Category Archives: US

Nov 2014

Western competition for Asian markets is heating up

President Obama used his recent trip to Asia to push through the Trans-Pacific Partnership (TPP), a massive trade agreement that includes twelve nations total, but excludes China. The TPP is the economic centerpiece of the U.S. rebalance to Asia, and China is responding to it by promoting the Regional Comprehensive Economic Partnership (RCEP), a mega-regional trade agreement that includes ASEAN, Japan, South Korea, India, Australia and New Zealand, but excludes the United States. Beijing is also pressing forward a free-trade agreement for the whole Asia-Pacific—the FTAAP—as a way to dilute the TPP and ensure that Beijing continues to get preferential access to some of its most important trading partners.

Yet, China is not the only one trying to create an alternative to the TPP. The European Union (EU) is pushing forward its own economic rebalance toward Asia—a move that challenges U.S. initiatives and provides Asian countries, including China, with more leverage over trade negotiations with the United States.



Europe’s economic presence in Asia is felt particularly in the areas of trade and monetary policy. For instance, Brussels is Beijing’s most important commercial partner—the two trade more than one billion euros a day. The EU is ASEAN’s third-largest trading partner, after China and Japan, but ahead of the United States. Overall, Asian markets are the destination for almost one third of EU exports and offer rapidly expanding market opportunities for European firms, which are also among the biggest contributors of FDIs in the region. In the case of ASEAN, Europe is by far the largest investor. EU companies have invested an average of 13.6 billion euros annually in the region in the last decade.

Following the surge of trade relations, Asia has become the largest buyer of euro-denominated assets. The share of euros in the foreign exchange portfolio of Asia’s major central banks’ accounts is, on average, for around 25-27 percent of the holdings of Asia’s major economies, reaching 30 percent and above in China (the world’s largest holder). This makes the euro the second-most-important reserve currency in Asia—after the dollar, but ahead of the yen.

Europe’s economic rebalance toward Asia is rooted—as in the case of the United States—in the realization that Asia has become central to global prosperity and to the Western powers’ own growth prospects. Since 2011, the EU has signed free-trade agreements with South Korea and Singapore; it is negotiating one with Japan, Vietnam, Malaysia and Thailand; and has opened discussion on a trade and investment agreement with the whole of ASEAN.

China and the EU are currently negotiating a bilateral investment treaty that, if successful, could pave the way for a bilateral free-trade agreement. At the last summit of the Asia-Europe Meeting (ASEM)—an inter-regional dialogue forum between European and Asian leaders—held in Milan in October, Matteo Renzi, Italy’s prime minister, expressed support for the opening of negotiations on an FTA with China. While some European leaders such as David Cameron, the British prime minister, have already declared their support for an EU-China FTA, the position of Italy—currently holding the presidency of the EU Council—is somehow surprising, given that the country’s small and medium enterprises have been particularly hit by Chinese competition in the last decade. Yet, sluggish growth in many Eurozone countries and growing Chinese investments in Europe are playing in favor of an early adoption of an EU-China deal.

The EU does not have troops or binding military alliances in Asia, making it easier for Brussels to engage the region without the security and strategic considerations that beleaguer the United States. While politically the EU’s presence in Asia is broadly complementary to that of the United States, economically the transatlantic allies are competitors. As Western competition for Asian markets is heating up, companies should devote the right amount of time and resources to understand the implications of these dynamics for their business.

A longer version of this article was originally published in The National Interest.

Oct 2014

Power shift: China is now the world’s largest economy

It is official: China has toppled the United States (US) to become the biggest economy in the world. Measuring gross domestic product (GDP) using purchasing power parity (PPP), the latest figures released by the International Monetary Fund (IMF) on 8 October 2014 estimate China’s GDP to be at $17.6 trillion, compared to the US’s $17.4 trillion (see graph below).


Image source: Daily Mail

Using PPP is an attempt to account for varying price levels between countries, particularly in goods and services which are not open to international competition. If measured in current dollars, unadjusted for cost of living, the US economy still dwarfs China’s, at $17.4 trillion to $10.4 trillion. Yet, according to the IMF, the PPP measure gives a better picture of the real size of an economy, since prices and salaries are not the same in each country. For instance, a typical worker in China earns a lot less than the typical worker in the US. However, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have. The IMF views the PPP as more stable and a better measure of how much a country’s economy is worth in terms of what its currency can buy.

Notwithstanding any measurement problems and/or criteria adopted, China’s rise has been remarkable in recent years, having firmly replaced the US as the main engine of the global economy. According to analysts at Morgan Stanley, China’s contribution to global growth has more than tripled to 34% this decade from 10% in the 1990s. The US contribution has decreased to 17% from 32% in the 1990s, and the part of Europe has fallen to 8% from 23%. By the end of 2014, Europe’s contribution will be more or less where China was in the early 1990s. As a result, the West – i.e. US and Europe combined – contributes today a quarter to global growth, while China’s part is more than one-third.

Over the long-run, the historical perspective sees China’s ascendancy as a return to it’s former grandeur. According to Angus Maddison, a British economic historian, China was the world’s leading trading nation up to the 18th century, until European powers took control of its ports and trade. It was Great Britain – which led the world in the industrial revolution – that became the world’s largest economy. This position was held by London until 1872, when the US took the lead.

The US has been the world’s largest economy for 142 years, until October 2014, when the IMF certified that the lead had returned to China. There are two main implications of this shift: firstly, there will be a Western scramble for the Chinese market – and for Chinese money. The global downturn which begun in the US in 2008 has not only weakened the American economy, but it has also had a tremendous influence on other countries, in particular those of the Eurozone. The peripheral countries of the euro-area have witnessed the most remarkable surge of Chinese outbound investments. Secondly, the next crisis is likely to originate from China.

Today, every one-point slowdown in China’s growth takes about half a point off global growth, according to analysts at J.P. Morgan. It is, therefore, crucial for Western governments and businesses to prepare now so that when China sneezes in the future, catching the cold would not be the only option.