China’s economic ascent since the early 2000s has generated more equanimity than the fear its military rise caused in the mid-1990s, which led to accelerated concerns in the international community about a “China threat.” While the Chinese military continues to modernize and its defense budget grows by double digits, China’s expanding economy is now regarded more as an opportunity than a threat, and helps the country conduct a savvy “new” diplomacy with confidence.

Nowhere is this shift in perceptions toward China’s rise more evident than in Southeast Asia, especially in terms of the changing attitudes of ASEAN (Association of Southeast Asian Nations), which was formed in 1967 partly as a collective response to China—which supported communist insurgents in the region—and did not normalize relations with China until the 1990s. Thus, the plan to create an ASEAN-China Free Trade Agreement (ACFTA) by 2010 for the ASEAN 6 (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and 2015 for the newer members (Cambodia, Laos, Myanmar [Burma], and Vietnam) signaled a profound change in the relationship between China and Southeast Asia. Covering a total population of 1.7 billion people and a combined GDP of about $2 trillion, ACFTA is billed as the largest free-trade zone in the world. ACFTA is estimated to boost ASEAN’s GDP by 0.9 percent and China’s by 0.3 percent [1].

China’s emergence as an avid pursuer of FTAs happened in spite of its latecomer status. China did not begin its pro-market economic reform until 1978-9 and did not join the World Trade Organization (WTO) until the end of 2001. Beginning in 2002, China has signed FTAs with Chile (2005), Pakistan (2006), New Zealand (2008, its first with a developed country), and Peru (2009) and is currently studying, negotiating, or implementing FTAs with over 20 countries or regions (China Daily, April 29; People’s Daily, February 9, 2006) [2].

China’s impressive trade offensive typifies its “new” foreign policy thinking. Yet, it is not clear whether this “trade diplomacy” represents a long-term and fundamental shift in Chinese statecraft or only a short-term tactical expedient aimed at buying the crucial time that Beijing needs in order to become the preeminent actor in the region capable of securing its military interests and projecting its power. It also raises the question of whether China’s active economic diplomacy in East Asia will spur commercial competition in this region where great-power conflict is still possible.

Despite the standard economic rationales offered by Chinese officials (such as helping increase Chinese exports, ensuring access to markets and raw materials, and attracting foreign investment), the main motivation for China’s trade activism appears strategic. In the case of Southeast Asia, China’s FTA with the ASEAN is driven by a political logic that responds to challenges posed by competitive regionalisms in the world economy, to cement growing economic ties with Southeast Asian nations and to alleviate their fear of a rising China, to secure raw materials crucial to China’s economic development, and to ensure a peaceful and stable environment close to home so as to buttress China’s growing influence and counterbalance American and Japanese power. It has thus been interpreted as a concrete example of economic statecraft employed to bolster the image of China’s “peaceful rise.”

ASEAN nations are attracted by the opportunities brought about by China’s economic expansion and trade liberalization; they also seek to leverage their FTA with China to additional FTAs with important trading partners within (e.g. Japan) or outside (e.g. the United States) the region.

Although there are economic benefits for pursuing FTAs, nations often pursue them for non-economic reasons (e.g. strengthening alliance, increasing peace and security, enhancing collective bargaining power, locking in institutional reform, and sharing resources). Regionalism (and FTAs in particular) plays a critical role in China’s current grand strategy—“peaceful rise.”

The policy of “peaceful rise” is based on an embrace of globalization as part of the solution to China’s growth imperatives. It relies both on China’s domestic economy and the international marketplace to sustain and fuel economic growth. To achieve the goal of rising to great power status, Chinese leaders believe that it must secure a peaceful international environment that is crucial to sustaining China’s economic development and augmenting China’s power. Ensuring stability in China’s periphery and avoiding a premature showdown with the United States are thus essential [3].

