Financial Times
29 December 2003

The rise of Asia gathers speed

A new economic power is emerging in Asia, one with a potent present and a far more significant future. Adjusting to China's rise is likely to be among the greatest challenges of our era. But China is not alone. India also stirs.

For the past hundred years, the US has had the world's largest integrated national economy. The other dominant centre of economic activity has been Europe, a rival of the US in economic size, though still not as integrated. The rise of Japan and several smaller high- income Asian economies has added another, rather smaller, pole of wealth.

In 2002, North America (excluding Mexico), together with the European Union, generated 59 per cent of global gross product. The US alone produced 31 per cent. The Asian high-income countries (with Australia and New Zealand included) generated a further 18 per cent, of which Japan contributed 14 per cent. Together, these high-income countries, with less than a sixth of the world's population, generated more than three quarters of global GDP.

This extraordinary dominance will not endure. China and India both contain more people than any continent, except Asia itself. Their rise heralds a transformation of the global economic - and, inevitably, also political - order as significant as that brought about by the industrial revolution or by the sub-sequent rise of the US.

The US arrival on the global economic scene in the late 19th and early 20th centuries generated friction and macroeconomic disruption, as, more dramatically, did Germany's. Since the second world war, however, the economic order has been reasonably stable. The US has been the leader, with an integrating western Europe emerging as part ally and part rival. Japan has been the third, but smaller, wheel. In spite of not infrequent bumps along the road, the global economic chariot has continued to move forward.

Today, the Chinese and Indian shares in global output remain small: China's is roughly 4 per cent and India's less than half of that. But they are growing fast. Asia is likely to be the dominant economic region by the middle of the century. Already, it is a formidably competitive supplier of a wide range of goods and services. Within four decades, China's economy could rival that of the US in size.

In 2002, China was already the world's largest single importer of foreign direct investment, receiving $53bn, as against the $30bn destined for the US. It holds the world's second largest foreign currency reserves, after Japan, exceeding $400bn.

A quarter of the overall US trade deficit is with China. China also runs a more modest trade surplus with the EU. But it has deficits with Japan, the rest of Asia and commodity producers. Overall, China imports components, capital goods and raw materials but exports assembled products to the high income countries, particularly the US. Half of China's exports are also generated by trans-national companies.

This high degree of integration into the global production chain should reduce the discomfort of its trading partners. The huge benefits brought by China's cheap supplies are also evident. Yet concern about the export of jobs is increasing. The speed of China's rise makes this inevitable. Already, it is the world's fourth largest exporter. It will be its third largest importer, after the US and Germany, very soon.

Popular resistance to the impact of the rising giants and friction over specific policy issues are inevitable. Fortunately, the World Trade Organisation provides a system that facilitates the rise of new powers. Unfortunately, similar arrangements do not exist for exchange rate regimes, though Chinese participation in ministerial meetings of the group of seven high-income countries would be a help.

Yet the most important requirement is intellectual, not institutional. It is appreciation of the shared interest in accommodation. If the world is to adjust successfully, its leaders will need to show wisdom and restraint. They should start by looking back at the chaos of the first half of the 20th century. They should then vow to do far better, this time.