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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
JULY 5 , 2017
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We continue a series on “Technology and Connectivity” in this issue of IntelDigest. Last week, we discussed the Global Forces … Trade, Technology, and Demographics … affecting the Global Economy; the evolution of China as an economic power; and, the coming Transformation of Jobs by a new Information Technology paradigm.
We began this series in the June 21 issue by decrying the Trump Administration’s policy of “Economic Nationalism.” Herein, we set out the reasons that the United States should NOT be ceding its leadership in the Global Economy.
Effects on the American Middle Class
In the U.S. and in many parts of the developed world, manufacturing industries have been fundamentally altered by shifts in technology and global trade. The Middle Class has been contracting, and is at serious risk in the decades to come.
This is a matter of great importance for both the global economy and for democracy. Middle Class families are the primary drivers of consumption, which fuels economic growth. Consumption accounts for more than two-thirds of economic activity in the United States. The American Consumer derives great benefit from the lower cost of consumable goods made possible by global trade and automation.
At the same time, the American Middle Class is at great risk of contracting further as technological advances and automation eliminate millions of jobs, for skilled and unskilled workers alike. And, this will have a significant impact on American Democracy.
The growth of an American Middle Class in the early decades of the 20th Century changed American Politics. We became a nation where a growing cadre of hard-working and educated citizens formed a large and influential bloc of voters between the very rich and the poorer classes. We are in danger, as our Middle Class contracts, of regressing to a 19th Century-style body politic, where the rich have both the money and political power to dictate to the rest of the citizenry.
Emerging Markets
After World War II, global trade had been carried by the American Consumer for several decades. However, that has been changing over the last 25 years. Emerging Market nations now conduct the bulk of their international trade among themselves, not with the United States. In 1990, emerging economies sent 65% of their exports to developed countries, such as the U.S. and Europe, and 35% to other developing nations. Today, those figures are substantially reversed.
China’s annual trade with Africa is nearing $400 Billion per year, more than U.S.-Africa trade. China’s trade with Latin America is almost $200 Billion, about the same as trade between Latin America and Europe. As Emerging Markets connect more with their peers, they become less reliant on the developed world.
Most of the world’s oil now flows between the Middle East and Far East, across the Indian Ocean and through the Straits of Malacca to China, Japan and South Korea. A full 80% of China’s oil and natural gas imports traverse this route, along with roughly 66% of China’s imported and exported goods.
Asian economies have been steadily expanding domestic consumption and services, so that the growth in global trade is decelerating relative to the growth of global gross domestic product. Consumption in China now represents two-thirds of China’s output and contributes 75% of its growth. Still, China has continued its investment binge in infrastructure and real estate, keeping commodities imports steady.
As societies grow wealthier, they tend to import more, borrow more, spend more, and travel more. Asia’s rising Middle Class will likely be a driver of international trade even as its companies reduce their dependence on the West.
China is now developing the largest coordinated investment and construction program in history … “One Belt, One Road” … a MegaProject meant to weave many new and sturdy Silk Roads across the Eurasian landmass. This project will include high-speed railways, pipelines, ports, bridges, and much more infrastructure development. The overall goal is to increase trade and international cooperation by facilitating the passage of goods and services across borders.
Since the collapse of the Soviet Union, Europe has been steadily rehabilitating its former Warsaw Pact and Soviet Republic neighbors with modern infrastructure, while China has begun to do the same with the countries on its western periphery. Central Asia has become the passageway for the supply chain between Europe and East Asia. In the coming decades, these supply chains will solidify under “One Belt, One Road,” fusing the Eurasian supercontinent into an integrated commercial zone encompassing over two-thirds of the world’s population.
In the meantime, Europe’s trade with The East … China, Japan, India, Australia, and the Association of Southeast Asian Nations … already amounts to over One Trillion Dollars per year, exceeding Trans-Atlantic trade. It is no wonder that the Europeans were eager to join the Chinese-sponsored Asian Infrastructure Investment Bank, despite objections by the U.S. Government.
Germany’s record trade surpluses will not be absorbed in the sluggish Eurozone, or by a protectionist America. Europe and Asia are brushing aside America’s unpredictability and getting on with the business of building a new Global Economy.
Global Opportunities
This should not be read as our trade partners aligning against us. They will continue to use the American financial system (where necessary) and American technology (when convenient). This is a simple matter of Supply and Demand.
The global economic system no longer relies on the United States of America. It simply craves connectivity and opportunity. It no longer matters where they come from. But, the most connected power will have the most leverage. It will supply the security, infrastructure, and other public goods desired around the world.
China has become a welcome and popular power in Africa and Latin America because it has sold them (and often built for them) the foundations of better connectivity. They have demand for infrastructure, and China supplies it.
This is a more distributed Global Economy. There are many major regional anchors, including the U.S., and more positive interdependence among economies. Nations now have the benefit of exploiting comparative advantages with one another.
A more distributed globalization provides more opportunity for non-U.S. economies. America is a debtor nation, but Japan, Germany, and China have the largest economies among the world’s creditor nations, generating profits from global lending and trade finance.
Emerging Markets’ faster growth rates and weaker currencies have inspired some of the world’s largest pension funds, from Canada to Norway, to expand their portfolio allocations to Asia, Latin America and Africa. The Norwegian pension fund recently switched its focus from bonds to equity, meaning it is investing more in multinational corporations with exposure to Emerging Markets.
Betting on Globalization
So, the “long money” is still betting on globalization. America should be leading the Global Economy into the future, NOT retreating from it.
The U.S. remains (for the time being) the most powerful and most connected state in the international system. We are the world’s largest oil producer, increasingly exporting oil to China and liquefied natural gas to Europe. The U.S. Dollar provides liquidity to the global financial system, and American foreign investment drives capital formation in Emerging Markets. The American network of military alliances provides security guarantees. And, American Technology is craved worldwide.
American competitiveness is NOT enhanced by isolating itself. American companies rightly favored the Trans-Pacific Partnership (TPP) and other trade agreements because they’ve long since outgrown our giant domestic market. Without substantial margins abroad, they will have to cut investment at home.
Donald Trump’s punitive measures are self-defeating because they hinder America from competing in a world of growing opportunity. The U.S. should be aggressively opening markets for American goods, services, and investment around the world.
Domestically, the Congress and Trump Administration should get down to the important business at hand, namely:
1. reforming the tax code to improve the position of American businesses in world trade
2. rebuilding infrastructure in the United States, which will make foreign investment in the U.S. more attractive
3. encouraging free markets for American technology
4. remodeling and enhancing educational and immigration programs to provide more job opportunities for our rising young workforce in a 21st Century Global Economy
We will complete this series on “Technology and Connectivity” next week in IntelDigest.