To achieve the goal of “peaceful rise,” China has refashioned its diplomacy. Rather than continuing to act like an aggrieved victim, China now aspires to be a responsible great power and is acting increasingly like one. Whereas China used to distrust “multilateralism” for fear that multilateral institutions could be used to constrain or punish it, now Chinese leaders recognize that deeply engaging these organizations help promote the country’s trade and security interests and limit American power. On many contentious and intractable issues, China has adopted more pragmatic stances. China is more aware that its rise has consequences for the Asia-Pacific region and beyond. So it is keen on easing the concerns of various countries. Moreover, China has become much more actively engaged in, and seeks to shape, regional affairs. Its hosting of the Six-Party Talk over North Korea’s nuclear issue is a good example. The major instrument used in advancing China’s objectives is its economic power, which is buoyed by its phenomenal economic growth, rapidly expanding domestic markets, and driven by its voracious appetite for raw materials needed for its economic development.

To sum up, China’s “peaceful rise” is a comprehensive long-term strategy leveraging globalization as a catalyst to accelerate China’s economic development and elevate China’s power and stature.

In this context, Southeast Asia is an important arena for China’s new economic diplomacy and a test case of Beijing’s credibility as a “responsible stakeholder.” Some noted regional analysts are concerned that ACFTA may turn the region into a “backyard for Chinese raw material imports and manufactured exports, and hence a natural candidate for a Chinese sphere of influence” [4]. For example, Rodolfo Severino, former ASEAN secretary-general, warned that such industries as textiles, toy, and motorcycle manufactures would be negatively affected in the short term, although he believed long-term benefits would follow (Australian Business Intelligence (October 8, 2002). Furthermore, because of its almost inexhaustible unskilled labor and huge amounts of FDI, China may pose a special challenge to the ASEAN-4 in their home or third-country markets.

There are also broader strategic implications of China’s success in Southeast Asia that is worth noting. In light of China’s activism in the ASEAN Plus Three (APT) and East Asian Summit (EAS) initiatives—both explicitly exclude the United States—will a Chinese version of the “Monroe Doctrine” loom over East Asia?

The first reason for this fear is a historical legacy of hierarchy that characterized China-Southeast Asian relations. Most nations in the region fell under China’s tributary system—“a reciprocal foreign relationship between superior and inferior” in which tribute offerings were normally reciprocated by lavish gifts from the Chinese emperor. Some scholars argue that “accepting China’s supremacy was materially worthwhile,” since the tribute system became the institutional setting and indeed “cover for foreign trade” early on [5].

In a modern twist, Chinese leader Hu Jintao, in his report to the 17th Congress of the CCP, singled out trade as an important instrument for China to achieve its goal of “peaceful development.” The same report reiterated that China would accommodate the “legitimate concerns” of developing countries (hinting early harvest) and support efforts to close the North-South gap [6].

The other important reason is the size asymmetry between China and Southeast Asia. China towers over each individual ASEAN member and all of them combined. AFTA (ASEAN Free Trade Area) intends to create a regional market of over 500 million people. Yet even this combined ASEAN magnitude would only constitute 29 percent of the population, 32 percent of the GDP, and 46 percent of the trade volume, of the combined ASEAN-China FTA. This is why there is a widely accepted view, expressed by Singaporean Trade and Industry Minister George Yeo, that an integrated ASEAN is the only viable response to an economically-rising China (The Straits Times, November 12, 2002).

Thirdly, in contrast to China’s coherent strategic goal, ASEAN does not have a clear picture about its place in the new strategic environment of an emergent China. Lured by the China market (especially the so-called “early harvest” provisions for the ASEAN-4), some analysts worry that ASEAN risks becoming a fringe player on the spokes of China’s regional trade architecture, while further enhancing the attractiveness of China as the hub for regional investment and production (Australian Financial Review, November 12, 2002). In this view, ASEAN will be reduced to a role of auxiliary actor in the main show—China’s rise. China can also turn out to be a fierce competitor—having already attracted the lion’s share of FDI into developing countries and having posed special challenges to manufactured goods from ASEAN. Furthermore, there are real concerns that ACFTA may undermine ASEAN’s own FTA thanks to China’s “divide and conquer” negotiation tactic, because individual ASEAN members may now pay more attention to ACFTA than AFTA.

