18 March 2014

Africa: Rising Tide - Is Growth in Emerging Economies Good for the United States?


South Africa has proudly joined the BRICS, the most dynamic part of the world economy. In doing so, South Africa hopes to tap into these growing emerging markets and sources of investment, as well as work towards the creation of alternative financial institutions to, for example, the World Bank.

But the strong performance of the BRICS over the past decade, and forecasts that it could be sustained in the decades ahead does not meet the similar acclaim in all quarters, especially the United States.

American international economic policy has traditionally presumed that foreign economic growth is in America's economic interest. As President Kennedy once put it, "a rising tide lifts all boats." But when it comes to the BRICS rise, many are not so certain.

The American public is primarily worried about jobs and when emerging economies grow rapidly by exporting more manufactured goods (China) and services (India), they provoke concerns in the public that they're creating unemployment and reducing wages. Some prominent economists have added to these concerns.

Nobel Laureate Paul Samuelson suggested that Chinese growth could reduce American welfare by lowering its gains from trade and Lawrence Summers, the former head of President Obama's National Economic Council, argued that Chinese growth hurts the US by raising world oil prices.

These concerns are consequential for all who seek effective global cooperation. If foreign growth does threaten US prosperity, the possibilities for such cooperation are in jeopardy. While it could still be in the US interest to promote growth in developing countries for altruistic or national security reasons, such cooperation becomes much less attractive if it is viewed as coming at the expense of US economic welfare.

In our recent book "Rising Tide: Is Growth in Emerging Economies Good for the United States?" we confront these fears through an extensive survey of the empirical literature and in depth analyses of the evidence. Our analysis suggests that some of these concerns are misplaced and that trade with emerging economies has been found guilty of many outcomes for which it is not responsible.

Many Americans blame the trade deficit for shrinking employment in manufacturing, for example. Trade has played a role, but they find that automation and American spending choices are far more important. Many think trade with emerging economies will make Americans poorer because emerging economies have become more formidable competitors.

But we find that emerging country growth actually raises American living standards because most emerging other countries are not (yet) major competitors for US exporting industries, and they sell America imports at lower prices.

Many think that rapid demand growth in emerging economies is the main reason for the rise in oil prices over the decade, but we find that the failure by advanced economies to increase domestic production is the more important factor and that in the future the United States is likely to become more self-sufficient in oil and thus its welfare less vulnerable to higher oil prices.

To be sure, trade presents challenges. Some imports from emerging economies have caused harm in the US, as trade-related job losses hurt specific communities and are costly for displaced workers.

But in the long run there are benefits to America that more than offset these costs, and thus the correct response to these problems is not to raise trade barriers but to improve aid to workers who are displaced and equip them with the skills to compete. Indeed, the rise of the BRICS can help lift the American boat.

Robert Lawrence a Professor at Harvard Kennedy School and a Senior Fellow at the Peterson Institute for International Economics. Lawrence Edwards is a Professor at the University of Cape Town. Their recent book is Rising Tide: Is Growth in Emerging Economies Good for the United States? published by the Peterson Institute for International economics.

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