Trade Turbulence and Why Asia Matters
The global economy is growing but things could get bumpy if populist forces continue to gain strength in the West.
Most frequent fliers have experienced an anxious flight or two with heavy turbulence. Most of those same fliers will — after tightening their seat belts and gripping their drinks — whisper the comforting mantra to themselves: “Turbulence does not bring down planes”.
It’s time to grip those drinks and repeat the mantra as policy turbulence fills the air amid Washington and Beijing’s clash over trade policy, President Donald Trump’s imposition of tariffs on steel and aluminum, and the strengthening of populist political forces in the West amid growing anti-globalization sentiment.
This policy turbulence over the horizon comes amid a time of relatively smooth sailing in the global economy. According to the International Monetary Fund’s most recent World Economic Outlook, world output grew a robust 3.8% in 2017, and is headed for 3.9% in 2018. The American economy has kept its momentum, with the jobless rate at a 17-year low, inflation subdued, and growth approaching 3%. The euro area, however, is showing signs of a slowdown after a modest recovery last year.
Given the importance of growth to poverty reduction worldwide, trade turbulence that slows down economies is bad news for the world. While Trump continues to point a finger at China, it’s important to remember the vital role of China’s demand engine to global growth. More broadly, the Asian trade and demand engine is arguably more important to the global economy than the United States or the European Union.
Consider this: Growth in emerging and developing Asia will be almost three times as fast as advanced economies over the next two years, according to the IMF. China will average 6.5% growth over the next two years, and India will see a robust 7.6% rise in economic output, the World Economic Outlook noted.
Now, consider this: Chinese demand has become a vital piece of the global economy. In the year 2017, China surpassed the US as the world’s largest importer of oil, and it remains the world’s largest purchaser of most commodities from metals to soybeans, not to mention the world’s largest consumer of movies, beer, and luxury goods. It is difficult to quantify the second and third order effects of China’s insatiable demand for goods, but it should not be discounted.
Meanwhile, the Chinese consumer is shouldering its fair share of the global consumption burden traditionally borne by the American and, to a lesser extent, European consumer. According to Allianz, the global insurer, Chinese aggregate consumption of final consumer goods went from one-tenth of the US share in 2005 to one-third in 2016. China’s growing middle class has become an attractive market for companies ranging from Apple to Adidas, Starbucks to Unilever, and Allianz argues that China’s private consumption could match the US by 2040.
All across Asia — the world’s fastest-growing region — Chinese demand and supply chains that feed Chinese manufacturing play a vital role in regional growth. Frontier and emerging market countries are increasingly dependent on either Chinese investment or trade, as well as broader links with Asian economies and companies. In some cases, such as Sri Lanka, that Chinese dependence has led to heavy debt and a virtual Chinese take-over of a strategic port. In other cases, such as Pakistan, Chinese investment has materially boosted the country’s infrastructure and power generation ability.
As for trade, Asia again is leading. The healthy 4.7% world merchandise trade growth in 2017 owes a great deal to Asia. According to the WTO, Asia contributed more than half of the growth in global exports for 2017 and some 60% of the overall increase in global imports. Asia boasted the fastest trade volume growth of any region in 2017. For underperforming African economies to grow, they will need multiple sources of investment, trade, and commercial interaction from Europe to the Americas to Asia.
While economic growth does not always lead to inclusive growth, you cannot have the latter without some form of the former. To achieve the promise of tomorrow’s sustainable development goals, create the conditions for a policy environment supporting inclusive growth, and help lift millions more out of poverty, we can only hope that today’s trade turbulence is just a few passing clouds and not a gathering storm over the horizon.