Admittedly, under the sovereign state system, a return to a modern version of the tributary system is not very plausible. China’s economic diplomacy has presented opportunities and challenges for East Asia. On the one hand, ASEAN nations have tried to “bind” China through regional institutions, such as ACFTA, APT, EAS, and ARF (Asian Regional Forum), raising the cost of Chinese belligerence. Indeed, China’s FTA activism has spurred measures by Japan and India to strengthen their own economic diplomacy in Southeast Asia. For instance, since the ACFTA was enacted, Japan has signed FTAs with Singapore, Malaysia, Indonesia, Thailand, and the Philippines.

In contrast, the interest of the United States in the region, as shown through the lens of economic diplomacy, pales in comparison [7]. Since 2004, China has replaced the United States as the largest trading partner of Japan, South Korea, Taiwan, India, Australia, Brazil, and Chile. Admittedly this is mainly due to the rise of China as a world trader, but it is also an indicator of America’s relative declining influence. The United States has only signed FTAs with Singapore and South Korea (the latter still not ratified by Congress). The United States’ hope of engaging in a FTA with the entire membership of APEC (Asia-Pacific Economic Cooperation) also looks less appealing or feasible than China’s bilateral FTAs, especially against the backdrop of the failed Doha Round of WTO multilateral talks.

China’s economic statecraft toward Southeast Asia will provide the material support for its stated goal of “peaceful rise,” augment its stature and influence in regional and world affairs, and present a challenge to the United States that calls for the need for Washington to shore up its economic competitiveness and attention toward this key region.

Source: http://www.jamestown.org/single/?no_cache=1&tx_ttnews[tt_news]=35434&tx_ttnews[backPid]=381&cHash=c34b8f981b

As signs grow that the worst of the global slowdown is passing, fears are being voiced that world trade could hold back the recovery. The answer depends on whether trade is seen as a reflection of the broader economy or a transmission belt for the downturn. The links between finance and trade are still little understood. World trade has experienced its biggest contraction since the 1930s — much sharper than the fall in economic output.

Some economists argue that damage to trade finance and global supply chains, and a series of open and furtive protectionist measures in the meantime, could hamper the recovery in trade, and with it the rebound in output. “There is good reason to fear that trade growth will lag rather than lead any recovery, and that this will itself constrain the pace of recovery,” consultants PFC Energy said. Globalisation — the integration of the world economy — could go into reverse as national self-interest takes priority over the promotion of trade, they said in a recent note.

URL Source: http://www.stuff.co.nz/business/world/2747949/Will-trade-lead-or-lag-the-recovery

Economist  joins in the discussion with yet another piece on whether China can consume more to save the world. Can China reduce its trade surplus to consume more & rebalance the world economy?

The article analyses the prevalent argument of high savings in China (the composition of savings is more corporate vs households; urban vs rural savings) and why consumers might not be able to spend more  (proportion of national income going to households as wages & investments vs corporate profits).

So, can the Panda chew on more?

HBR posted a recent commentary on whether globalization has come under fire during this crisis.

Of all the trends we followed before the crisis, globalization seemed the most secure. Today, however, big and important question marks hang over some aspects of global economic integration.

The past decade-and-a-half has witnessed a level of global integration unseen since before World War I (and arguably in history). Between the early 1990s and the current downturn, global GDP grew at robust rate–roughly 5% nominal GDP growth per year. Yet, trade flows grew nearly one-and-a-half times faster, while capital flows grew at twice the rate. The advent of viable undersea fiber networks in the late 1990s created the first real-time global data networks ever, unleashing a torrent of global information flows. In the last 2 decades, more than 200 free-trade treaties were signed, tariffs fell to unprecedented lows, and countries like China and India, after years of relative isolationism, engaged much more vigorously in the global economy.

