Asia Alone: The Dangerous Post-Crisis Divide from America

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FROM INTERDEPENDENCE TO A DANGEROUS DIVIDE

How is the Crisis Changing Asia and America?

Langfang and Interdependence

The existing interdependence between Asia and America can perhaps be best seen in a town in China.

Langfang is a satellite town outside Beijing, a secondary city with some four million people and a burgeoning technology sector. Relatively green with parklands, the city has a five-kilometer pedestrian mall, the longest in China. Some have dubbed Langfang China’s Silicon Valley.¹ It boasts large industrial parks that focus on technology and computers as well as the ambitious Oriental University City with some 14 universities and a combined enrollment of more than 35,000 students.²

I visited in November 2008, arriving in a black made-in-China Audi just weeks after the failure of Lehman Brothers Bank in New York and the collapse of American markets. The massive factory complex includes production facilities and housing for the workers—three shifts, around the clock—and takes up an entire block in the industrial sector.

Foxconn International Holdings, a Taiwanese company based out of Shenzhen, invested some US$1.2 billion in Langfang to build this plant. The company is the world’s largest handphone manufacturer, turning out products for Motorola and Nokia and other companies that largely address the U.S. market, which was growing at the time even as competition squeezed profit margins. Foxconn opened the facility in Langfang after its other plants in Beijing and Shanghai could not keep up with demand and costs in Shenzhen started to escalate. A second-stage project was in the works, and another identically large plot on the edge of the industrial estate had been cleared and prepared for construction to start on Phase 2 of the expansion.

But plans can change. American consumer spending crashed in the wake of events after the Lehman Brothers collapse, and the hunger for mobile phones went with it. In the last quarter of 2008, global mobile-phone shipments rapidly fell 10 percent.³ The effects rippled right across the Pacific to Langfang. At the end of 2008, Foxconn posted a net loss of US$21.1 million, compared with a US$397.4 million profit a year earlier.⁴ Foxconn’s plant at Langfang continues in operation, unlike others across China that have shut down in this and other industries. But plans for expansion are on hold, indefinitely. The effect is not just on paper. Visibly, viscerally, the effects are there for all to see. At the edge of the industrial park, the ground that was cleared for Phase 2 of the project now just sits vacant: bare brown earth amid the green of the surrounding area.

On the Saturday that I visited, shifts of workers were walking around with more time than they used to have. The rush of overtime work and 24-hour shifts was no more. Many China-based factories closed and retrenched their workforce, especially in the Pearl River Delta. Langfang and the surrounding province of Hebei saw fewer closures but still faced the challenge of finding more investments and jobs for the burgeoning numbers of young Chinese who will leave schools to seek employment.

The prospects for these young Chinese, of this business, and of Langfang, have been inextricably tied across the Pacific to the United States. The American market has been the main engine that pulled Asia’s rise. The growth in American demand drove up production in Asia, and the bulk of Asian exports went to the United States. In the first 10 months of 2008, just before the crisis, as much as 17.7 percent of Chinese exports, worth US$212.7 billion, ended up in the United States, the largest share of any country.⁵ This is but one measure of the interdependence between the United States and Asia, especially China.

Most have recognized this interdependence as a positive development, a result of globalization and the world becoming flat, in the terms of New York Times commentator Thomas Friedman and his well-known book. In this flattened world, economic interdependence linked Asia to America and vice versa. Most of Asia linked to China, and the Chinese economy was so integrated with the American that their relationship has been tagged superfusion or Chi-America. A minority of voices have questioned globalization and this interdependence between the United States and Asia. But largely their complaints were that jobs were lost to the cheap labor in Asia—by some workers in some factories in some sectors of the American economy. There was no wider recognition that this U.S.-Asian interdependence might pose a potential vulnerability for the overall economy.

That recognition only came in the wake of the events of 2008, and with painful costs. Once the American engine wheezed and collapsed, so did China and the rest of Asia. Interdependence across the Pacific has costs. The empty stretches of land waiting in Langfang and the young Chinese idly roaming the streets there were its symptoms. In November 2008, chilly winds blew across China and the other nations of Asia, most of which faced steep falls in their economies. It was not clear when the American economy might recover. For this factory in Langfang, it was not clear when, if ever, that empty plot of land would be developed. For China and Asia, as the crisis began, there were fears of a sharp contraction of growth, the slamming of gates at export factories gone bust, and millions of workers left unemployed.

