The Importance Of The BRIC Countries To The United States Economy - Term Paper Example

? The importance of the BRIC countries to the United s economy Contents Executive Summary 4 Introduction 5 2.The economic review of BRIC countries 7 2.1 Brazil 7 2.2 Russia 8 2.3 India 9 2.4 China 10 3.Role and significance of BRIC countries in global trade and commerce 12 4.US BRIC trade relations 17 5.Conclusion 19 References 20 Executive Summary It is the beginning of a new era. Globalization is taking place at an incredibly fast pace. The globe is integrated in terms of economics, politics, military and culture. The on-going financial crisis has demonstrated the level of integration of financial markets. As the level of integration amongst the financial markets increases, it is critical for policy makers and global investors to understand the synergy between certain economies. This is important to adjust their portfolios and achieve proper diversification. In many ways, these are unprecedented times. The study and analysis of the relationship between the fastest emerging economies and the United States economy is gaining a lot of attention. The US economy dominates the global economic environment influencing industry trends and market behavior. However, the evolving economies of the BRIC countries have challenged the US economy and it is envisaged that the future holds immense potentials for growth and development in these countries. US trade relations and economic ties with these countries will play an important role in defining future prospects and economic potentials for both US and BRIC countries. The study evaluates the growing significance of the BRIC countries to the US economy and analyses the factors driving these economic indicators. 1. Introduction “BRIC countries are expected to contribute one-third of the world's GDP increment in 2015, by which time their total economy will surpass America, according to a leading Chinese think tank” (Economic Times). The countries of Brazil, Russia, India and China are the key emerging markets in the world economy. China and India represent for approximately 33% of the world’s total population. Both these countries have a high concentration of their population in the middle class who possess high purchasing power. The gross domestic product (GDP) rates in the BRIC countries are higher than those of developed countries (Desai, Acharya & DeKeizer). By 2025, it is estimated that BRICs will account for 50% of G6 countries. By 2045, the BRIC economies will take over that of G6 countries. By 2025, annual increase in dollar spending from BRICs would be twice G6 and four times by 2050 (Wilson). By 2033, it is estimated that India will have the third largest economy in the world after China and the United States. Among the BRICs, India will have the fastest growing economy. As a percentage of population, India will have highest working age population i.e. 15 to 60 years. In 2050, three of the largest four economies will be in Asia (Desai, Acharya & DeKeizer). The emerging markets provide a number of opportunities. They have the potential to have high growth rates. They have the capability to attract greater volume of foreign direct investments (FDIs). They make a huge amount of investment in infrastructure. The presence of a large middle class gives a boost to demand. There is an enormous supply of skilled and cheap labor. There is great opportunity for outsourcing work particularly in India. Emerging markets present even more opportunities in the form of disinvestment of public sector units (PSUs). There is large scale of mergers and acquisitions both domestically and globally. They are also fast in catching up with technological changes. These BRICs have a vast supply of agricultural and mineral resources. Their commodities markets are also growing rapidly (Desai, Acharya & DeKeizer). In demographic terms, BRIC consists of world’s two most populated countries and another two with sizeable populations. China has the world’s largest population accounting got one-fight of the total world population. India accounts for 17.5% of the world’s population. Brazil holds 2.9% and Russia 2.2% of the world’s population. There are also differences in the four countries with respect to natural resources, level of industrialization and impact on the global economy (IMF). Trade coming from the BRICs is approximately half the value of the combined trade with the European Union and the United States. It is also more than other emerging economies. BRIC FDI and development financing are having a major impact in a few critical areas irrespective of their small values in comparison to developed countries. But in spite of the growth, the per capita GDP in each of the BRICs would remain low compared to that of the United States. This means that the BRIC economies will work in integration with the American economy and not compete against it. Currently, all four BRICs have broad and strong economic ties with the United States. These trade ties enable the United States to have an understanding of all the four BRIC countries (Brawley). 2. The economic review of BRIC countries The subsequent sections provide an in-depth assessment of the BRIC economies and its evolving significance. 