In short, the world economy became fundamentally more interconnected and interdependent. The big question now is: Will the pendulum swing back?  [more]

Niall Ferguson and James Fallows debate the statement by Zhou Xiaochuan, head of China’s central bank, calling for the replacement of the dollar as the dominant world currency with the creation of an international reserve currency.

One man’s V is another man’s W. Let’s all hope and pray that the Obama Administration’s bet on not having another round of stimulus to avoid raising borrowing costs and investment in healthcare to boost consumption will all EVENTUALLY pay off.

Article: http://www.project-syndicate.org/commentary/roubini15

Hi everyone, check this out.

World trade is no longer collapsing and fears of rampant protectionism have not been realised.

THE worst global economic slump since the Depression has generated reams of mind-boggling numbers. Among the starkest—and the most worrying—have been measures of world trade. According to the World Bank, the dollar value of trade is about a third lower than it was a year ago. Barry Eichengreen, an economic historian at the University of California, Berkeley, estimates that trade has contracted by more in this crisis than it had at a comparable stage of the Depression (see article).

Lately the news has been more encouraging. Trade is far from booming, but it has at least stopped declining. The World Bank even detects “hints of an uptick” in early data for June. Bernard Hoekman, director of the bank’s international trade department, has “little doubt that the decline in trade has bottomed out”.

Whether global commerce makes a speedy and lasting recovery depends, in the first place, on how quickly and sustainably global demand picks up. But it also depends on two other factors.

One is the reason why trade slumped so badly at the turn of the year. If the main culprit was the drop in global demand, as most economists believe, trade should recover smartly when demand picks up. But if it was an increase in protection, trade will be slow to emerge from the doldrums. Such measures, as past crises show, are easier to put in place than to remove.

The second is global trade politics. Governments will continue to be under pressure to erect trade barriers as unemployment continues to rise and as their room for more fiscal and monetary expansion becomes cramped. Leaders of the world’s biggest economies have repeatedly promised to conclude the Doha round of trade talks, which have already dragged on for more than seven years and been near to death several times. In doing so, they have set themselves an important test.

A hole in the hull

Compared with a year ago, the state of trade is dire. According to the World Bank, the dollar value of exports in the 48 countries for which final data for May are available was still about one-third lower than in May 2008. However, year-on-year data mask recent changes (see chart 1). Month-on-month figures point to a dramatic slump at the turn of the year, but stability since. The bank reckons that the average value of exports (for 44 economies accounting for three-quarters of world trade) dropped by 15.4% in November, held steady in December and plunged by 12.2% in January before flattening out.

The precipitate drop in trade—far more marked than anything that has happened to global GDP—was caused in part by the way production is now organised. Trade has always been more than proportionally affected by fluctuations in output, but the globalisation of the supply chain has increased its responsiveness. Stages of production that were once local are now much more likely to be carried out abroad. Douglas Irwin, of Dartmouth College, estimates that in the 1960s and 1970s, if global GDP increased (or decreased) by 1%, trade would grow (or shrink) by about 2%. In the 1990s, the change in trade was 3.4%.

In recessions, according to a new paper by Caroline Freund of the World Bank, trade contracts even more sharply than it responds in easier times. Using data from the global downturns of 1975, 1982, 1991 and 2001, Ms Freund finds that whereas real income growth was, on average, 1.5 percentage points lower than its pre-recession rate, trade growth stumbled by 7.2 points, or nearly five times as much.

Several reasons why trade should decline so fast in recessions suggest themselves. It could be that, anticipating a sudden slowdown in growth, firms draw down accumulated inventories sharply, causing a rapid contraction of trade. But it is also possible that during downturns governments turn to protectionist policies, heightening the responsiveness of trade to a fall in demand.

