export oriented? In a manner of speaking, yes. They export services to other countries which also created jobs in India. An example of this are telephone service lines that are located in India even though the actual company may be located elsewhere. However Indian producers have been focused on providing cheaper goods for the citizens of India and not focused as much on the export of their goods. Finally, is India an ally of the United States? Yes they are, and in fact many of their exported services have been exported to the United States. What interests me about the notion that India has a thriving economy is the idea of a regional challenger to China. And going one step further I can imagine one of two separate outcomes: one is they become economic adversaries and two is they implement a regional trade agreement that also includes other Asian Tigers. The development of India's economy will tip the economic balance in Asia, the only question is how it will tip. After comparing India's economy to the criteria of an Asian Tiger it can be said that despite India's problems, their economy is on the rise and should it continue to grow at this rate they will one day rival China  for Asia's top economy.

British Dilemma

Jaguar Land Rover is experiencing some success with reported extra shifts to keep up with demand, expansion to the facility and construction on a new engine plant.  Although recession may be in Britain’s future, great hope is placed on their exports to the fast growing Asian and Latin American countries. The pound has dropped almost a quarter since 2007 and Britain hopes that this situation will mirror its economic standing in the 1990s when devaluation of the pound helped them export their way out of recession. But this time around Britain is to dependent on declining rich-world markets such as Europe and the U.S. Conservative MP, Douglas Carswell described Britain’s exports to Europe as being “shackled to a corpse.” Establishing markets with the emerging economies of Asia and Latin American would be better for Britain in the long term. However, the share of exports going to China, India and Brazil is less than 5%. This is because Britain does not have the large natural-resources endowments or the production of capital goods that these industrializing economies are interested in. Also British firms have been moving slow towards building trade links with these countries because in the past when their domestic economy was booming they were never forced to find customers in other markets.

Britain’s car industry is their one major hope of establishing relationships with these new markets. British car exports to China rose to 23% and sales to India also rose to 67%. If Britain can get its other industries to catch on to the success of Jaguar Land Rover than its export strategy will actually work. This article goes along with are discussion in class about the Asian Tigers export orientated strategy. Although an export strategy might have worked for the Asian Tigers, I’m not exactly sure how much success Britain will have. From this article, it sounds like Britain is relying heavily on its luxury car industry when in the scheme of things Britain does not have a comparative advantage in producing cars, Germany does. I think Britain should focus their efforts on vamping up their manufacturing and financial service industries to meet the need of these new industrializing economies.

Going along with this, the article: In Europe, a Risk-Filled Choice for Britain, goes more into detail about the decline of the British pound. This article states that this decline will be good for British exports because their goods and services will be more of a bargain for foreign buyers and investors. But a cheap currency alone is not enough to keep Britain competitive. This is because the Spain, Ireland, Portugal and Greece have all had to make painful adjustments by the government and industry such as cutting spending, raising taxes and millions lay offs that helped these countries gain competitiveness in the global market (also mentioned in the previous blog). Britain has not made these adjustments to get its finances in order but maybe should have to remain competitive. The author states, “But with exports to China at just 2.8 percent of Britain’s over all output-lagging behind sales to that country by Germany, France and Italy-fulfilling the dream of becoming a high-end industrial powerhouse will require a substantial increase in investment in British industry.” I think that this raises the discussion of what Britain should do. Is it necessary Britain impose harsh economic adjustments like the rest of Europe or should take another route in continuing to build their economy back up? Is the British economy in trouble?

The US in a new international economy and the plight of the Euro

This Wall Street Journal article listed above summarizes how America's traditional allies, the European Union and Japan have been struggeling since the economic crisis and how it is up to the United States to lead the modernization of the international system ultimately supplying economic security and opportunity to developing countries. Author, Robert Zoellick outlines 5 important strategies for the United States to pursue in a new international economy. The outlined agenda includes: building up the North Atlantic Free Trade Agreement, in hopes of providing energy security and boosting productivity for America, Mexico, and Canada giving the continent an edge in manufacturing. The second strategy is for the United States to anticipate the dangers that can come with its federal reserve setting interest rates at 0%, and if Japan is a predictor for these implications we could expect the US having to competitively devalue its currency. Instead of this the United States needs to push the IMF to set standards about currency manipulation and exchange rate policies, "it should be a referee that blows a whistle, even if it cannot penalize." The third, fourth, and fifth recommendations  are grounded on the idea of using free trade to help develop emerging economies through the WTO and are an interesting take to what we've learned the past week on whether free trade facilitates newborn economies into a world system or if its counterproductive.

