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Curzon
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Curzon

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August 18th, 2008

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Deconstructing Globalization

Three and a half years ago in a discussion on dollar devaluation and foreigner purchase of US bonds, I wrote a post breaking down the definition of so-called globalization:

What the “globalization” of the world economy really means is that many, many countries—from Japan and China to Southeast Asia to Latin America—merely provide goods for US consumption. There is very little widespread integration: remove the US and globalization dies. This means that the prosperity we see outside of the West is predominately based on Americans buying foreign goods. Were we ever to stop, much of the world would face a big, big problem

I bring this up because of today’s story about the US economic slowdown and its effect on China:

On Aug. 5, shortly before the start of the Beijing Olympics, the manager of a clothing factory on the outskirts of Qingdao in Shandong Province, eastern China, looked grim, saying, “Orders from the United States have dropped sharply, leaving us unable to turn a profit.”

The factory, which boasts hundreds of sewing machines, depends on U.S. exports for most of its earnings. These days, however, its operations have almost ground to a halt. Many apparel factories in Qingdao have gone out of business, casting a pall over the city.

Says an official from the National Development and Reform Commission’s small and medium-sized enterprises department: “During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout [China], leaving more than 20 million people out of work… Bankruptcies of textile and spinning companies during that period numbered more than 10,000, while two-thirds [of those that have not gone under yet] have been on the brink of bankruptcy.”

What’s more, the Chinese National Bureau of Statistics recently reported that the Chinese economy’s dependency rate on foreign economies exceeded 60 percent. For the first time, Beijing officially admitted for the first time that China’s more than 10 percent annual economic expansion is heavily dependent on the West. How the US goes, so goes the world. A lot of countries are going to start to discover that very shortly.

Comments to this entry

Lluis
August 18, 2008
6:03 am
Yes, that may be. But I'd rather say that global world economy depends on Western import of goods, not only on US'. EU's population is similar to that of the US and most of the manufactured goods here also do come from China. That certain factory may produce solely for the US, but I'm sure some others produce stuff, at least partly, for European countries.
Curzon
August 18, 2008
7:01 am
True, but looking at the hard numbers, the EU maintains a trade surplus. Countries such as Germany, Switzerland, Belgium, and Sweden, to just name a few, still have enormous an trade surplis. In all practicality the EU as a whole sells more to the world (i.e. US) than it buys from the world.

http://en.wikipedia.org/wiki/Image:Current_Account_Balance_2006.png
IJ
August 18, 2008
8:44 am
The earlier question is still crucial for globalisation. Why do foreigners buy US debt?

From an earlier forum: "One motive for China to purchase our bonds is to keep our military guarding the sea lanes. We are the policeman of the global economy, and plenty of interested parties—Japan and China being the two big ones—buy our bonds to support us. . . we defend the sea lanes that keep East Asia’s energy supply lines and goods export lines open."

On 'guarding' the sea lanes, China is not convinced. China says it is obliged to build up a navy because of fears the US will embargo its imports - especially through the vital Straits of Malacca.

Why do foreigners buy US debt?
The Glittering Eye » Blog Archive » They Also Serve
August 18, 2008
1:39 pm
[...] Coming Anarchy notes that, if the operative definition of “globalization” is that American consumers buy stuff made all over the world, flagging U. S. consumption could have very serious implications for the economies of many of the world’s countries: What’s more, the Chinese National Bureau of Statistics recently reported that the Chinese economy’s dependency rate on foreign economies exceeded 60 percent. For the first time, Beijing officially admitted for the first time that China’s more than 10 percent annual economic expansion is heavily dependent on the West. How the US goes, so goes the world. A lot of countries are going to start to discover that very shortly. [...]
Michael Turton
August 18, 2008
2:28 pm
China also made some adjustments in the labor laws that will make employees more expensive, ended the system of tax rebates on raw materials for producing exported products (if you exported the product the customs tax on the raw material was rebated), increased taxes, and several other changes. That, and the slumping US economy under King George, has led to massive plant closings all across southern China. But some of those factories are moving elsewhere in Asia, while others are moving deeper into China -- which is what Beijing wanted -- to force the investors to spread the wealth.

Michael
Michael
August 19, 2008
12:13 am
At risk of diverting from the topic, that previous article reminded me of something I was wondering recently: Can anyone point to a succinct explanation of the nuts and bolts of US debt service? That is, when a portion of our budget goes to servicing its debt or (hypothetically) paying down its debt, how does that money make its way to the debt holders?

Thanks, and sorry for the hijacking.
ElamBend
August 19, 2008
2:43 am
China buys US bonds because it has little else to safely do with those dollars. Because of the trade relationship the US and China had, huge amounts of hard currency in the form of dollars came into China. Even with their massive development projects and all the oil they purchased (priced in dollars), the Chinese needed a way to invest their dollars safely. Historically, the safest, most stable investment has been US bonds.
Ironically, the dollars that we will pay China back for those bonds are worth less (through inflation) than the dollars they were purchased with.
Yet, the question stands: where else would they have put their money?
Even now, with the problems in the US economy foreign funds flow into US investments. (Check the S&P 500 against any of the BRIC bourses, as bad as it is, the SPX beats the others).

[China has a lot of issues facing it right now, besides, just the slow-down in exports. They are about to experience a massive real estate bust and their equities market has already tanked. They are not immune from the business cycle. Here's hoping the come through well.]
IJ
August 19, 2008
9:22 am
Why do foreigners buy US debt.

No doubt the RoW have different reasons. The policy of the Chinese government was set out in the Atlantic Monthly at the start of this year. The $1.4 Trillion Question

At that time China wanted to sell as much as possible to the US - by keeping the RMB low against the dollar. Many sacrifices were made to achieve this, as James Fallows explains in the article. Maybe too many sacrifices, it is now suggested.
tdaxp » Blog Archive » Two views on Globalization, America, and China
August 27, 2008
2:56 pm
[...] Coming Anarchy: What’s more, the Chinese National Bureau of Statistics recently reported that the Chinese economy’s dependency rate on foreign economies exceeded 60 percent. For the first time, Beijing officially admitted for the first time that China’s more than 10 percent annual economic expansion is heavily dependent on the West. How the US goes, so goes the world. A lot of countries are going to start to discover that very shortly. [...]