East Asia and India Are a Bright Spot of World Economy

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

That area produces 40% of global GDP and accounts for half of world population.

At a time when we are facing a depressing economic outlook for the trans-Atlantic community, it is pleasing to note that major Asian economies offer growth prospects ranging from 2% in Japan to a sizzling 8% plus in India and possibly also in Vietnam.

The question is: How much will that Asian economic growth benefit the rest of the world?

The answer is: Not much for two reasons. About 60% of Asian trade is estimated to be intra-regional, and all the major economies in that area are running trade surpluses, ranging from $4 billion (Thailand and South Korea) to a whopping $430.2 billion in China.

Last year, the trade surplus of the six Asian countries under review was $475 billion.

The only exception was India, where the trade deficit of $41.8 billion reflected a sharply accelerating domestic demand that is expected to trigger a huge $160 billion trade gap by the end of this year.

And conforming to intra-Asian trade patterns, China was the main beneficiary, with a trade surplus of $70 billion on its goods sales to India. The numbers for the first quarter of this year strongly suggest that China’s fivefold increase of exports to India will bring Beijing’s trade surplus close to $100 billion in 2022.

A growing economic complementarity

That is an example of a rapidly expanding intra-Asian trade, and, consequently, of a growing complementarity of regional economies, fostered by free-trade within the ASEAN (ten countries of the Association of Southeast Asian Nations), which has now been extended to create the world’s largest free-trade area – Regional Comprehensive Economic Partnership (RCEP) -- that also includes China and Japan.

Unlike the European Union, ASEAN and RECEP have no ambitions of becoming political, economic and security blocs with centralized and supranational political, trade, monetary, and fiscal administrations.

In Asia, trade is at the core of regional cooperation. Thanks to strong trade ties, China and India became highly complementary economies despite problems with contested border issues. For example, three-quarters of chemical and manufacturing inputs used by India’s thriving pharmaceutical industry – the fourth largest in the world -- are supplied by China.

That complementarity will increase as India’s economy continues to be driven by a strong domestic demand, fueled by an accommodative monetary policy and a sharp increase in government spending. Imports, as a result, are expected to grow at double-digit rates, and India’s trade partners could get 2.5% of its domestic demand growth.

India’s inflation, however, is likely to pose problems. Rising food and energy costs have pushed consumer prices to 6.3% in the first quarter, slightly above the official target range of 2-6%. At some point, India’s interest rates may have to rise to restore price stability.

China, by contrast, has no inflation problems. Consumer prices in the first quarter were a tame 1.1%. That allows the monetary policy to maintain prudently supportive credit conditions. The fiscal policy is a different story, because a budget deficit of 6% of GDP offers no room for tax cuts or higher public spending.

Asia’s “rich and powerful” economies

Chinese exports to the rest of Asia are on an upward trend, but the weakening U.S. and E.U. economies could trigger China’s declining overseas sales in the months ahead.

In view of that, Beijing may have to step up infrastructure investments to rev up its large manufacturing sector and keep the economy on a 5% growth path.

China also holds the key to Japan’s economic growth. Nearly a third of Japanese exports go to China. In fact, Japan’s last year sales of more than $200 billion to China and Hong Kong are equivalent to what the country exports to U.S. and E.U. taken together.

Such a large, and growing, amount of trade is incompatible with Japan’s increasingly hostile attitude toward China. If Beijing turns the screws, Japanese exports would tumble, taking down with them an already weak business capital spending.

Exports are central to Japan’s growth. Last year, domestic demand contributed only a third of the economic growth. The rest of a 1.8% GDP increase came from the trade surplus.

There are the answers to foreign exchange traders puzzling about the yen falling to 130 against the dollar – and marking a 20-year low.

By comparison, Indonesia, Vietnam and Thailand are more balanced economies with strong fundamentals, growing labor force and plenty of room for expanding domestic demand.

Asia’s focus on pragmatic issues of regional trade and cooperation is in stark contrast to a European quest for trappings of an unworkable and wasteful superstate.

That has allowed Asian economies a greater freedom to pursue policies in accordance with domestic needs and stages of economic development. As a result of that, Asian economies are now poised to become a “rich and powerful” beacon to the world the legendary Singapore leader Lee Kuan Yew predicted in the early 1970s.