2.1 Brazil Even though Brazil is a strong emerging market, it has not entered into any bilateral tax or investment treaty with the United States. Brazil trade policy focuses on increasing trade within the Mercosur, a regional trade agreement in South America, over expanding trade with the EU and the US. Protectionism poses a major threat to economic growth. It has imposed high amount of tariffs on capital goods, especially in comparison to other emerging economies. Brazilian tariffs against US exports are high compared to average US tariffs against Brazilian exports (An & Brown). Despite the fact that Brazil is a leading exporter of commodities, exports only constitute 12% of the country’s GDP. It remains a closed economy. Trade relations with US are strained. Trade disputes impede trade growth. This in turn limits the collaboration and integration between the two countries. In spite of several economic disputes and barriers between Brazil and the United States, two facts remain evident for the time being. First, the United States and Brazil are the largest economies in North and South America respectively. Secondly, the volume of trade between the United States and Brazil has been increasing substantially over the years (Sauvant, Maschek & McAllister). The graph below illustrates the trade volumes between US and Brazil. Fig – US- Brazil trade (Source: An & Brown) 2.2 Russia The Russian economy is undergoing change transforming from a socialistic set up to a market driven economy. Since 1991 after the collapse of the Soviet Union, Russia has tried to develop a market economy and boost economic growth. Bilateral direct investment has been relatively low between Russia and the United States. United States only accounts for 4% of Russia's foreign trade. Similarly, Russia accounts for less than 1% of the United States’ foreign trade. The United States has not granted Russia the permanent normal trade relations (NRT) status as it does for most of its other trading partners. Russia is not a member of the World Trade Organization (WTO), or the Organization for Economic Cooperation and Development (OECD). This means that there exists a certain amount of institutional and legal uncertainty in Russia. Fig US-Russia trade (Source: An & Brown) In 2009 Russia was ranked 146th out of 180 countries on the Transparency’s Internationals Corruption Perception Index. The United States, China, Brazil and India were ranked 19th, 79th, 75th, and 84th, respectively. Russia has still not ratified the 1992 bilateral investment treaty with the US. As a result, the low levels of trade trust and confidence has resulted in no co-integration between the Russian and United States economies (An & Brown). 2.3 India Before the 1990s, India was a closed economy and its markets were not open to foreign competition. There were a number of restrictions on imports, tariffs that averaged over 200% and stringent restrictions on foreign investments. Corruption was present in all fields and was a major deterrent to economic growth. Even though India has opened its doors to the world, its tariffs are still high in comparison to other countries. It also has stringent investment norms. In many ways, India could still be regarded as following a protectionist economic policy (An & Brown). Fig US-India trade (Source: Hammer) In 1991, India brought in economic reforms that included increasing foreign direct investment and exchange regimes. It also reduced tariffs and other trade barriers. India brought about major changes in its statutory monetary and fiscal policies. It also worked on the modernization of the financial sector. Average non-agricultural tariffs have fallen below 15% and average agricultural tariffs are between 30-40%. In 2002, India eliminated quotas on 1,420 consumer imports and deduced non-agricultural custom duties (An & Brown). India still has imposed a ban on foreign investment in retail trade. It has also brought in anti-dumping measures to protect trade. India is following a global trade regime in the services industries. But the country’s outlook is mixed. In July 2008, a key World Trade Organization Doha Ministerial in was unsuccessful due to differences between the US and India over market access. India’s tax structure is complex. India has entered into trade agreements with many of its neighboring countries. It is also looking for trade agreements with other East Asian countries as well as the United States (An & Brown). 2.4 China Due to the high volume of trade that takes place between the United States and China, there is a high level of co-integration between the two countries. China is dependent on the United States for exports. The exports to the United States constitute a major component of China’s GDP. The United States is dependent on China for debt. China is the U.S.'s biggest foreign creditor with approximately $800 billion in US treasury securities in 2009. In 2007, exports accounted for 36% of China’s GDP as compared to 20% in 2001. This shows the impact of exports on the Chinese economy. China represents 80% of the BRIC country exports to the United States (An & Brown). Fig US-China trade (Source: Hammer) The word ‘Chimerica’ was coined by Niall Ferguson and Moritz Schularick to describe the strong relationship between the United States and China. Since 1978, China has transformed into a centrally planned economy. In 1978, a decision was taken to permit foreign direct investment in several small special economic zones. Chinese goods and markets have undergone liberalization to a certain degree. A majority of prices are decided by the markets. The government control on the labor force has become relatively less and under developed capital markets have seen rapid progress. China and the United States are integrated not just through trade but also by exchange rates. The Chinese Yuan or Renminbi is pegged the US dollar (An & Brown). 