OWEN HARRIES, the first editor, together with Robert Tucker, of The National Interest, once reminded me that experts—economists, strategists, business leaders and academics alike—tend to be relentless followers of intellectual fashion, and the learned, as Harold Rosenberg famously put it, a “herd of independent minds.” Nowhere is this observation more apparent than in the prediction that we are already into the second decade of what will inevitably be an “Asian Century”—a widely held but rarely examined view that Asia’s continued economic rise will decisively shift global power from the Atlantic to the western Pacific Ocean.
No doubt the numbers appear quite compelling. In 1960, East Asia accounted for a mere 14 percent of global GDP; today that figure is about 27 percent. If linear trends continue, the region could account for about 36 percent of global GDP by 2030 and over half of all output by the middle of the century. As if symbolic of a handover of economic preeminence, China, which only accounted for about 5 percent of global GDP in 1960, will likely surpass the United States as the largest economy in the world over the next decade. If past record is an indicator of future performance, then the “Asian Century” prediction is close to a sure thing.
Since the Second World War, rapidly developing East Asian economies—Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand and, most recently, China—have all relied upon a remarkably similar export-manufacturing model. They seek to grow by making exported products for consumers in advanced economies cheaper, faster and more reliably than can be done in other countries or regions. Those predicting the “Asian Century” assume that what worked in the past will continue to work for populous countries such as China, Indonesia, Vietnam and Burma—economies that still have low to middling incomes and seek to replicate what their fully industrialized neighbors have done.
The implications of the region’s reliance on American and European markets are severely underappreciated. Unfortunately for East Asia, there could soon be too much production in that region and not enough consumers in rich economies. It is also certain that nothing stands still for long and the nature of manufacturing is undergoing a quiet but genuine technological revolution. Authentically disruptive technologies, such as automation and 3-D printing, are gradually wreaking what the economist Joseph Schumpeter called “creative destruction.” As these and other technologies take hold, they will not only change the way products are made but also dramatically alter how value is added and profit is earned.
If these and other manufacturing revolutions come to pass, firms in advanced economies may adjust their production networks at the expense of Asia’s low- and middle-income countries. If so, these countries—many of them with tens or hundreds of millions of workers needing employment—will have to find new ways of stimulating rapid growth and reducing reliance on imported innovation and know-how. The much-touted “Asian Century” assumes that the successes of a small number of fully industrialized countries in the region, such as Japan, South Korea and Taiwan, can be replicated by other countries, and in similar ways. But for these vast but fragile economies and societies, the next few decades will certainly not be as easy, and may not be as promising, as the previous five.
AT THE heart of the so-called East Asian model of rapid economic development and industrialization is the emphasis on developing a strong export-manufacturing domestic sector that is bolted onto a highly protected domestic consumption market. In addition to the natural advantage of being able to offer a cheap and plentiful supply of low-cost labor, state interventionist policies were implemented to attract foreign firms and capital into the export-manufacturing sectors. These include tax concessions and subsidies given to domestic and foreign firms to locate manufacturing plants in various East Asian countries. Export-enhancing policies also include currency regimes that artificially suppress the value of the domestic currency relative to Western currencies, making it cheaper for Western firms to inject capital and for Western consumers to purchase the exported goods. The export-oriented model has also been aided by advances in logistics and transportation that allow transport of goods to become ever more economical. For example, transportation networks are now so efficient that, if carried on the largest modern cargo ships, it now costs about two and a half cents to ship a T-shirt from Asia to America.
Export manufacturing is at the heart of East Asia’s rise. The East Asian manufacturing trade as a proportion of the global manufacturing trade has increased from about 12 percent in 1970 to 26 percent in 1990 to over 35 percent today. The Association of Southeast Asian Nations (ASEAN)’s share of global export manufacturing increased from a miniscule 0.3 percent in 1970 to about 6 percent currently. In 1990, at the peak of Japan’s economic rise, its share of global export manufacturing exceeded 12 percent. Now China is the outstanding individual performer, increasing its share of global export manufacturing from 0.5 percent in 1970 to over 15 percent currently.
In East Asia, more than two-thirds of all manufacturing is for the export sector. For highly export-dependent countries such as Malaysia and Singapore, the figure is over 85 percent, while for China it is about 60 percent. Although the rise of East Asia as the central hub of global export manufacturing has been the driving force behind the impressive growth in the region, the economic gains in Asia are often treated as if they have occurred independently of the West. In reality, advanced Western economies, and America in particular, have been and remain essential to the growth story of East Asia for two important reasons.
FIRST, EXPORT-ORIENTED growth models mean that consumers in industrialized countries, especially in the West, will remain far more important to regional exporters than Asian consumers. For East Asia’s great exporters such as China, Japan, South Korea, Singapore and Malaysia, manufactured goods and parts make up well over 85 percent of all their exports. While the relatively open and accessible domestic consumption markets of the United States and the European Union are about $11.5 trillion each, the entire domestic consumption market of East Asia is under $10 trillion. China’s is about $3.4 trillion; Japan’s is roughly $3 trillion. Even then, Asian domestic markets are much more restricted than in the West, and much of the consumption in low- and middle-income countries in Asia—including China—involves nontradable, low-quality goods that are of little interest to exporters.
The importance of Western consumers to the prosperity of Asian economies is further reaffirmed by figures showing that, having averaged 6–7 percent growth per annum for a decade prior to the global financial crisis, average GDP growth in the developing countries in East Asia (excluding China) fell to 0.6 percent in 2009. Even China’s GDPgrowth plunged momentarily to almost 0 percent in 2008–2009 before Beijing responded with a four-trillion-yuan stimulus, the largest in economic history and equivalent to about 14 percent of its 2008 GDP.
Moreover, it is clear that Western markets remain the predominant driving force behind trade between East Asian countries. The majority of trade between East Asian countries consists of “processing trade” in which parts are shipped in for further assembly or modification before being shipped out again. The iconic illustration of this is Apple’s iPod, which, while designed in California, is made up of parts that could come from over twenty countries and traverses assembly lines that can encompass Thailand, Malaysia, South Korea, the Philippines, Singapore, Taiwan and China. It is estimated that around two-thirds to three-quarters of all trade within East Asia is “processing trade,” with around 70 percent of all manufactured end products destined for consumers in advanced economies.
This is evident in figures showing that while ASEAN-China trade had grown at high double-digit rates per annum for the previous ten years, trade between China and ASEAN immediately contracted by 7.8 percent with the onset of the global financial crisis. When it came to specific countries, Sino-Malaysian trade actually declined 1.7 percent in 2009 from the previous year, having grown at a remarkable 21.7 percent per annum in the ten years before. The decline of Chinese two-way trade with other neighbors in the same period was even worse. Figures for 2008–2009 show that Chinese two-way trade with Singapore, Japan and Thailand declined 15.7 percent, 21.5 percent and 9.8 percent, respectively. Remember that this all occurred despite China’s economy, the largest in Asia, growing at almost 9 percent over this period.
SECOND, IT is worth noting that the importance of export manufacturing to the region’s economic future is not just about enlarging GDP through growth in net exports; it is also the primary way significant improvements in innovation and competitiveness occur within countries. High- and middle-income countries such as Japan, South Korea, Taiwan, Singapore, Malaysia and China all began by being importers of innovation and know-how, and Beijing remains largely dependent on doing so for its continued development. This has occurred through an export-manufacturing model that encourages advanced-economy firms to establish manufacturing operations in one’s country, after which the positive flow-on effects will be passed on to the domestic economy.