Broadly speaking, the timing of the collapse and stabilisation in trade flows, as well as the sectoral and geographical pattern of the decline, suggest that demand and destocking, rather than a retreat into protection, are the chief causes. The World Trade Organisation (WTO) points out that America, which was the first big economy to enter recession, also saw the sharpest contraction of imports last year (see chart 2). Data for America and Japan show that trade in non-durable consumer goods like clothes and food, for which a basic level of demand persists and purchases of which cannot be put off for as long as those of bigger-ticket items, has declined least among main product categories. Exporters specialising in capital goods and durables, such as Germany, have been hit harder than others. And even for cheap non-durables, the early falls were the sharpest, suggesting that retailers were furiously running down their inventories.

Differences in the trends of goods and services trade also support the destocking thesis. Aaditya Mattoo and Ingo Borchert, economists at the World Bank, point to the relative resilience of trade in services, which unlike goods cannot be stored and are therefore immune to the inventory effect. In April America’s imports of goods were 34% lower than a year earlier. Its exports were 27% lower. Both imports and exports of services, however, were down by only 10%. Imports of business, professional and technical services (including information-technology services outsourced to places like India) were 4% higher in the first quarter of 2009 than a year earlier.

The WTO has analysed trade policies as well as trade flows. There have been several instances of countries raising tariffs, within the limits of their WTO commitments. America, the European Union and Switzerland have all introduced new farm subsidies (or restarted programmes that had been allowed to lapse). The number of anti-dumping cases initiated by WTO members rose sharply in 2008, from a 12-year low in 2007, and continued at a high rate in the first quarter of this year.

Other measures, especially when carried out by sub-national governments (counties and states), are less explicit. Local-procurement provisions attached to several stimulus packages, including America’s and China’s, are intended to favour domestic suppliers over foreigners. Sectoral subsidies, particularly to carmakers, have often come with pressure to ensure that any job cuts take place abroad, not at home.

But changes in trade policy have not all gone one way. Several countries, from Australia and China to Ecuador and Paraguay, have moved in a liberal direction, reducing import duties or removing non-tariff barriers since the beginning of March. Chad Bown, an economist at Brandeis University, points out that the total value of trade targeted by the flurry of new anti-dumping actions is small: less than 0.45% of the total value of G20 countries’ imports.

All this is fairly reassuring. The bottoming-out of trade reflects a slowing of the decline in the world economy. Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.

But caution is still needed. Several big economies are being supported by expansionary fiscal and monetary policies, which will eventually have to be unwound. Recovery is likely to be sluggish. Unemployment will probably continue to rise—by between 21m and 50m this year, according to the International Labour Organisation. With monetary and fiscal stimulus already near their limits, trade barriers may seem a tempting way to protect jobs. Some countries could raise tariffs substantially without breaking WTO rules. Or stricter buy-local provisions, say, could squeeze trade.

The road back to Doha

This is why the politics of trade—not least the prospects of completing the Doha round—remain important. Some of the round’s doubters have questioned its value because it promises no substantial further reductions in actual tariffs, merely aiming to limit countries’ scope to raise them. The World Bank’s Mr Hoekman is more optimistic. Countries realise that open markets cannot be taken for granted, and few of them want to be seen to fall foul of their international commitments. This makes the “insurance” aspect of the Doha round more attractive than it was just a few months ago.

But the crisis has also revealed the limitations of existing multilateral norms. WTO rules on public procurement do not restrict the ability of local governments to discriminate against foreign suppliers. Countries that have not signed the WTO Agreement on Government Procurement are free to pursue discriminatory policies. This leads Mr Hoekman to argue that another benefit of concluding Doha will be that it will open up the scope for negotiations to establish rules of the game in areas such as international financial sector regulation, government procurement and services trade, where the crisis has revealed scope for protectionism.

Unfortunately, a successful conclusion to the round is still far from certain. The last attempt collapsed in July 2008, when India insisted on more protection for its farmers against sudden surges in imports than America was willing to accept. For all the good intentions of world leaders, hope therefore rests largely on Ron Kirk, America’s new trade representative, and Anand Sharma, India’s new commerce minister, finding common ground. The two have already met several times. Mr Kirk has spoken of the need to conclude Doha in a way that is “balanced and ambitious”. Mr Sharma has stressed that he has a mandate from his prime minister to sign a global trade deal.