3. Role and significance of BRIC countries in global trade and commerce The BRIC countries did not display much evidence of global trade, investment and capital exchange initially during Industrial Revolution and the later half of the 20th century that marked the growing trade interaction between the developed countries. This was largely accountable to the political conflicts and insurgence that plagued these countries during this time. During the 1980s, the BRICs opened up and started interacting with the global economy. After the end of the second world war, when a new economic order was being envisaged, the USSR and China removed themselves from the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD) and the General Agreement on Tariffs and Trade (GATT). India and Brazil continued to be members of these institutions with minimal participation and involvement. In spite of Brazil participating in these organizations, its role has been more as a client and not as a member in decision-making processes. When compared to other BRIC members, Brazil has established and maintained a market structure and an economic management model that is true to capitalism’s formal pattern of economic organization. India was much more nationalizing, bureaucratic and backward than Brazil. India’s liberalization has been triggered by its economic diasporas in the United States and not through internal transformations (even though there has been liberalization under Manmohan Singh). China was in economic doldrums. This was brought about by the decline during the Civil War and the Japanese invasion, along with the strategic planning of the Maoist Era (the Great Leap Forward and the Cultural Revolution. In actual figures, between the end of the 18th century and the 1960’s, China’s GDP fell from nearly one third of the world’s GDP to less than 5%. China’s GDP gradually started to improve in the 2000’s. With respect to Russia, it was greatly hampered by the disintegration of the USSR. In addition, data and information from the Soviet Era cannot be relied upon to ascertain its economic development in the 20th century. This is because it experience enormous material and human disasters. According to a study by Goldman Sachs, this G4 group’s joint GDP will be more than the G7’s current GDP by 2035. By 2040, China’s GDP will be more than the other countries. The factors contributing to this achievement may be many such as a possible technological explosion in China and Russia pursuing its extraction activities; intensive competition in Brazilian agriculture and growing dominance of Indian internet services and information technology. Even though the BRICs joint atomic mass might exceed overtake G7, their per-capita income and productivity indicators will continue to be behind the developed countries. Economic transformation is the product of structural and politically based factors. Russia and China declined due to the problems brought in by their socialist economies, which was introduced by strong leaders. In spite of their superior knowledge of party organization, Lenin and Mao were not able to fully understanding the workings of a modern market economy works. In Russia, the shift from socialism to capitalism has been hard and inconsistent. China has experienced governmental authoritarianism and firm guidance in creating a market economy. China has a distinct position in the world due to its sustained growth that has been brought about by major structural changes that have caused huge social impact. In the case of Brazil and India, the shift to capitalism has not been due to a forced return to the market economy but is a result of the inherent forces in their semi-capitalist economies. As a result, the economy has opened up and there is large-scale liberalization of all sectors. Brazil’s main issue was to come out of self-feeding inflation and the exchange rate pressures. The liberalization process was able to sustain even in the face of financial turbulence between the second half of the 1990s and the beginning of the 2000s. India had to overcome an outdated state of planned economy and severe protectionism. Even though it faced many hurdles, India was able to come through with the support of its economic diasporas in major developed economies. The BRIC strategies to liberalization and economic integration differ widely from other developed countries, but have evolved gradually to accommodate changes. A lot has changed now from the times of restrictive policies adopted by the four countries less than a generation ago. The most dramatic changes took place in the socialistic countries of Russia and China. Whereas, Brazil and India were at the beginning stages of capitalism slowed down by governmental control and interference. India and Brazil were the founding members of GATT. They were also part of the inception of the Bretton Woods institutions, without adapting to their economic policy (Almeida). In the past thirty years, there has been a spectacular boom in China’s economy. This has been validated by the consistent growth in the GDP and the growing importance of China in international trade. According to the preliminary WTO data for 2009, China has gone past Germany as the world’s leading merchandise exporter. China accounts for nearly 10% of world exports. China is behind the United States in worldwide imports. The United States accounts for 13% of the world’s imports and China represents 8% of the world’s imports (WTO). BRIC countries are playing a key role in the global economy. For Brazil and Russia, their natural resource stocks and raw materials dependence of many developed countries were the major factors for this growing importance. Whereas in China and India the economic growth, has been triggered by the inflow of foreign direct investments backed by favorable economic policies. The average annual growth rate of real GDP of the developing, transition