Sunday, 24 June 2018

As Asian miracle wanes, US may wax

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Asia’s economic miracle may be waning just as the foundations for an eventual resurgence in the US are being laid.

James Saft, Reuters Columnist

Asia, China in particular, may be bumping up against the limits of a capital-intensive growth model predicated on cheap labour. To counteract this, countries like China may have to adapt legal, political and even academic practices which could up-end existing power relationships.

At the same time, technology, geology and new manufacturing techniques may in combination give US growth an energy and innovation boost.

“To pose the question about the Asian miracle is not to doubt China’s and Asia’s economic potential and significance, but to throw down the gauntlet to the conventional thinking that extrapolates Asia’s past economic performance into the indefinite future, and assumes that the competitive challenge from the US and other Western countries and companies is now a spent force,” George Magnus, an economic consultant to UBS writes Monday in a note to clients titled “Asia: is the miracle over?”

To be sure, Asian growth rates won’t dip below those of the US, other than under the most extraordinary scenarios. There is, however, real potential for rates in China, India and elsewhere to disappoint the sorts of forecasts now common, and for the US to stage a meaningful, and surprising, rally.

China’s fantastic multi-decade record of economic growth owes much to better use of labour, as workers were redeployed from less productive rural work into the country’s urban-centred export machine. That, supported by an extraordinary investment in physical capital drove high rates of growth and productivity, but at the expense of a domestic consumer economy.

That particular set of tactics are now showing diminishing returns. Wage differentials are narrowing while, at least for the near term, Europe and the US will show less appetite for exports. Magnus argues that the next step upward will have to be founded on greater efficiency and innovation, both of which in turn depend on political and institutional reform. In a one-party state like China this is both difficult to do and difficult to forecast.

Intellectual property rights may well become better guarded, and what Magnus calls a system which favours incremental over radical change may be remolded too, but the evidence on the ground thus far is thin.

US potential

None of this does much to change the real hurdles faced by the US It labours under too much debt, has a nasty problem with the long-term costs of health-care and, crucially, as the owner of the world’s leading reserve currency is given the latitude and even encouragement to not make hard decisions but simply solve issues of debt and consumption with still more debt and consumption.

That said, the US has a lot going for it over the next decade. Advances in technology and lucky breaks in geology means that the US is beginning to enjoy a shale gas revolution which will create jobs and investment and give it the sort of energy independence unimaginable a decade ago. UBS estimates this may boost growth by about a half a percentage point in coming years – only about a third of the impact of the technology boom – but a very meaningful amount in a low-growth environment.

At the same time, so-called 3D manufacturing shows really stunning, if yet unproven, potential to re-shape the way the world makes things, and to do so in a way which largely favours the US over not just China but Japan and Germany as well. The process, in which highly customisable products are literally sprayed into existence using something not too dissimilar from an ink-jet printer, as opposed to the old style of banging things out of materials, plays really well to US strengths.

While used now mostly to make prototypes, the spread of 3D should make it cheaper and more advantageous to put factories close to their markets. That’s a huge contrast from the existing global supply chain, in which achieving small per-piece price advantages is so important that we site parts plants for a single product all over the globe.

The US has not just shown itself to be leading in innovation, as 3D rises a higher percentage of the value of a manufacturing operation will be in intellectual capital – the designing of the program which makes the product, rather than the massive factory in China or the Ruhr. Why site your factory half a world away from your market and take a risk of losing your intellectual property? Shipping costs too will play a bigger role if labour inputs into the cost of making something are smaller.

None of this will happen soon, and none is set in stone, but the challenge to Asia in general and China in particular is clear, as is the opportunity for the US.

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email:, Twitter: @jamessaft)

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