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CAMRI Global Perspectives Monthly digest of market research & views Issue 15, July‐August 2014
US Economic Pull, Push or Let Go? The Case of Asia
By Brian Fabbri
Visiting Research Fellow, CAMRI & President, FABBRI Global Economics
The US needs to find an economic strategy
to reverse its relative declining economic
role in Southeast Asia.
Acceleration in US GDP growth used to be
good news for the Rest of the World (RoW)
as it meant greater US demand for the RoW’s
exports, especially from emerging markets.
However, in the past decade US growth has
slowed, and its external deficit has narrowed
significantly. Moreover, exports from China
began to satisfy a greater share of US import
demand reducing the market share from
other economies.
As a consequence, the proportion of GDP in
Southeast Asian economies that is driven by
exports to the US has decreased sharply. It is
hence reasonable to expect that even when
US GDP growth does accelerate, it will not
have the same positive pull on emerging
economies (ex‐China) as it did in the past. As
a result, the US will need a new economic
strategy if it wants its diplomatic policy pivot
to the Pacific region to succeed.
US Economic Growth to Stay Low for Longer
At the beginning of 2014, many
prognosticators believed that US economic
growth was on the threshold of finally
accelerating back to its historical annual
growth path of 3% to 3.5%, this after several
years of below‐par growth. For example, the
IMF forecasted that US growth in 2014
would accelerate to 3% Q4/Q4 from a dismal
1.8% in 2013. Even the Federal Reserve
Board of Governors forecast that US growth
would accelerate in 2014 to 3% at their
December 2013 FOMC meeting. The IMF has
recently sharply revised down their forecast
for US GDP growth in 2014 to 1.7%.
Ultra low interest rates were perceived to be
a major stimulus to the economy, and the
housing industry appeared well along the
way towards a sound recovery. It was
expected to be a contributor to US economic
growth.
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Adverse winter weather stymied economic
activity early in 2014
Unfortunately severe, adverse weather
stymied growth in the first quarter, and the
expected growth rebound in the second
quarter did not materialize as much as
expected. Consequently, US economic
growth this year is now expected to remain
well below an estimated 2%.
The US is not as open as it used to be
The days of mammoth US external trade
deficits are past. The US had trade deficits
averaging over US$700 billion between 2005
and 2008, and they eventually amounted to
5.5% of US GDP. Such huge trade deficits
supported economic activity in many
emerging markets throughout the world.
Subsequently, the US external deficit has
declined to US$476 billion in 2013, and now
accounts for only 2.8% of US GDP. Moreover,
imports have shrunk slightly to 15.9% of
gross domestic purchases from a peak of
16.5% of GDP in 2008.
The reduction in the trade deficit has been
shared by a significant increase in the
services surplus (accounting for
approximately 52% of the decline), and a
sizeable decrease in the goods deficit (48%).
China becomes the major non‐NAFTA
trading partner
The pattern of trade has also changed
markedly over the past 15 years. All of the
US’s major trading partners lost some share
of total US imports to China, and surprisingly
OPEC. The surprise in OPEC’s rising share is
primarily due to the belief that the US has
begun to develop its own energy source and
become less dependent upon OPEC oil.
These new domestic sources will soon
US Trade Deficit is Shrinking
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Billions of $; le
% of GDP; right
US Imports from Major Economic Regions (% of Total)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
EU
ROW
JAPAN OPEC
NEC
China
NAFTA
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reduce the US need for foreign oil, and
OPEC’s exports to the US will account for a
smaller share in the near future.
China is by far the largest trade exporter to
the US of any single country in the world. It
is only exceeded by two trade blocks: NAFTA
and the European Union (EU). China’s
absorption of market share of US imports
over the past 15 years has been quite
dramatic, rising from 10% in 1999 to 17% last
year. Japan lost the largest share, slipping to
6% of imports to the US.
The Newly Industrialized Countries (the four
Asian Tigers, one being Singapore) only lost
1 percentage point, and now account for 6%
of imports to the US. Imports from the RoW
(which includes non‐OPEC Africa and
Middle‐East, non‐EU Europe, and the rest of
Asia), remained approximately the same
over the past 15 years: 13%.
US importance to Southeast Asian trade
decreases
Disentangling the Southeast Asian countries
from this broad assortment of countries
(RoW) adds to the picture of their lessening
involvement with US trade. Although total
exports from the big five Southeast Asian
countries (Thailand, Malaysia, Singapore,
Indonesia, and Philippines) increased over
the past 7 years, it fell sharply from 16.3% in
2005 to 11.9% in 2013 as a share of their
total GDP. Exports to the US declined in all 5
of these economies over the past 7 years.
The total rate of growth in their collective
GDP also declined significantly over the
same time period as shown in chart 5, albeit
not necessarily because of this lost trade
with the US.
Economic Trade’s relevance to the US
Strategic Policy
The success of the current US strategic shift
to emphasize the Pacific region and place
less emphasis on the older relationships in
the Atlantic region is quite dependent upon
lifting economic ties with the Southeast
Asian countries. As discussed, trade with the
Asian economies (apart from China) is
diminishing. Therefore, it is important to
create new initiatives to raise the level of
SE Asian country Exports to US (% of GDP)
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5.00
10.00
15.00
20.00
25.00
30.00
2007 2008 2009 2010 2011 2012 2013
Indonesia
Philippines
Singapore
Malaysia
Thailand
SE Asian Regional GDP Growth Slows as Exports to US Diminish
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0.00
5.00
10.00
15.00
20.00
25.00
30.00
2007.00 2008.00 2009.00 2010.00 2011.00 2012.00 2013.00
Blue: % exports to US Red: GDP annual growth
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trade with the Southeast Asian countries to
improve political connectedness.