and developed economies, as per United Nations data (UNCTAD) were 5.0, 2.7, and 2.5 respectively during the period 1992-2007 (Gryczka). For the same period, scrutinizing the figures of the BRIC countries, it can be observed that the annual average growth rate of Chinese real GDP was 9.5%, India-6.5%, the Russian Federation-2.6% and Brazil -2.7%. This means that between 1992 and 2007, the economies of China and India grew at a rate faster than the developed economies, particularly members of OECD. According to the data for 2008-2009 (WTO), for the majority of developed countries the annual percentage change of real GDP in 2008 was far below the world average of 1.6%. It was 0.4% for United States, 0.7% for EU-27 and -1.2% for Japan. The scenario worsened in 2009 with all the three countries reporting figures lower than the world average of -2.3% (-2.4, -4.2 and -5%, respectively). The global financial crisis has minimal effect on China and India. In 2008-2009, both the countries’ GDP growth rate dropped only relatively slightly from 9.0 to 8.5% in China and from 7.3 to 5.4% in India (UNCTAD). Analyzing these facts combined with the trade developments in these two nations, it can be said that the growth of the economies in India and China in the past few years enabled them to overcome the global financial crisis without major negative consequences. According to Bartlett, there are three key factors that empower the BRIC countries to withstand the recent slowdown of the developed Western economies. This includes the robust growth of local purchasing power and domestic demand, which provides BRIC-based companies the leverage to close the gap of decreasing exports to the West. The increased inflows of foreign direct investments into the BRIC economies also helped in their consistent growth. Even though, FDIs still originate from developed countries, their share in global FDI stock is consistently decreasing, from over 70% in 1995 to 68.5% in 2008. There are number of factors contributing to the strong FDI performance of the BRIC countries. Owing to the vast size of their economies and huge domestic demand, WTO initiated the liberalization of Chinese exports and foreign investments to these developing countries. This means increased FDI inflow into both the manufacturing and service sectors. The benefits rendered by labor-intensive production can however be eroded by the growing pressure from labor communities to increase wages in an increasingly competitive economic environment (Yusuf). The significant technological changes in all BRIC countries, the establishment of special economic zones for bringing in export-oriented FDI particularly in China and India, in Russia and Brazil, the huge natural resources, industrial base and geographic location – are all indicators of advancing economies. There is also the other side of the coin that needs to be looked into which highlights the weaknesses of the BRIC countries. In Russia and Brazil, there is widespread exploitation of natural resources for rapid economic growth. In China and Russia, there are a number of issues with intellectual property rights. The problems of wide-spread corruption and bureaucracy are present in all the BRIC countries. In all the BRIC nations, there is a growing disparity in the income levels of urban and rural populations. India and Russia have the problem of inadequate infrastructure. The developed economies are still leaders in the export of financial services, insurance services, royalties and license fees, personal, cultural and recreational services. Despite this, China and India are acquiring increasing importance in the exports of construction, computer and information services, communication services and other business services. According to the WTO data for 2007, India with exports value of 27.7 billion USD was ranked second in the export of computer and information services. It was ranked fourth among the exporters of communications services (with exports value of 2.3 billion USD). On the other hand, China stood third in construction with exports value of 5.4 billion USD in 2007. It also ranked third in other business with exports value of US$ 40.4 billion in 2007 (Gryczka). 4. US BRIC trade relations Over the past few years, the increase in the exports of BRIC countries has resulted in them undertaking more and more trade with the United States. In 2008, two-way trade with BRIC with BRIC nations accounted for 26% of the total trade undertaken by the United States. When compared to a decade earlier, there was an increase of 9%. By 2008, the United States merchandise deficit with BRIC increased to $290 billion. This was mainly brought about by the increased imports from China, which is the United States’ trading partner that has the highest growth rates. Since 2002, the trade volume and value between the United States and China has been more than the combined value of United States trade with the other BRIC countries. China’s growth story has been boosted by the United States imports of computers and related parts. It has been four times that of the remaining BRIC countries. In 2007, in the services sector, the United States trade surplus with Brazil, India, and China totaled $9.4 billion. Since 2007, India has overtaken China becoming the leading provider of service sector imports to the United States amongst the BRIC countries. In 2007, India with $662 million was the only BRIC nation to achieve a service trade surplus with the United States (Hammer). In the past decade, the United States has been the leading merchandise export market for all BRIC countries, with the exception of Russia. But there are differences in the volume