Interdependence has often meant that those questions for Asia must await answers from America. But since the early days of the crisis, some have started to believe, and want to believe, that China and the wider Asian production base can return to growth without the United States. The numbers in China and other larger Asian markets, especially from the second half of 2009 and into 2010, back up that belief. More and more, Asians are beginning to consider whether their region can grow on its own, and go its own way.

Origins in Crisis

This trend began in one crisis, and it is accelerating in the second and still unfolding crisis.

The first crisis was triggered by the collapse of the Thai baht in mid-1997. Most of Asia suffered a financial storm that severely wounded both national economies and pride. Thailand, for example, had been growing at an average of 9 percent in GDP terms per year from 1987 to 1996—one of the fastest rates in the world. Then almost overnight in the crisis, hit by speculative attacks, its baht collapsed after US$33 billion in foreign reserves had been exhausted by the central bank, plunging to less than half its value against the U.S. dollar.⁶ This spread rapidly to other Asian economies—South Korea, Taiwan, Indonesia, and Malaysia especially.

In this time of crisis Asians also suffered from the sense that the United States had abandoned them and was standing arrogantly on the sidelines. Directly or through the International Monetary Fund (IMF), the so-called Washington consensus on open markets and disciplines insisted on prescribing painful remedies, bitter medicine. Following the conventional wisdom to tighten the money supply and raise interest rates as a condition of rendering assistance, IMF action led to further economic falls. The starkest symbol of this Asian surrender was the sight of IMF President Michel Camdessus standing imperiously, arms folded, while President Suharto of Indonesia bowed and signed papers to accept the IMF terms. That country not only went into an economic downturn, it suffered political upheaval as angry mobs turned Suharto out of office after more than three decades of unquestioned authority.⁷ Asians remember what happened in that crisis.

In their recovery from this crisis, the Asian economies struck upon a set of common policies: to produce and then export increasingly to the United States, to keep their finances solid and currencies competitive to ensure stable macroeconomic conditions and affordable prices for their exports, and to increasingly trade with each other as different parts of the production chain gravitated to different countries in the region. An Asian production base was formed in the aftermath of the crisis; a production base that ended up especially exporting to American markets. This increased the economic interdependence between Asia and the United States after the crisis of 1997-98. For a decade afterward, both Americans and Asians shared in rapid growth.

The second crisis is the global financial and economic turmoil that has emerged in 2008 after the collapse of Lehman Brothers Bank. In this crisis it is now America and its banks that have been at the epicenter of the problems. Asians had cleaned up most of their financial systems after the first crisis and their banks did not suffer a similar direct impact. But credit is so interdependent that the American crisis created a crunch for all banks and their borrowers, worldwide. The ill effects rapidly transmitted themselves to infect the Asian production system, which was so interdependent with America. Yet in this crisis, the United States was not subject to discipline and austerity measures. Interest rates were lowered rather than raised to ease the supply of money. No further banks were allowed to collapse, after the failure of Lehman Brothers, but instead were recapitalized by governments. Huge stimulus packages were passed by the U.S. government, despite already being highly indebted. The IMF has been put on the sidelines. The rules that had applied to Asia in the first crisis did not, in this second crisis, apply to America.

Between these two crises, despite continuing and indeed strengthening economic interdependence, Asia and America have drifted apart politically. This has been made worse by a series of omissions by the Bush administration, which will be judged for ignoring Asia. To its credit, it did attend to putting ties with China on an even keel, and to developing relations with the other Asian giant, India, to unprecedented levels. Hotspots like North Korea also received attention, and there was a near-obsessive focus on the global war against terrorism. But the Bush administration ignored the wider picture of Asia. Its officials dealt with some issues and some countries—but in isolation rather than context. Anti-Americanism grew, even in societies that were once staunchly pro-American. An Asian regional identity—separate if not antagonistic—has grown.

