The United States and its Economic Partners
Michel Morkos Al Hayat - 17/03/08//
Neither the hopes of the US President, George W. Bush - who voiced his preference for a stronger dollar - nor the US Federal Reserve's move to pump an additional $200 billion to quench the financial institutions' thirst for investment-oriented liquidity helped lift the national economy from the woes it reached. If the man in charge believes that "his country's economy will rebound," it is because this setback has, in spite of many disadvantages, a lot of positive points that spilled over the US to create worldwide turmoil and cast shadows all over the globalized economy.
The real estate crisis - which caused ripples on both sides of the Atlantic - forced major financial institutions that formed strong national economic pillars to write off $285 billion in bad outstanding debts. This amount may be a small fraction of the value of the world economy, but it seems as the façade that preceded the dollar devaluation, the crash of money markets, and the unexpected and irreplaceable losses faced by world stocks. On the other hand, it lifted the prices of oil, precious metals, raw material and agricultural and food products.
Based upon the economic theory stating that "the one who buys pays the price of the crisis, and the one who sells makes profits", the geography of the globalized economy seemed one of different relief and features. Starting with the US itself, the Economist reported in an early February issue that some states were not affected by the subprime mortgages crisis. They did not even feel it. Montana and Michigan are a prime example of this disparity. The first, which relies on mining, agriculture and tourism, expects a 4% growth in 2008. As for the second, it fell victim of the slowing car industry and the mortgage crisis. Consequently, a belt runs in the US from Texas up to the east north, a belt that survived the economic crisis thanks to the mounting exports and the reported rise in prices of raw material. In contrast, some other states were plagued by recession and high unemployment rates.
In fact, the "weak dollar" increased US exports and reduced the huge gap in the trade balance, which started to regain its balance with trading partners, lead by India and China. The latter was, for the last few years, the strongest competitor of the US. It achieved, on the US account, a huge trade surplus. However, the trade balance's growth seems to slow down due to the Chinese Yuan appreciation.
The economic crisis' divergent impact within the US is also seen all over the world. Countries that export oil, mining material, precious metals and agricultural products are among the highest beneficiaries. The benefit is restricted to the degree in which these countries can maintain a previously-achieved level of financial revenue, should this revenue be valued according to the fixed price. Developing countries come in second. They have proved their ability to survive in the face of economic pressures, even though the US dollar fell heavily (10 percent since the start of the year) against their local currencies. Some Euro-zone countries were also able to increase their exports: their main markets are within the European Union and they use a "single currency" that eases product flow; hence, they do not face economic problems caused by differences in exchange rates.
Due to necessity and results, the economic crisis is controlling investment directions and guiding labor force. In the US, the unemployed headed during the 1990s crisis to the southern states. Yet today, they are unable to move. There are no buyers for their houses. Consequently, unemployment rates are on the rise in some states, while other developing states are in need of labor. Institutions are migrating towards developing countries, where they make profit and declare huge budgets and turnover in weak US dollar. In the first two months of this year, the number of US enterprises investing in China decreased, yet their assets had risen. This is mainly due to the rise in investment costs in China caused both by the reevaluation of the local currency and the falling dollar.
In spite of the repercussions of the economic crisis, most multi-nationals reported operational profits in 2007 and are expecting further gains this year. Only one European bank registered a loss, while the other major banks made profits in spite of writing off a large portion of their assets due to bad outstanding debts. It seems the riches they acquired thanks to their previous operations spared them the deadly fall. Major corporations, some of them retail companies, headed towards India and China. We also saw an increase in the sales of enterprises that produce various products, such as food products and small goods, as well as other companies that take on huge projects and hi-tech equipments. These companies enjoy a strong presence in developing countries. "Not only can developing countries' markets withstand the counter winds coming from the US, they also provide the highest percentages of revenues, profits and market share for businesses in developed countries," according to Newsweek's Marc Margolis. Countries such as Brazil, China, India and Mexico provide two-thirds of the profits and 60% of the growth for multi-nationals.
However, this financial and economic boom witnessed by some developing countries may be affected by the Americans' ability to spend. The ever-increasing middle class in these countries has not yet reached the Americans' spending level. According to Morgan Stanley, consumption in India and China does not constitute one sixth of the US consumption. Hence the US importance to the global economy: the US is the largest consumer of developing economy products, with imports reaching the mark of $2 trillion, despite a budget deficit that equals 2% of its GDP and a trade deficit that equals 6.5% of that same GDP. This forces the United States to borrow $10 million per hour from its trading partners. On top of all this, it is in constant need to import in order to make its industry stronger, because 60% of its overall imports go to the local industry and are subsequently used for its trans-continental production. If that industry fails, the slowdown will reflect upon developing countries as well.
Unlike economic phenomena and apparent contrast, the US "created," along with China and the developing countries in the Pacific, a special "Breton Woods" agreement, which guarantees the developing countries' "loyalty" to the dollar for a long time, as well as the uninterrupted flow of their products towards to the US shores.
Therefore, the "weakness" of the dollar seems to be a new policy aiming at achieving a larger economic benefit and at attracting foreign investments to the US.
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