The Importance of the TPP
One of these initiatives is the Trans‐Pacific
Partnership (TPP). The TPP is a proposed
regional free trade agreement that is
currently being negotiated by twelve
countries throughout the Asia‐Pacific region.
Its passage would fundamentally alter the
trade relationships between the US and
these countries. However, it is in
competition with another regional free trade
agreement: the Regional Comprehensive
Economic Partnership (RCEP), which has
been proposed by China. The Chinese free
trade proposal excludes the US.
Negotiations for the TTP therefore need to
progress for the political pivot to the Pacific
to have substance, and it has to progress
faster than the RCEP. Consequently, it is up
to the US Senate to recognize TPP’s
importance to this political shift. They must
cast aside historic static allegiances, and
actively negotiate this treaty.
It’s Up to Congress
The political pivot is probably the most
important diplomatic policy initiative by the
US in the past decade. For the political pivot
to succeed, economic dependence with
Southeast Asia must increase to benefit the
leadership of these countries, and to raise
the relevance for US lawmakers to begin
serious political and trade compromise.
Without it, the present economic trends
indicate that Southeast Asian economies’
dependence on the US will diminish, and
trade will continue to decline with the US
while their trade with China will rise. If the
US does not take a more serious interest in
this initiative, then the US will have to accept
the inevitable consequence of losing
`relevance’ in the Pacific.
For more information, please contact
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KEY INDICATORS TABLE (AS OF 28 July 2014)
INDEX LEVEL (LC) %1MO (LC)
%1MO (USD)
%1YR (LC)
%1YR (USD)
INDEX LEVEL %1YR
S&P500 1978.91 1.02 1.02 19.43 19.43 3MO LIBOR 0.23 ‐11.66
FTSE 6788.07 0.54 0.36 7.61 18.85 10YR UST 2.49 ‐3.01
NIKKEI 15529.40 2.88 2.40 11.73 7.59 10YR BUND 1.15 ‐31.07
HANG SENG 24428.63 5.74 5.77 15.66 15.76 10YR SPG 2.49 ‐46.04
STI 3350.17 2.48 3.13 6.67 8.60 10YR SGS 2.27 ‐8.91
EUR 1.34 ‐1.53 1.21 US ISM 55.30 5.30
YEN 101.86 0.43 3.72 EU PMI 51.90 6.10
CMCI 1460.89 ‐3.25 1.80 JP TANKAN 7.00 450.00
Oil 101.67 ‐3.85 ‐2.89 CHINA IP 9.20 3.40
Source: Bloomberg
APPENDIX
GLOSSARY OF KEY TERMS (Source: Bloomberg, with tickers in parenthesis. In US$ where applicable) S&P500: capitalization‐weighted index of the prices of 500 US large‐cap stocks (SPX) FTSE: capitalization‐weighted index of the prices of the 100 largest LSE‐listed stocks (UKX) NIKKEI: capitalization‐weighted index of the largest 225 stocks of the Tokyo Stock Exchange (NKY) HANG SENG: capitalization‐weighted index of companies from the Hong Kong Stock Exchange (HSI) STI:cap‐weighted index of the top 30 companies listed on the Singapore Exchange (FSSTI) EUR: USD/EUR exchange rate: 1 EUR = xx USD (EUR) YEN: YEN/USD exchange rate: 1 USD = xx YEN (JPY) CMCI: Constant Maturity Commodity Index (CMCIPI) Oil: West Texas Intermediate prices, $ per barrel (CLK1) 3MO LIBOR: interbank lending rate for 3‐month US dollar loans (US0003M) 10YR UST: 10‐year US Treasury yield (IYC8 – Sovereigns) 10YR BUND: 10‐year German government bond yield (IYC8 – Sovereigns) 10YR SPG: 10‐year Spanish government bond yield, proxy for EU funding problems (IYC8 – Sovereigns) 10YR SGS: 10‐year Singapore government bond yield (IYC8 – Sovereigns) US ISM: US business survey of more than 300 manufacturing firms by the Institute of Supply Management that monitors employment, production inventories, new orders, etc. (NAPMPMI) EU PMI: Purchasing Managers’ index for the 17 country EU region (PMITMEZ) JP TANKAN: Bank of Japan business survey on the outlook of Japanese capital expenditures, employment and the overall economy, quarterly index (JNTGALLI) CHINA IP: China’s Industrial Production index, with 1‐month lag (CHVAIOY) LC: Local Currency Disclaimer:Allresearchdigests,reports,opinions,models,appendicesand/orpresentationslidesintheCAMRIResearchDigestSeriesisproducedstrictlyforacademicpurposes.Anysuchdocumentisnottobeconstruedasanofferorasolicitationofanoffertobuyorsellanysecurities,norisitmeanttoprovideinvestmentadvice.NationalUniversityofSingapore(NUS),NUSBusinessSchool,CAMRI,theparticipatingstudents,facultymembers,researchfellowsandstaffacceptnoliabilitywhatsoeverforanydirectorconsequentiallossarisingfromanyuseofthisdocument,oranycommunicationgiveninrelationtothisdocument.