The Spectacular, Sudden Crash of the Global Economy

By Joshua Holland, AlterNet. Posted February 24, 2009.

Much of Asia has become a huge production platform for the West. It’s been said, half-jokingly, that the modern global economy works something like this: the U.S. produces pieces of green paper, which it trades to China for the goods lining the shelves of Wal-Mart and Target, the Chinese trade those pieces of paper to the oil-producing states for energy, and the oil producers exchange them with Europe for Mercedes and foie gras. 

Economist Robert Brenner described a "long downturn" in the world's wealthiest countries, noting that their economies grew by a steady rate of 5 percent or more each year from the end of World War II through the 1960s, but in the 1970s their growth fell to 3.6 percent, and it has averaged around 3 percent since 1980. 

But as the social scientist Walden Bello pointed out, even those anemic numbers are misleading. “China's 8-10% annual growth rate has probably been the principal stimulus of growth in the world economy in the last decade,” he wrote. Without China’s (and to a lesser degree India’s) consistent growth rates, global economic expansion has been all but nonexistent.  

China became an export engine by keeping wages down through repressive union-busting and by drawing on an almost endless supply of poor rural peasants to work its production lines.  

While global trade flows have exploded, much of that trade has been between multinationals based in the advanced economies and their own offshore units. They ship production overseas, but the goods produced end up back in domestic markets; it’s a means of avoiding “first-world” wages, public interest regulations and environmental restrictions. 

China and the U.S. have developed a precariously symbiotic relationship. As Walden Bello wrote, “With its reserve army of cheap labor unmatched by any country in the world, China became the ‘workshop of the world,’ drawing in $50 billion in foreign investment annually by the first half of this decade.” To survive, firms all over the world, "had no choice but to transfer their labor-intensive operations to China to take advantage of what came to be known as the ‘China price,’ provoking in the process a tremendous crisis in the advanced capitalist countries’ labor forces.” 

It was always an unsustainable model; the United States’ annual trade deficit with China -- financed by debt -- was $6 billion as recently as the mid-1980s; by last year it had exploded to $266 billion.

Defenders of the global trade regime have long argued that China’s currency will rise in value against the dollar, the trade deficit will shrink, and there will be significant “decoupling” between the two economic powerhouses as a new generation of middle-class consumers in the East Asian countries begin demanding a greater share of all those manufactured goods. 

On the surface, it appeared that at least the last part of that was indeed happening. As Bello noted, “To satisfy China's thirst for capital and technology-intensive goods, Japanese exports shot up by a record 44%, or $60 billion. Indeed, China became the main destination for Asia's exports, accounting for 31% while Japan's share dropped from 20% to 10%. China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.”  

But Bello went on to describe that this "decoupling" was also an illusion: 

Research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries." 

The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.

We often hear that U.S. consumer spending accounts for 70 percent of the economic activity in the country. Do the math: with 20 percent of the world’s economic activity, U.S. consumers -- most weighed down with stagnant wages and maxed-out credit -- make up about 14 percent of the planet’s economic demand. Add the other affluent countries (which were also heavily invested in our real estate market and related securities), and it’s easy to see why the economic meltdown has grown to global proportions. The dominoes are tumbling. 

See more stories tagged with: china, us, global economy, stimulus package, financial crisis

Joshua Holland is an editor and senior writer at AlterNet.

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