Are emerging economies dependent on US?

Decoupling has generally been referred to as the phenomenon because of which even though the US is experiencing a slow down, the rest of the world will hardly feel the impact of this development and would continue to grow and prosper. The proponents of this ?decoupling? thesis have argued, in particular, that the growth momentum achieved in the Bric countries will provide the necessary impetus to the global economy for it to remain unaffected by the downswing in the US economy.

Recent developments in at least two of the Bric countries?China and Brazil provide some support to the ?decoupling? thesis. In both countries, their external payments position has displayed significant positives. While in the case of China, the trade surplus has expanded at record levels for the third consecutive year in 2007, Brazil?s central bank announced in a report that the country?s debt crisis was over.

Brazil, which defaulted on its debt in the 1980s and declared a moratorium on debt payments, is riding a boom in demand for key exports such as beef, iron ore and soy. International reserves nearly tripled from $64 billion in 2003 to reach $188.2 billion last week. Contributing to the increase in reserves was when the country?s trade surplus reached $40 billion last year. Coupled with rising foreign investment and fuelled by Brazil?s high domestic interest rates, net currency inflows reached a record $87.5 billion in 2007.

Perhaps more importantly, the Brazilian central bank predicted that the country would become an external creditor for the first time ever in January 2009 by an amount of $4 billion and gain a strong buffer against adverse overseas events for the economy in the year ahead. In the past couple of years, the rating agencies have been taking cognisance of Brazil?s growing stature in the global economy by upgrading the country?s sovereign rating. In May 2006, for instance, Fitch Ratings upgraded the sovereign rating for Brazil to BB+ from BB, thus becoming the first ratings agency to put the country within one notch of investment grade. Subsequently, both Moody?s and Standard and Poor?s gave a similar rating.

The country?s strong performance on the external sector, contributed by the buoyancy on the trade front, was realised without any significant increase on its dependence on the US markets. In fact, between 2004 and 2007, Brazil?s exports to the US had increased by a mere 7%. This trend in the Brazil-US trade is consistent with the effort that the country has been making over the past few years to strengthen its trade relations with other countries of the South, in particular, South Africa and India.

Till the end of 2007, the Chinese external sector has performed unmindful of the impending slowing down of the US economy. The country?s trade surplus in 2007 expanded by nearly $10 billion as compared to the levels reached in 2006, notwithstanding a slight deceleration in the percentage growth in its exports. A noteworthy feature of China?s export performance over the past three years is the move away from the US in relative terms.

While in overall terms, China?s exports increased by 26-28% during 2005-2007, US imports from China increased by only 13% in 2007 as compared to 28% in 2004. In fact, the deceleration in growth registered by Chinese exports to the US in 2007 reversed a trend witnessed between 1999 and 2006 when exports had consistently increased by over 20%. As a result, the share of the US in China?s total exports declined from about 42% in 2000 to 26% in 2007.

The decline in its dependence on the US as an export destination is hardly surprising given the increasing interest shown by China to enhance its trade links with countries in the developing world. Besides increasing its trade with countries like India, one which has witnessed spectacular jump in the past few years, China has taken major strides to enter into bilateral agreements with the Asean members and the Latin American countries.

A significant move taken by China to diversify its commercial relations has been the overtures made towards Africa. With several countries in the region having recovered from the economic uncertainties in the 1980s and the 90s, China may have already taken the big step towards ensuring that its economic fortunes are minimally impacted by the performance of the world?s largest economy.

?The author is prof & head, Centre for WTO Studies, IIFT, New Delhi