Fencing with the West

Discordant trade relations with the United States are only making Asia stronger, not weaker.

It was a week of stark contrasts in the changing fortunes of East and West. On February 16, Robert Zoellick, the mustachioed chief trade negotiator of the United States, landed in dusty New Delhi with a mission—to convince India to break down its barriers so that more American goods could compete in the local market. The following day, Praveen Kadle, the affable CFO of Tata Motors, hopped on a flight from Bombay to Seoul to complete the acquisition of a South Korean company. After days of preaching the virtues of free trade, Zoellick left India empty-handed and perhaps a little embarrassed. Kadle, meanwhile, returned with a deal that gives India’s largest automaker a 26 percent share in the Korean heavy trucks market.

Seemingly unrelated, the two events are in fact key indicators of a power shift in the subtle game of global trade. By all appearances, US trade negotiators have lost their footing. Fretting over a record trade deficit of US$542 billion, they call for Asian governments to remove trade barriers. At the same time, Congress introduces protectionist policies at home. Treasury Secretary John Snow presses Beijing’s leaders to revalue the yuan. Yet the Bush administration relies on China and Asia to finance its budget deficit by snatching up US Treasury bills, mass investments that keep interest rates soothingly low. In sum, the US needs Asia more than ever before, but its leverage is diminishing and its policies are all over the map.

Compare this to the emerging concordance on trade all over Asia. The entry of an Indian company into Korea, one of the first investments in that direction, is the latest example of a trend that came into full bloom only in the last two years: Asian countries are trading more with each other and becoming more integrated. This is fuelled as much by an intricate regional supply chain as it is by their growing domestic economies. As Ifzal Ali, chief economist of the Asian Development Bank, notes: “If these trends continue and regional economies remain focused on policies to achieve faster growth on domestic demand, Asia’s outlook should become less dependent on developments in the major industrial countries.”

What this means for CFOs is that Asia is entering a new era of economic stability that bodes well for business, one that is built on a strong foundation. Donald Hanna, chief Asia Pacific economist for Citigroup in Hong Kong, says the trend has been going on for the last ten years with the formation of international production and distribution networks in East Asia. “The rise in intra-regional trade should strengthen the independence, but the independence in some sense was already there,” says Hanna. Rob Subbaraman, Asia economist at Lehman Brothers, agrees. “There are two things driving intra-regional trade: the elaborate production network, and strengthening domestic demand,” he says. “In a way the region is more in control of its own destiny.”

In short, while the United States has got itself in a position where it needs to correct its trade relationships with Asia to help protect its economic growth, Asian economies are finding that demand from within the region (notably China) is replacing the role of the US as a source of growth. “That does not mean that over the medium term, what happens in the export markets of Japan, Europe, and the United States will not matter very much,” says Ali. “But if there is a misstep in these economies, the impact of a downturn there would be less now as well as in the future than has been in the past.”


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