When the US Sneezes, Do Parts of the World Get Sick?
February 11th, 2008
Submitted By: Catriona Banks-Orosco
“When the US sneezes, do parts of the world get sick?” That was the question posed to us in International Business as we discussed how a slowdown in the US economy might affect other nations.
Recent articles in the Wall Street Journal and Financial Times [registration is free] describe a slow down in the economies of China and India. China’s growth is expected to slow by 2%, down to 9% this year. India’s growth will slow 1%, down to 8.7%. Not exactly stagnant, but still they’re both less than the double digit growth the countries have been experiencing over the past few years.
So, is the slow down in China and India directly tied to the economic slowdown in the US or simply the natural process of a growing economy? Does it indicate a larger problem? Or opportunity?
Exports have fallen in both countries. India is likely to keep their interest rates high to attract investors and to try to tame inflation. China’s imports outpaced exports for the last three months of 2007. As the value of the US dollar falls, imports cost us more, but suddenly our exports have a larger audience that can afford our products. China exports products to many nations, but the US market is known for its mass consumption. So could our slowdown in consumption, create the space necessary for China and India to consider longer term, environmental implications in future growth plans? The World Bank is hoping for just that. A slowdown will allow China to “recalibrate growth away from heavy industry in favour of consumption and services.” This would allow China to re-balance the economy away from resource intensive industries, reducing green house gas emissions and pollution. It would also position China to eventually become the world’s largest economy, surpassing the US in consumption, and buoying the global economy. Redirecting growth away from heavy industry won’t necessarily translate to environmental protection. But a transition to services and consumption could help lift a major portion of the population out of poverty. Heavy industry has not created many jobs. A transition to services and local consumption will create jobs for more people. As the overall level of income rises, the citizens of China are likely to begin to demand more protections, for themselves and their surroundings. Of course this won’t happen overnight. But history has shown that as populations are lifted out of poverty, they expect more. The same will hopefully be true in India, where the rise in incomes of some of its people has not been spread across its vast population.
I don’t fear the common cold, I don’t like it, but I’m not afraid of it. I let my kids dig in the dirt, wear shorts in the rain and wear themselves out. The logic is that it will increase the strength of their immune systems by allowing them to be exposed to regular germs in their environment. Maybe the slowdown in the US will have the same effect on the world economy. Many nations will be adversely affected in the short term. However, it could also force the world to take a breath, and consider future paths instead of simply plowing forward. Ideally all nations will gain an understanding of how to grow economies in a sustainable manner.
How do you see the US economic slowdown affecting the rest of the world? Could it be good for the world economy?
Entry Filed under: Beijing, China, India, Misc., Misc., Pre-Departure
6 Comments Add your own
1. Chris Carr | February 12th, 2008 at 8:24 pm
Good post. This is a subject of much debate.
I have read that some in India and China contend that their economies have become or are largely decoupled from any US economic “sneezes” (e.g., the sub-prime crisis, housing slump, etc.). I am not an economist, but it seems to me that such a position/argument is shaky. The US still remains the worlds biggest export market. So if we ain’t buying stuff from China and India, then they ain’t selling, and their own domestic markets are not yet able to pick up that much slack. Is this a good or bad thing and/or will it nudge along an overdue recalibration? Time will tell …..
2. Simeon Trieu | February 13th, 2008 at 2:21 pm
Well, I’m not taking international business this quarter, but…
From what we know of globalization, it’s impossible for China, India, and the US to decouple themselves from each other. To not trade with each other means to have lesser transactions, lesser revenues, and less profitability. It’s surprising that China actually had imports outpace exports in the last three months! You would figure that the “factory of the world” would constantly be exporting.. maybe their quality shortages are catching up to them?
Another thing that I’m wondering about is whether India and China will use this opportunity to invest more in the US. Since the US economy seems to be deflating, wouldn’t this be a good time for powerful foreign nations to gain an advantage by investing in the “undervalued” US economy? We found from Dr. Ashok Bardhan that China has been investing in US Treasury bonds and found themselves in a damned if you do, damned if you don’t situation, where they can’t pull their investments all out of the ailing US economy for fear of losing a significant portion of that investment. And we know that India has been investing heavily in many US companies, either by outsourcing or entrepreneurship. Maybe India and China are more coupled than they want to believe?
3. Chris Carr | February 13th, 2008 at 5:14 pm
A major reason that China’s imports may be exceeding exports recently is because other Asian countries are now importing into China like crazy. E.g., the Japanese and Koreans. These countries have a trade surplus with China, not deficit (the US). Of course a large part of those imports are assembly items which in turn are exported to the US and Europe after assembly into a larger product in China. It’s very difficult to unwind and track all of this in the trade data to get a true handle on the interconnectedness.
4. Brandi Eng-Rohrbach | February 13th, 2008 at 6:05 pm
I think that our destinies are forever intertwined. I read an article on CNN lately called Rebates: Congress giveth, China taketh away? I think this article echoed the issue Catriona is raising. It was saying that giving more money in form of tax rebates to consumers really may be giving more money over to China. This is essentially the same argument that our recession is hurting China. I think it really just is that our economy is no longer an isolated economy. There is just a world economy. As they say in High School Musical (a worldwide pre-teen phenomena which I saw being sold pirated in China last summer), “We’re all in this together”.
I think that the slowing growth rate of China is because of a slowing down of the global economy at the moment. I also feel it is a result of the fact that that even if you have the same amount of growth in GDP it means that your percentage of growth will be smaller because your GDP is bigger. In simpler terms, if you have two pies and you add the same amount to both, it will be more noticeable on the smaller pie. A more mature economy has a bigger pie and thus it can’t grow as big percent wise. So i think this slowing in growth is probably the result of being part of the world economy and a world economic downturn.
I don’t think this change will necessarily have any affect on a switch to services. A large service industry would require a external or internal demand. An internal demand would require a large consumer base. This doesn’t quite exist yet in China. An external demand for services definitely exists. China could begin competing for outsourcing of services with India for this demand.
Even a service based industry in China doesn’t mean pollution would be curbed, however. If China isn’t manufacturing somewhere else will like Russia, Brazil, or Vietnam. These countries also don’t have strict environmental regulations thus no worldwide improvement will be achieved. Thus, I don’t feel that a slowing in China’s economic growth will curb pollution levels worldwide. Especially if places like the United States continue to pollute more as well.
5. Gary Chou | February 21st, 2008 at 8:37 am
Catriona, I love your hypophora! It was very you. Yes, recession is a great time to rejuvenate and elutriate, it’s part of normal economic cycle for the stabilization sake. Like all matters in universe increase entropy, it’s inevitable that diffusion from higher to lower concentration takes place from time to time. Head of states should really learn about living from a Central Coast mom!
6. Eric Kvilhaug | February 22nd, 2008 at 10:15 pm
The downturn in the US economy will most definitely have an effect of the rest of the world. As states above we are the largest consumer of exported goods from around the world. As our dollars loses value our product become more enticing to other countries, with the devaluation of our currency our product might fall in value enough to start taking market share away from other countries goods. This can have a doubling effect that is felt by certain countries based on our economy. I think this “hurt” will not reach India and China as severely as it will small countries.
India and China are large enough to take small loses in strides and not worry about it, if I was a small country dependant on Importing to the US I could be worries, unless we are taking about the importation of rum and tequila, which in the economic downturn will only become more popular. Speaking of this my Budweiser stock seems to be doing ok, simply put, the economy sucks and so does the taste of Budweiser, so went distraught, drink away your sorrows with something just as terrible.
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