Looking West (And South) Towards The Future

If the U.S. economy is to successfully navigate its current perilous course, attention must move from the baggage of the past to the opportunities and challenges of the future. Nothing symbolizes that better than the comparison of Europe’s ongoing economic morass with China’s relentless growth.

Our friends at McVean Trading consistently produce one of the most insightful newsletters on global economic trends. They’ve been generous to share their recent analysis of the global trading shifts that have led to China’s current export dominance. We’ve reprinted the article in full on the Capital Matters website. The article includes a interesting analysis of inflation trends in China, but the most important takeaway is that the Chinese surge is not an isolated event, but a continuum of trends that began almost forty years ago, first with Japan’s export boom, then with the Korean, Malaysian and Taiwanese Miracles and more recently with the strength of the Chinese manufacturing economy. These are all part of a global movement to equalization of economic opportunity.

Far from dragging down the American economy, China’s boom is better viewed as the extension of trends that started more than 200 years ago when Samuel Slater (unfortunately no relation) memorized the technology developed in England for mechanization of the textile industry and brought it to the U.S. Andrew Jackson gave Slater credit as being the “Father of the American Industrial Revolution.” Of course today the shoe is on the other foot and Slater would more likely be branded as an intellectual property pirate than as a hero.

Over time the seat of textile manufacturing moved from New England to the American South and eventually on to China. It would be hard to argue that over the longer term New York or Boston has suffered as a result of the shift in their regional economies from strength in clothing and textile manufacturing to their current positions as global powerhouses in finance education and RD. To me the takeaway is that England, far from being weakened by the shift in manufacturing jobs to its former colony in the Americas, was able to cement its position as the superpower of its day. It took advantage of these developments by investing heavily in the U.S. and continuing to build its dominance as the global trade leader of its era. A quick spin around London circa 2012 certainly does not lead to the conclusion that the U.K. fell into irreversible decline because of America’s growing prosperity.

The U.S. is now in an analogous situation. The rise of Asian manufacturing has certainly hurt many individual Americans, but overall the U.S. has been far more prosperous than it would have been without access to low cost imports. In many of the more advanced technology industries, U.S. manufacturers have maintained their dominance, a feat that would not have been possible in the absence of access to lower cost “imported” labor. With the current political focus on “protecting American jobs”, one of the most critical questions the country faces is whether we can maintain a consensus that enables the most innovative American firms to continue to access the resources they will need to compete on a global basis.

We’re in the midst of the strongest economic boom the world has ever witnessed. For clear evidence how pervasive this trend has become, take a look at the glittering new capital of Kazakhstan, one of the most remote corners of the world. The National Geographic just published a great pictorial that you can download here. We should not be threatened by the increasing prosperity of the world at large.

There are two take-aways in this for investors. First, continued inflation in China and other parts of the developing world will have implications for U.S. importers, including retailers such as Wal-Mart (WMT), which could see their cost of goods rise significantly, as well many high tech manufacturing firms such as HP (HPQ) that depend on Asian labor for component part production. Additionally investors should carefully watch the rhetoric in this year’s political campaigns. If the current talk about jobs, jobs, jobs turn in a protectionist direction, that will paradoxically not bode well for major U.S. manufacturers that depend on imported intermediate components for their finished goods. For many parts, particularly high tech components, the supply chains simply do not exist in the U.S. and protectionist legislation that impedes the importing of these parts or raises their costs will have direct negative impact on U.S. firms that depend on Asian supply chains for these components.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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