But since his appointment, Mr Kirk has focused mainly on the enforcement of existing trade rules. His latest policy speech, at a steel plant in Pittsburgh, concentrated on detecting violations of labour standards by trading partners and promises to resort to legal action if necessary. Gary Hufbauer, of the Peterson Institute for International Economics in Washington, worries that a “fusillade of cases will set Doha back”.

Some argue that by demonstrating that his resolve to a worried domestic audience, Mr Kirk may find it easier to get the authority he needs to negotiate Doha. Those who are hoping for the trade talks to reach a successful end can only hope that this reading is correct. If it is not, an agreement may be no nearer.

URL Source: http://www.economist.com/PrinterFriendly.cfm?story_id=14082950

Here’s a nifty piece on generational differences in terms of economic values and outlooks.

The Generation M Manifesto
Dear Old People Who Run the World,

My generation would like to break up with you. Everyday, I see a widening gap in how you and we understand the world — and what we want from it. I think we have irreconcilable differences. [more...]

I put up Pulses article on the futuresgroup wordpress blog here. Some takeaways are …

Competition from other ports rising on intra-Asia trade – 8 of top 10 container ports inAsia. E.g Guangzhou and Shenzhen overtaking HK. Shift in trade patterns with sharp-rise in intra-Asian trade. This should benefit SGP due to strong feeder network, but due to low demand and oversupply of port facilities, this will lead to cost competition/price war which SGP would come out poorly.

New ports from new trade patterns – India and ME trade patterns rising, Sri Lanka’s Colombo port is a more natural transshipment hub than SGP. Increased China-US could see more mainline services going directly on transpacific trade, reducing transshipment through SGP.

Too much trade volume – Rising intra-Asia trade may be so high that container lines choose to serve ports with mainline services going directly from point to point in Asia, rather than through feeders as now. Long running hub-spoke vs distributed angst here. But add in China Shipping Lines hmmm…

Help regional neighbors to improve – this boosts volumes which in turn could feed into SGP. PSA has done this with terminals in Kolakata etc in India, Tianjin etc in China. But this is different from regional challengers BKK (air logistics), HK/Southern China (China hub). Recently Fedex has moved its hub from Subic in Philippines to Guangzhou, DHL is entrenched in HK. How do you balance the rise of challengers in giant markets China, Indochina with the stability/security etc SGP offers?

Institutional arrangements are responsible for the policy agenda that gets shoved through the policy window, and so too will they play a critical role in shaping the future geography of trade. The threads of vested interests woven into the fabric of international trade will determine both its strength/ fragility and design (perhaps wharped by protectionist or mercantilist tendencies or influenced/ forced into harmony by the weaver (and who would that be?)). BRIC (Brazil, Russia, India, China) is the latest institutional formation to join the family of the G(roup)s and how their influence will play out in the international arena depends much on their ability to compensate for one another’s deficiencies and compromise on their private agendas.

Goldman Sachs’ take on BRIC (can’t possibly leave out Jim O’Neill in this blog): http://www2.goldmansachs.com/ideas/brics/index.html

On BRIC’s incompatibility: http://www.foreignpolicy.com/story/cms.php?story_id=5011 , http://www.reuters.com/article/businessNews/idUSLE11928120090614?feedType=RSS&feedName=businessNews&pageNumber=1&virtualBrandChannel=0

On BRIC’s multipolar world order: http://www.timesonline.co.uk/tol/news/world/us_and_americas/article6514737.ece

On BRIC’s unease with the dollar: http://news.bbc.co.uk/2/hi/business/8101154.stm

On India’s capitalists: http://www.bbc.co.uk/worldservice/documentaries/2008/09/080905_desert_capitalists_one.shtml

On China in Africa: http://www2.lse.ac.uk/LSEMagazine/pdf/Summer%202009/RaisingTheRedLantern.pdf