and value of trade with the United States amongst the BRIC countries. Let us look at the type of goods and services that have made up the imports and exports of the BRIC countries to and from the United States. For Brazil, merchandise exports from the United States mainly consist of capital goods, such as gas turbine engines, machinery and chemicals. U.S. merchandise imports include crude oil, regional jet planes, iron, and primary products. The services sector trade has primarily been led by travel services to and from Brazil. With regard to Russia, U.S. merchandise exports comprise of capital goods, such as machinery, autos and airplanes. Agricultural exports, mainly driven by poultry, also contribute significantly. However, the recent bans in Russia on poultry goods from the United States will have an impact in the future. U.S. imports from Russia have been mainly led by oil products. In 2007 and 2008, the oil imports in the United States from Russia were 57% and 64% respectively. The data figures for the service sector trade for Russia is unavailable. For India, U.S. merchandise exports mainly consist of aircraft, machinery (such as computers and telephone infrastructure products), and precious stones (such as, diamonds and gold).U.S. merchandise imports have primarily been driven by diamonds, clothing (such as, suits and shirts), and iron pipes & tubes. The United States is the leading trade partner for India. Services sector trade between India and the United States has grown at a rate faster than that of merchandise trade between the two countries. This has mainly been dominated by commercial services, such as software and information technology, and engineering, according to Indian data and anecdotal information. In regard to China, U.S. merchandise exports include machinery products (semiconductors, computer parts), and yellow soybeans. The majority of machinery product is deployed for the production of other electronic products both for the domestic and export markets. U.S. merchandise imports comprise of consumer electronics, such as laptops, LCD screens, toys, computer and telephone parts. Service sector trade has been led by royalties/license fees on the U.S. export side and freight and port services on the U.S. import side (Hammer). 5. Conclusion The BRIC countries are predominantly dependent for their growth on the United States. In contrast, the United States is less dependent on the BRICs market for its needs. For Brazil, the United States ranks second both amongst its export markets and as a source of imports. With regard to India, United States stands second amongst its exports market and is ranked third with respect to imports. In China, the United States dominates its exports being its second largest exports market. However, United States is not one of the leading five sources of imports in China. Russia is the less influenced by the American economy as the United States is not amongst Russia’s top export markets. Russia also does not import a significant trade volume from the United States. Therefore, Brazil, India and China need the United States much more than the U.S. needs them (Brawley). The United States has played a major role in establishing, promoting and sustaining international laws, bodies and organizations that have benefited their members. In theoretical terms, in coming years the BRIC countries may account for one-fifth of the world economy and also outpace the G7 in two decades. However, in practicality it is not an accurate projection of global economic development trends. The global economy is greatly affected by developments in science, technology, capital and strategic information flows. It is fair to say that the developing nations’ demographic significance and distribution of technology and direct investment will ensure that these countries’ contribution to global goods and services exports and GDP will consistently increase and reach new heights (Almeida). References Almeida, P.R. “The BRIC’s role in global economy” Trade and International Negotiations for Journalists Rio De Janeiro (2009) P.146-154. An, L. & Brown, D. “Equity market integration between US and BRIC countries: evidence from unit root and cointegration test.” Research journal of international studies Issue 16. (2010) 15-24. Bartlett, D. “Economic trends in the BRIC countries.” (2008) Finance Director, Europe. Brawley, M.R. “Building blocks or a brick wall? Fitting US foreign policy to the shifting distribution of power.” Asian Perspective Vol 31. No.4 (2007) 151-175. Desai, T., Acharya, M., & DeKeizer, D. “ERM in broader economy – international and cultural issues in ERM – an emerging market perspective.” (2005) ERM Symposium. Gryczka, M. “Changing role of BRIC countries in technology-driven international division of labor” Business and Economic Horizons Vol 2. Issue 2 (2010) 89-97. Hammer, A. “Dynamism and diversity in US-BRIC trade.” (2009). USITC Executive Briefings on Trade. IMF. “New Growth drivers for low income countries: The role of BRICs.” Strategy, Policy and Review department (2011) In collaboration with African Department. Sauvant, K.P., Maschek, W.A. & McAllister, G. “Foreign direct investment by emerging market multinational enterprises, the impact of financial crisis and recession and challenges ahead.” Global Forum on International Investment. (2009). OECD. UNCTAD “Assessing the impact of the current financial and economic crisis on global FDI flows.” (2009). Wilson, D. “Dreaming with BRICs: the path to 2050.” Economics research from the GS Financial Workbench. (2003) Goldman Sachs. Yusuf, S. “Growth through innovation: an industrial strategy for Sanghai.” (2009) The World Bank. Read More