Expanding on the idea of a struggling European Union, the question emerges on whether or not some of the EU's members want to keep using the Euro. The second link I'm posting voices concerns of Southern European countries having to return back to a national currency. "Across Europe's southern rim, people recoil at the idea of returning to national currencies, fearing such a step would revive inflation, remove checks on corruption and derail national ambitions to be part of Europe's inner circle." (WSJ, 2013) Only 20% of Italians believe that leaving the Euro will help revive the economy, while 74% of the country thinks it will have detrimental results. An interesting component to the article posted is an interview of an Italian Chocolate Factory owner, who's factory resides in the foothills of the Alps. He argues that the common currency of the Euro has forced producers to act more competitively, saying businesses are forced to compete at higher levels knowing that they don't have the helping hand of currency devaluation, he goes on to contest that Italy would be far more worse off if it had its own national currency.

The last I'm posting is another Wall Street Journal article that reports industrial production in the Euro Zone has fallen to a three year low. While industrial production is at a three year low that is not the only problems that run rampant in the Euro Zone. These issues include minute consumer spending, daily highs in unemployment all while facing massive spending cuts by local governments. A struggling Europe is definitely a salient issue to young Americans like us who may have international business ambitions or maybe just want to spend an extended period of time in the Euro Zone and attempt to make money in a struggling economy. This is an issue that I believe the class will enjoy further discussing.

Thanks for reading!

Lucas DeNardo

Do Temporary Trade Barriers Lead to Freer Trade in the Long Run?

To combat the recent recession many countries, especially developing nations, have begun to impose temporary trade barriers, such as antidumping, countervailing duties, and safeguards.  According to Bown and Crowley these new measures might not lead to prolonged protectionism.  Instead they suggest that these measures could be a positive sign.  High-income nations typically have lower tariffs than developing nations; however high-income nations have often implemented protectionist policies during downturns in the economy.  If developing nations are mimicking the patterns observed in high-income nations, then temporary trade barriers might actually lead to increased trade liberalization in the future. 

Optimistically, the trade barriers are an indication that developing countries are beginning to follow in the footsteps of developed nations and that in the long-term trade will continue to liberalize.  However, developing countries are not the only nations that are implementing trade barriers. Although the G20 continue to advocate for free trade, trade barriers have been increasing.  The Economist, in contrast with Bown and Crowley, views the increasing trade barriers as a signal that the global economy is heading down a slippery slope.  They suggest that the WTO should continue to condemn the protectionist policies of the G20. Moreover, the Economist points out that modern trade barriers are not often taking the form of high tariffs but instead countries are implementing more informal barriers- import licences, customs controls, etc.  The “red tape” now being imposed can effectively keep imports out of the market and it is difficult to detect and stop.  If trade barriers continue to raise the global economic situation will be reminiscent of the 1930s when extreme protectionism was rampant and the world plunged into the Great Depression. 

    

Thankfully, in contrast with 1930 there are currently international institutions in place that help regulate international trade.  The goal of the WTO as stated by the Director-General Pascal Lamy:

“The WTO’s founding an guiding principles remain the pursuit of open borders, the guarantee of most-favored-nation principle and non-discriminatory treatment by an among members, and a commitment to transparency in the conduct of its activities. The opening of national markets to international trade, with justifiable exceptions or with adequate flexibilities, will encourage and contribute to sustainable development, raise people’s welfare, reduce poverty, and foster peace and stability”

In his mission statement Lamy recognizes that exceptions and “flexibilities” are a necessary part of trade agreements; however trade liberalization remains the main goal of the WTO.  If Bown and Crowley are correct and the increase in temporary trade barriers is in fact a sign of converging economic policy, then the WTO should be cautious about criticizing protectionist policies that are responding to the business cycle.  On the other hand, if the current protectionist policies are just the beginning of a long-term trend, then the WTO should take action. Both the WTO and individual countries are trying to cope with the effects of the worst recession since the Great Depression.  The economy is finally starting to show signs of life again.  The WTO now must walk a fine line to encourage global economic recovery and growth.

Is China's Threat Legitimate?

As we discussed in class on Tuesday, the success of the "Asian Tiger" strategy is predicated on having a stable macroeconomic policy. More specifically, a country's macroeconomic policy will be considered stable if it consists of low inflation with a stable and "appropriately valued" exchange rate. As this Op-Ed Wall Street Journal article writes, the value of the Dollar in the international market may see an increase in the future. The article argues that, even though the Dollar may lose the currency war, it will appreciate. While currency appreciation is associated with deflation, one aspect of a stable macroeconomic policy, losing the currency war may be the more noteworthy outcome discussed in this article.

While the United States remains to be the world's largest economy, China, the world's second largest economy, continues to exhibit it's legitimacy as a threat to the United States. As discussed in this Article, China's economy continues to grow with a combination of increased exports and slowing inflation. As a consequence of China's continuing economic expansion, Chinese investment in the United States continues to grow. Investment in U.S. firms by Chinese companies totaled $10.7 Billion in 2012, which the article explains, is "higher than the Chinese total from 2009 through 2011 combined." Such a massive increase in Chinese investment is one indicator of China's growing strength  as they narrow the gap with the United States as the world's largest economy. Many experts are claiming China's continued growth is a cause of their undervalued currency. This is a topic we discussed in class as well; an undervalued currency makes exports artificially discounted. This benefits the consumer but hinders the success of domestic producers. If these experts are correct in their assessment, then China's economy could face difficult times in the future. If the currency were to undergo a revaluation, their inflation would increase and their exchange rate would prove to be inappropriately valued, i.e. their macroeconomic policy would become highly unstable. Time will only tell if China's continued growth is sustainable.

