Globalist Perspective

From “Made in the USA” to “Made in China”

Why will Western economies have to wage an increasingly intense competition with the rest of the world for resources and capital?

Takeaways


  • As the new global consumer adopts and acquires Western lifestyles, the prices for energy, water, agricultural goods and other natural resources will be higher.
  • The debt is in the West and the savings are in the East, or the developing nations. The poor are "rich" — and the rich are "poor."
  • Cross-border mergers and acquisitions are no longer the exclusive preserve of the West.

Middle-class consumers in the developing nations — estimated at some 400 million people by the World Bank — are now placing unprecedented demands on Planet Earth. Their pent-up demand for electronic goods, appliances, automobiles, skin-care products, clothing and other goods has reached the point whereby emerging market consumers are increasingly setting global trends, leading in global fashion and driving global sales in a number of industries. In a seminal shift, global consumption is titling toward the developing nations and away from the United States and the West.

While the West is condemned to a prolonged period of thrift and austerity, conspicuous consumption is rapidly becoming the rage in places like Brazil, India, Turkey and other emerging markets. Emblematic of this trend, China’s automobile market is now larger than America’s. What is now good for China is good for General Motors, a market leader in China.

While many companies in the developed nations stand to benefit from surging consumer demand in the emerging nations, the effects on the macro balance sheet of both the United States and Europe is more problematic. For instance, while booming auto sales in the emerging markets is a blessing for U.S. automobile manufacturers, the same dynamic is a curse for the average American. The more consumers in China, Turkey, Egypt and other countries take to the road in their shiny new cars, the more upward pressure on world oil prices and the higher the cost of oil for an energy-dependent America.

Most average Americans are oblivious to the rising middle classes of the developing nations and what this new consuming cohort means for the world’s already stretched natural-resource base. They have yet to recognize that as the new global consumer class adopts and acquires Western lifestyles — moves from the village to the city, works in air-conditioned offices, drives to work, consumes more protein — the demand will be greater and the prices higher for energy, water, agricultural goods and other natural resources.

Prices paid for world resources, then, will increasingly be set by forces outside the developed nations, leaving Western consumers in the unusual position of being price takers, not price setters, subject to the whims of suppliers and consumers in the emerging markets.

Capital is yet another critical input increasingly in possession of “the Rest.” Indeed, toward the end of 2010, nearly 8% of the world’s total foreign exchange reserves — in effect, the globe’s excess savings — were in the vaults of the developing nations. That equates to roughly $7 trillion, a figure that includes China’s $2.8 trillion in reserves, accumulated largely by running a massive trade surplus with the United States, and over $300 billion among Middle East oil producers, obtained with the help of the secular run-up in oil prices. These variables, coupled with the surge in debt among the developed nations, have triggered a stunning shift in global financial power. Simply put, the debt is in the West and the savings are in the East, or the developing nations. The poor are “rich” — and the rich are “poor.”

In this new world, U.S. central bankers have competition when it comes to influencing the U.S. and global capital markets. Today, wherever the relatively unknown central bankers of the developing nations decide to invest their massive savings, and in what particular assets, directly affects Western credit markets every single day. The same goes for sovereign wealth funds (SWFs) — or government-controlled investment firms whose numbers and pools of capital have increased over the past decade.

Yet another challenge for the West lies with the outward push of multinational corporations based in the developing nations. Shopping has become a favorite pastime for consumers in the developing nations, but they are not alone. Also acquiring a taste for shopping — notably foreign shopping — are large corporations headquartered in Mexico, Brazil, China, India, and other emerging markets. In other words, cross-border mergers and acquisitions are no longer the exclusive preserve of the West.

Indeed, global deal making is but another lost monopoly of the West. Aspiring multinationals from the developing nations are becoming more aggressive bidders for assets in other emerging markets — crowding out Western multinationals from acquiring oil fields in central Asia, telecommunication companies in Africa, and banks in Argentina, for instance. These same firms have boldly set their strategic sights on assets and popular brands in the United States and Europe, creating in the process a whole new competitive landscape for many Western firms.

Many in the United States and Europe see all of the above as a threat. This is not surprising — not with the U.S. unemployment rate hovering around 9% and with much of Europe in the grips of austerity. The status quo is in flux. Change is in the offing. The West has lost its ability to impose its economic will on the rest of the world, its credibility and ability to lead devalued by the U.S.-led financial meltdown of 2008. The West’s lack of confidence in the future is palpable.

It does not, however, have to end badly for the United States and Europe. If the West and “the Rest” can come to recognize their mutual interdependence and move down the path of mutual cooperation, the future could very well be a win-win for both parties, as opposed to a zero-sum game in which one side’s gain is the other side’s loss.

Against this backdrop, it is not impossible to envision the full bloom of globalization — with the world economy more integrated and interwoven than ever before. With an effective G-20 governing the global economy, with the United States and Europe adapting to their diminished role in the world, and with key developing nations becoming real global stakeholders, a new era of globalization is possible.

This feature was adapted with the author’s permission from a longer essay, “From ‘Made in America’ to ‘Made in China:’ The Next Phase of Globalization,” published on March 29, 2011.

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About Joseph Quinlan

Joseph Quinlan is the managing director and chief market strategist at U.S. Trust, Bank of America Private Wealth Management.

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