For further information: Gail D. Fosler, (212) 339-0300
The Conference Board
For Immediate Release Release #4527A
U.S./CHINA TRADE ACCORD WILL LIFT GLOBAL GROWTH AND THE PACE OF CHINESE INVESTMENT
The U.S./China trade accord and the prospect of China's accession to the World Trade Organization (WTO) will likely lift global growth and accelerate the pace of domestic investment in China, according to an analysis released today by The Conference Board.
If the growth rate in China was projected to be 8% and that of Asia 6.7% before the trade agreement, these rates are likely to increase to 10% and 7% respectively. This upward revision is based on an anticipated acceleration in the Chinese investment growth rate to 12% -- a rate roughly equal to the post-1989 average, but well below the growth rates of the mid-1990's.
As a consequence, global growth will edge up to 3.6%, with higher rates in the second half of 2000 than at the beginning of the year.
"Faster than expected growth in China and Asia next year could lead to more inflation and interest pressures, " says Gail D. Fosler, senior vice president and chief economist of The Conference Board in a supplement to the latest issue of StraightTalk, her newsletter prepared exclusively for Conference Board Associates. "Up to now, inflation has been absent from the global outlook."
BENEFITS TO THE U.S.
U.S. exports and manufacturing will both benefit from a stronger Asian manufacturing sector. But this improvement is unlikely to raise the overall U.S. growth rate, still projected to be 3.7% in 2000. Given the underlying domestic strength in the U.S. economy, any further stimulus to growth is likely to pull in as many imports as it generates added exports. Also, developing Asia (including China) accounts for only 19% of U.S. exports -- although greater economic activity in one global region seems to spill over to other seemingly unrelated regions. While the agreement may eventually help the bilateral U.S./China trade imbalance, the U.S. trade deficit with China will remain large for the foreseeable future.
The positive benefits of investment precede the negative effects of competition. Increased investment, especially to the extent it spurs domestic development, will add to overall growth, while the benefits of additional growth will create new jobs to help offset those lost from China's ongoing restructuring process.
Since China's restructuring would have occurred with or without WTO membership, employment impacts of the U.S. agreement should be judged in light of the job losses and slower growth that would have prevailed without the accord.
THE U.S. AND CHINA
Emerging market growth in Asia will generally be constrained by a shortage of foreign investment. This shortfall is particularly critical for the crisis countries of Indonesia, Korea, Malaysia, the Philippines, and Thailand, which are already projected to suffer a net outflow of foreign investment.
The U.S./China trade deal and Chinese accession to the WTO are likely to make China an even greater magnet for foreign investment--particularly foreign direct investment. Because foreign direct investment is closely tied to the pace of investment in the Asian economy, the benefits that many Asian economies are likely to enjoy from a more dynamic China will be offset by shortages in foreign investment that will limit domestic investment and growth in the near term.
OUTLOOK FOR THE DOLLAR
The Conference Board predicts the yen will strengthen to 90 in 2000 and the euro to 1.14. The erratic pattern of European growth has helped hold European interest rate expectations and the euro down. But as the U.S. economy cools next year in the face of surprising European strength, these patterns should clarify, and strengthen the euro.
"Nevertheless, the momentum in the global economy does not appear sufficiently strong to justify a sharper fall in the dollar," concludes Fosler.
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Sources: StraightTalk and Supplement to StraightTalk Volume 10, Number 10, The Conference Board
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