Free Trade in Latin America: Good or Bad?

In an Op-ed article in the New York Times published June 2012, the author claims that the United States, China and the European Union should sign free trade agreements with developing countries in Latin America like Peru and Colombia that are beginning to grow rapidly.  According to the author, the developed countries could "do well while doing good", or in other words, profit while helping these developing countries grow their economies.

Unfortunately, this article takes a naive approach to the specific needs of Latin America as a whole, and Colombia in particular. A free trade agreement with the United States or the European Union could be devastating for Colombia's receding war on drugs. (In fact, Colombia actually signed a free trade agreement with the U.S. in May of 2012. Applauded by the U.S. pork industry and the White House, and mourned by many sectors of Colombian society including the small-scale farmers; only time will reveal the full impact of this agreement. For more information on the terms of the agreement and some background information on U.S./Colombian economic relations, this Economist article is very informative.) The U.S. and the European Union provide enormous subsidies for farmers, especially in the  beef and pork industries. Without protective tariffs to balance out these subsidies, many small Colombian farmers will no longer be able to compete. "Small farmers… lack the basic infrastructure necessary to successfully export. These farmers- who tend to be located in conflict zones and have already been oppressed by the on-going armed conflict- will certainly not be able to compete domestically with exports from the U.S." (U.S. Office on Colombia. May 20, 2011.)

There is a legitmate fear that these farmers will turn to the only crop still profitable, coca.

Western advocates for free trade often overlook the fact that many Colombian farmers are also indigenous peoples, so the likelihood of them moving from their ancestral lands to cities, where manufacturing jobs created by the free trade agreement are emerging, is very slim. And really, it would be detrimental to Colombia and Latin America if they did. Cultural diversity is an important characteristic of Latin American society, and indigenous tribes have made enormous strides in gaining collective rights under the law. Free trade agreements could begin eroding that progress.

In class we talked about the benefits of free trade on paper, concluding that there were few downsides. However, applied to real world situations in cultures outside of our own, more problems emerge. If America and the European Union truly want to help our neighbors to the south, free trade agreements may not be the solution.

The End of Offshoring, The Factor Model Explaination

In a recent article, published in a special report by The Economist, it was claimed that the outsourcing of jobs and contracts overseas has begun to reverse. In the 1980's, large (Western) firms began off-shoring a substantial portion of their labor, with the idea being that they could offset their high labor costs by sending work to countries where labor costs were much lower. For over two decades the strategy was highly successful, but now many of the firms that sent work overseas are rethinking their positions. There are several reasons for this:

• Wages in China and India have steadily increased by 10-20% every year for the last decade, as opposed to the fact that manufacturing wages in America and Europe has hardly increased at all.

• Alternatives to China and India, such as Vietnam, Indonesia and the Philippines still offer fairly low wages, but they could never hope to have China's scale, efficiency and support chains.

• This has been a noticeable trend for several years. In 2010 an Economist's Free Exchange blog published a post called, "China: The End of Cheap Labor?"

• Firms have also discovered the disadvantage of distance, particularly due to a slow by steady rise in the cost of shipping goods across the sea. Not to mention the fact that any of these supply chains could easily be disrupted by natural disasters and wars (or giant sea monsters).

• Firms have begun to move away from the model of producing everything they need in one location to supply the rest of the world. China is no longer seen as a low-cost labor hub. Rather, it is now seen as a major emerging market, and any MNCs that do move their production there are doing so to be close to a new and massive market.

• "Companies now want to be in, or close to, each of their biggest markets, making customized products and responding quickly to changing local demand"

The most important thing for readers to take away from this article is the fact that MNCs are no longer responding simply to the need to find cheap labor for production, but they are now taking heed of a far wider range of variables such as transportation costs and new markets. This article also reflects some important things discussed in class and the readings, particularly the "Factor Model," which explains how the costs of various factors of production will rise and fall depending on the level of demand for those factors as a result of liberalized markets. In this case, that would be labor. The shear growth of off-shoring to places like China over the last few decades have had a huge upward pressure on the cost of labor, which in turn makes the goods shipped from there less inexpensive than they used to be. Not only that, but interest groups, who can lobby for advantageous trade policies, will now be able to place more pressure on policy-makers and firms to bring jobs back to the US. The Economist states that "with labor-cost differentials narrowing rapidly, it is no longer possible to point at rock-bottom wages in emerging markets as the reason why the rich world is losing out. Developed countries will have to compete hard on factors beyond labor costs. The most important of these are world-class skills and training, along with flexibility and motivation of workers, extensive clusters of suppliers and sensible regulation."