Openness To Trade- Boon or Bane?

Opening up trade was considered a mantra for economic growth and prosperity. The developed world and the IMF advocated this for various nations. It was expected to promote investment and exports such that a large number of economies would benefit. While the going was good, such benefits seemed to have accrued to several economies including China, Malaysia, Taiwan and Cambodia amongst other nations. These nations experienced high rates of growth and employment and improvement in standards of living. But, now with the economic cookie having crumbled, these nations are facing severe economic hardships, with a sudden dip in their growth rates accompanied by increase in unemployment.

The entire South East Asian region, is expected to grow at a meager 1.2% in 2009 and some of the underlying economies are likely to experience negative growth. As per World Bank forecasts, Malaysia’s GDP will shrink by 1% and that of Thailand by 2.7%. It may be noted that in 2007, the Malaysian economy grew a robust 6.3%. The Pilipino economy, which expanded at 7.2% in 2007 will see growth of only 1.9% this year. China, which has be growing at double digit rates for nearly a decade is likely to slow down to 6.1% in the first quarter of 2009. China’s first quarter growth in 2008 was 10.6%, which tapered to 6.9% in the last quarter of 2008. Compared to the present 6.1% growth rate, China has pared nearly 4.5% in its growth rate. The main reason for such a drastic drop in China’s growth rate is its over dependence on exports. Estimates suggest that exports accounted for nearly 30% of the Chinese GDP and a severe reduction in demand from the US has resulted in this massive reduction in the Chinese growth rate.

At the beginning of the financial meltdown, it was expected that the South East Asian economies may be able to withstand the financial maelstrom as a result of their learning from the financial crisis of 1997-98, which had led to a huge and sudden depreciation in their currencies. These economies built up huge foreign exchange reserves in order to avoid such a crisis in the future. However, these reserves were derived largely from export earnings and a collapse in demand in the US did not spare these nations. Data for the month of January 2009 suggests that exports from Taiwan and the Philippines plummeted by 40%, while Cambodian exports fell over 30% compared to the same period a year ago.

The sudden fall in growth rates resulting from dwindling exports have resulted in widespread job losses in the region. In Cambodia, some 50,000 workers have been laid off in the garments industry alone, the figure being double that for Vietnam. Nearly three million garments industry jobs are likely to have been pared in China. That is just the tip of the iceberg. The Chinese authorities have suggested that nearly 20 million jobs have been lost due to the economic downturn, forcing millions of migrant workers to return to their villages. The Philippines government has projected job losses to the tune of 800,000 due to the economic crisis.

Quite clearly, openness to trade helped spread economic prosperity to different corners of the world, but overdependence upon the US as being the single largest importer of goods and services seems to have jettisoned the advantages for the time being.

  • comfibold

    To quote the old stock market saying:

    “When America sneezes, the world catches a cold”

  • comfibold

    To quote the old stock market saying:

    “When America sneezes, the world catches a cold”