Western financial chaos stemming from the imprudent deregulation of financial institutions and consumption fuelled by credit flimsily secured on inflated housing markets, could speed the shift in global trade and economic power to the South and the Orient in particular. According to financier, George Soros, “The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world”.

Global shift

In many ways what is currently happening is a mirror image of what occurred during the Asian financial crisis of the late 1990s and it is the Asians who are likely to have the last laugh. Then, it was the collapse of Asian banks and the devaluation of Asian currencies that presented dazzling opportunities for Western companies to purchase Asian stocks and assets at knock-down prices. Today, it is the cash-rich companies of emerging markets such as India and China that can now step up their forays into Western manufacturing by purchasing shares in failing Western companies at bargain prices. The result is likely to be a vertical integration of Chinese and Indian industry that will see companies from these countries come to dominate the higher value-added end of product chains. Further, the relative buoyancy of some emerging market economies could attract from the West even more investment seeking a safe haven through diversification in stable markets abroad. Economies, such as Brazil, China and India, are very likely to benefit if good economic management and legal predictability can be maintained and strengthened. 

In the 15th century, Asian power steadily declined with the expansion of European empires. The suffering, mass destruction and slaughters, caused by economic failure and internecine warfare in Europe during the first half of the 20th century, emboldened colonised Asia, while firmly handing the mantle of European globalisation to the United States. By the 1990s, with the weakening of communism and socialism, India and China coaxed some three billion people out on to the capitalist path just as technology was breaking down barriers and causing global shrinkage. Technology, labour and capital all became highly mobile, turning China’s low-wage economy into a magnet for manufacturing, while India’s attracted software and outsourcing. 

The rise of the east

By mid-2008, just as the Western-induced global financial crisis was beginning to bite with a vengeance, the then European trade commissioner Peter Mandelson referred to China’s “growing status as a world power”, as China assertively brought its newfound economic power to bear on World Trade Organisation negotiations. China was duly invited to meetings of the select Group of 7, joining India and Brazil and confirming the irrevocable shifting of the tectonic plates of global trade. Today, China has the self-confidence and temerity to openly accuse the United States of plundering global wealth by exploiting the dollar’s dominance and is urging other currencies to take the dollar’s place. However, China, at this stage, is unlikely to turn its own currency, the yuan, into a reserve currency competing with the U.S. dollar, as it would involve making the yuan convertible and reducing controls on capital flows. 

China’s audacity is well-founded. It currently has a 6 percent share of world trade (up from 1.8 percent in 1990), a current account surplus amounting to 10 percent of GDP, economic growth of 10 percent, huge sovereign investment funds and is now the fourth largest economy in the world. Further, China’s state-controlled banking system and savings surplus have helped insulate it from the Western financial crisis, although shrinking Western markets coupled with China’s rising labour costs and the upward valuation of the yuan will inevitably affect exports that represent one-third of its GDP. Accordingly, China’s economic growth has declined since peaking in the second quarter of 2007; but, in contrast to the downturn in the West, it is expected that China will manage a controlled cooling of its economy that, just a year earlier, was in danger of overheating. 

Heading south

India enjoys growth of 9 percent, but its corporate foreign debts are higher than those of China and its private banks are feeling the squeeze. However, because its exports represent just 17 percent of its GDP it is credited with having great resilience to weather a severe U.S. economic downturn. 

“Together,” said Indian Prime Minister Manmohan Singh in 2005, “India and China could reshape the world order.” At the time the two countries cemented a pact with the resolution of border disputes, the discussion of a bilateral free trade agreement and the calling for the syncretistic cooperation of their respective computer software and hardware industries to become world leaders in the field. Significantly, at this time of crisis, both China and India are increasingly being looked upon to help counter the slowdown of consumption in the West, although some remain doubtful that they can. 

Half the world’s population now live in the emerging markets of the South, with China and India accounting for one third. Economically, at purchasing power parity, emerging markets produce nearly 40 percent of the world’s GDP, having grown at an average rate of 7 percent per annum globally over the last five years and 8 percent in Asia. With a combined share of global exports of goods and services that has more than doubled over the past 18 years, the South has become an important engine of economic growth. Furthermore, South-South trade has grown rapidly since the mid 1980s at more than 12 percent a year, which is almost twice the growth in North-North trade. This trend is likely to continue as developing countries, which increasingly view the advanced developing countries as “overly aggressive” in their demands for the liberalisation of industrial tariffs in WTO negotiations, look to the South for new markets. The countries of the South currently account for some 37 percent of world trade; but this is projected to increase to 50 percent over the next few years as closer trading relations develop between the dynamic economies of the emerging markets.

A new dawn

The entry of emerging markets from the South onto the international scene was significant enough to cause a decline in the price of manufactured goods globally. On the other hand, increasing demand from emerging economies, notably China and India, contributed to the increases in the prices of food and energy, especially prior to the current Western financial crisis. Another sign that emerging markets have become major players in the global economy is that certain of them, particularly Asian and oil exporting countries, have become the “financiers of the world”. For the first time in history the South is now financing the North overall and many prominent Southern companies are using their accumulated capital, technology and expertise to become multinationals. Yet the significance of emerging markets is set to increase still further over the next few decades. Studies indicate the combined size of the economies of Brazil, Russia, India and China could, in the next 40 years, be larger than that of the six largest economies today. All this clearly confirms the profound rebalancing of the world economy that is well under way.

Not unexpectedly, this rebalancing is reflected in changes in cargo transportation patterns. In 1980, China was the U.S.’s 24th largest U.S. trading partner; but by 2006 its trade had grown to rank it second. U.S. trade with several other east Asian nations, such as South Korea, Taiwan, Singapore and Malaysia, also rapidly increased at the same time. However, contemporaneously, trade between the U.S. and its major European partners grew more slowly, thus diminishing the relative importance of trans-Atlantic trade. These changes in U.S.-Asian maritime trade are vividly demonstrated by congestion problems in Atlantic ports due to Asian trade, the more intensive use of U.S.-Asia routes including the Suez Canal and the serious consideration being given to opening the arctic North-West Passage route as the polar region warms. Changing trade patterns have intensified further with the increased tendency to assemble complex products, such as cars, in plants scattered around the globe, from components brought in from multiple locations worldwide. 

With this continuing shift to the South, it is not only global transportation and logistics networks that have had to reconfigure to accommodate changes in trade patterns; but, with the current financial crisis as a catalyst, the world order is likely to have to too.