A new American administration came to office during this crisis, amid great optimism and great need. With this historic change in leadership to President Barack Obama, a new openness to the United States has appeared in Asia and elsewhere. And with the crisis, the need for global leadership has increased. It is possible for the growing division between Asia and the United States to be healed and a new partnership formed. But it will not be easy.

It is not a simple matter of changing presidents. It is not a simple matter of giving more time and attention, and even these will be in short supply given that so many issues elsewhere also command American attention and involvement—the economic crisis, the wars in Iraq and Afghanistan, and climate change among them. We also have to contend with trends that are emerging in the crisis and that, if left unchecked, will pull Asia and America in different directions. Two major and intersecting trends are, first, the relative decline of the United States and second, the call for a new pattern of Asian development that is less reliant on American consumer demand and more balanced.

A New Asian Balance

Even before the crisis, in early 2008, some were arguing that Asian and American economies had decoupled. Prior to the mid-1980s, foreign trade in East Asia was dominated by trans-Pacific flows centered on the United States. But between 1986 and 1992, the share of Asian exports destined for other Asian countries rose sharply. Trade between Southeast Asia and China, for example, grew from a mere US$925 million in 1977 to more than US$74 billion in 2002.⁸

Despite increased trade and economic integration among Asian countries, however, the United States remains the final market for as much as 60 percent of Asian production. Asian trade has been largely in intermediate products, sent across borders as part of a pan-Asian production chain that ends in China, and then is finally exported to the American consumer. The crisis showed there is no decoupling at present and that interdependence continues: when the United States has a serious problem, Asia suffers.⁹

But even if there was no decoupling going into the crisis, the crisis may in fact end up in decoupling. The crisis has prompted many to call on Asia to end its reliance on the American consumer and increase its own consumption. There are also calls for Asia to develop new financial mechanisms and instruments to harness its own savings for investment within the region. The chairman of the HSBC Bank, Stephen Green, describes this as a fundamental trend that has emerged in the world economy . . . the rebalancing of the global economy towards Asia where China is a leading power.¹⁰ Green, like many others, sees this as a positive development.

Perhaps, but such prescriptions represent a considerable change from the patterns in effect since 1997. In this period, Asian economies exported to the American market, which continued to show a strong appetite for goods. They racked up large trade surpluses and reserves, while the United States went into deficits at both the national and household levels. With these reserves, the Asian countries then bought and held U.S. Treasury bills.

Of the U.S. public debt that is privately held, about half is held by foreigners. As of December 2007, China’s U.S. Treasury securities holdings were US$406 billion, accounting for 17.2 percent of total foreign ownership of U.S. Treasury securities.¹¹ This has since risen to some US$789.6 billion, surpassing Japan, which holds US$757.3 billion.¹² Between them, China and Japan hold almost 44 percent of U.S. Treasury Bills and, in this way, underwrite the value of the American dollar. This has enabled the United States to enjoy a wealth effect in assets and continue high levels of consumption and debt.

Asians produced and saved, while Americans consumed and lived on credit. No one complained, even if a few saw that the arrangements were unusual. The years of giddy growth on both sides of the Pacific gilded the issue. America grew at more than 3 percent per year and some sectors, like banks, boomed. Asia grew by more than 6 percent, with some nations, including China, often topping 10 percent. Growth made this trans-Pacific arrangement seem not just viable but essential.¹³

In the wake of the crisis, however, many more now see this pattern as unnatural and unsustainable. America’s economy in 2008-09 shrank for four consecutive quarters. Since the recession began in 2007, some eight million jobs have been lost.¹⁴ Many Asian economies immediately shrank, although China, India, and other large markets have in the latter half of 2009 seen their growth rates revive.¹⁵

Looking ahead, even when the United States recovers, many predict that the American level of demand will not return to what it was before the crisis. Many therefore advise that Asians must go beyond the export-led model of growth and rebalance their economies. Greater consumption in Asia is seen as necessary to help the world economy and Asia itself, but some doubt that Asians can do this, especially in the short term. The claim is that Asians are culturally prone to save more. This might start to change if and when Asian governments provide wider and stronger safety nets for their citizens, along with higher wages for workers. That is, however, a considerable if. Few Asian governments have done so in the past. Most have relied, to lesser or greater degrees, on an export-led strategy for