Tuesday, May 8, 2012

Africa and Middle East - new trade hubs?

A lot has been written about China's growth after its accession to the WTO  in 2001. China's aggressive domestic policies have ensured Chinese goods enter new, expanding markets. I personally experienced three instances recently of the all "pervasiveness" of the growth of Chinese products.

1. Local toys in local shops seem to be the preserve of the Chinese. The other day I noticed that even toys used in traditional Indian festivals are now made in China!

2. I was flying on a domestic air carrier. The ear phones offered in a plastic cover indicated it was made in China.

3. A few days ago a Japanese Professor visiting me presented me with a small LED reading light that can be attached to books for night reading. After explaining the latest Japanese technology behind the light, he looked up and said "Made in China"!

A Deliotte Research Publication  has come out with its Global Economic Outlook 2nd Quarter 2012 in which a chapter on "Trade Patterns of the Future" looks interesting. Predicting, surprisingly, that China may lose its pre-eminent position the authors have averred:
"It is quickly becoming apparent that China may be losing its status as the “factory of the world.” Cost economics that long worked in China’s favor have come full circle; domestic wages are on the rise, eroding much of the cost arbitrage offered to foreign companies. Even Chinese companies are affected as improving living conditions in the hinterland discourage potential migrants from seeking work in urban coastal provinces. Furthermore, an aging population in the next decade will likely weigh down labor supply and impact wage competitiveness. As Chinese production moves up the value chain, workers are demanding higher wages, better working conditions, and added welfare benefits. Thus, rising labor costs, along with pressure to loosen control on its exchange rate, could pose a serious threat to China’s international competitiveness if productivity does not correspondingly improve."
Authored by the Dr.Satish Raghavendran and Neha Jain, the chapter predicts that the new trade hub would be Africa and the Middle East.
"As economies in Sub-Saharan Africa and the Middle East develop and open up to trade, links between Asia, the Middle East, and Africa are expected to flourish. Economic integration between these regions and the emergence of South-South trade will likely result in the formation of influential trade hubs. The trade of the future will be determined by the availability of cheap resources and the destination of final demand itself. Some firms in developed economies have already begun to question whether the challenges of outsourcing their production processes outweigh the benefits of producing locally.

In this respect, Africa and the Middle East offer both low-cost production capabilities as well as a rapidly growing domestic market. While there are political and economic risks, a burgeoning consumer base will likely induce foreign business to navigate these markets and leverage locally available resources in a more cost-effective way. Supply chain disruptions following the earthquake in Japan also have highlighted the challenges of extreme specialization and reliance on a few economies. Another advantage that the Middle East and Africa offer is the close proximity to European markets. Thus, the emergence of Africa and the Middle East as new trade hubs is likely to play a pivotal role in connecting people, products, and technology."

Would this be the future of trade patterns? Would China's dominant position in today's growth story be challenged? China itself is seriously engaged with Africa as I had noted in this blog piece. Africa's percentage of world trade and intra-Africa trade is very small. Some argue that Africa needs to boost its internal productive capabilities before relying on trade as a weapon of growth. Will it be the end of "Cheap China" making way for a resurgent "Africa" and middle east? One has noticed that the Chinese State has played a pivotal role in structuring its domestic policies to ensure China plays an active part in the international market. Some have called it protectionist while others argue that it has been an intelligent and aggressive use of its international space. Will the African and middle eastern countries have the same strategy? Is it too premature to predict a Chinese decline?

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