What happens when the tail in the global economy stops wagging the dog? That's the question raised by a striking development: the sharp slowdown in developing Asia's imports, which are now running just slightly above year-earlier levels after soaring by 23%, to nearly $1 trillion in 1995.
In the traditional view of global economic cycles, it's the industrialized countries that lead the way, with the export-dependent developing nations following in their wake. In recent years, however, trade flows have shifted dramatically. The developing nations' balance of merchandise trade with the industrial world swung from a modest surplus at the end of the 1980s to a record deficit of $142 billion last year.
One result, notes a recent International Monetary Fund study, was a "significant structural break" in the economic relationship between the two groups in the early 1990s. Specifically, instead of mirroring the slowdown in the industrial nations, growth in the developing world--particularly in Asia--accelerated sharply. And that pickup not only helped to limit the slowdown in industrial nations but also has also contributed to their recent recoveries.
Now, however, warns economist Joseph Quinlan at Dean Witter Reynolds Inc., the opposite pattern may be unfolding. A variety of problems--ranging from current account deficits and infrastructure bottlenecks to exchange-rate pressures and fears of overheating--caused a number of Pacific Rim nations to step on the brakes. As a result, intraregional trade has slumped (almost 40% of exports are to other Asian nations), compounding the problem of slack demand from the West. And import growth has slowed even more dramatically.
It's the deceleration in imports in the face of a slowing U.S. economy and sluggish European and Japanese recoveries that has Quinlan worried. Developing Asia now accounts for close to a fifth of total world imports and, based on last year's numbers, some 20% of U.S. exports and over 40% of Japan's exports. Already the IMF reports that the combined trade surplus of 22 industrial nations fell from $14.9 billion in the first half of last year to just $200 million in the first half of this year.
"Considering Asia's huge appetite for imports," says Quinlan, "we may be at a point where if Asia sneezes, the industrialized nations catch cold."