Monday, November 5, 2007

Japan, International Trade, De-Coupling from the US Economy, and Triangular Trade

The excerpts below from an article in the WSJ, gives a practical example of how a major exporter (Japan) handles their export business, how this effects trade with the US, and Japan’s concerns about de-coupling. Text in bold is my emphasis.

Japan's growth is increasingly dependent on exports -- and the corporate investment needed to manufacture those exports. That could be a problem now, as the possibility looms of an economic slowdown in the U.S., for decades Japan's biggest export market.

Japan could be partially insulated by a long-term shift in its trade relations. Though still export-dependent, Japan's economy is less U.S.-dependent than before. In 2000, 30% of Japan's exports went to the U.S. This year only 20% will -- probably less than its exports to China, including Hong Kong, for the first time.

This trade shift means that if the U.S. economy alone goes bad, growth for Japan "will become more difficult but not catastrophic," says Macquarie Securities economist Richard Jerram. Flat consumer spending plus a sharp fall in housing investment probably caused domestic demand to shrink, economists say. But exports -- led by those to the rest of Asia -- likely more than made up for this, to produce some 1% to 1.5% of annualized growth. . . .

. . . .Longer term, with Japan's population falling, its corporations need to get a bigger slice of their earnings from overseas in order to continue growing. Already Japan's major auto makers lose money in their domestic market, even as they devour market share in the U.S.

A big reason Japan's exports have shifted away from the U.S. is that Japan's industrial strengths fit neatly with the demand from fast-growing economies -- such as machine tools to kit out factories and equipment to construct roads and buildings. . . .

. . . . This kind of export makes Japan the only member of the Group of Eight leading nations to run a trade surplus with China including Hong Kong.

The concern for the Japanese economy is that this -- as well as Japanese exports to other countries -- might be based on "triangular" trade: If U.S. consumers stop buying goods made, for example, in China, then Chinese industry won't need Japanese machines to build and equip its factories.

The stakes are heightened for Japan because exports are increasing as a percentage of Japanese GDP, to 16% this year from 10% in 2000. That means that if the U.S. drags the rest of the world into a recession, Japan will be more vulnerable than ever.

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