SPECIAL REPORT—Emerging markets continue to grow considerably faster than the United States. And Developing Asia’s economic growth is stronger than other regions. In fact, it is anticipated to achieve a GDP growth rate of 7.1 percent this year and 7.7 percent by 2018, according to IMF data. Much of Developing Asia’s relatively strong performance today is based on its past efforts in lowering tariff levels and successfully integrating with world markets.

Thus, according to PIIE, the average tariff rate in East Asia and the Pacific was 25 percent in 1985. In 2009, it was estimated to have dropped to under 5 percent. In contrast, the average tariff rate in South Asia, which was estimated at a whopping 85 percent in the 1980s, was down to 13.5 percent last year, PIIE says.

China: An Expanding Market with Issues

China, the biggest player in Asia, is the second largest world importer next to the United States. Last year China purchased $110.6 billion in goods from the U.S., making it the United States’ third largest foreign market. Top U.S. exports to China in 2012 included agricultural products, transportation equipment, computer and electrical products, chemicals, and machinery.

Prior to joining the WTO in 2001, China restricted imports through high tariffs and taxes, quotas and other barriers. Since then the Middle Kingdom has come a long way. Today, China’s trade barriers are among the lowest as compared to developing countries. This, combined with many other reforms, helped China integrate into the global economy and, in turn, economically outpace other large economies.

For decades, China’s growth model primarily has been dependent of export markets. In turn, it has become the world’s largest exporter. But as the global demand for China’s products has decreased resulting from the recent recession and subsequent period of slow global growth, China has attempted to simulate domestic demand.

Although some success has been achieved, many analysts believe Chinese domestic demand unlikely will be sufficient to boost that country’s economic growth back to the double digit levels it experienced for over a decade. In fact, Chinese household consumption as a percentage of GDP now is declining, The Wall Street Journal reports. Relatively poor social safety nets, which result in extremely high savings rates, are often noted as major obstacles to significantly greater consumer spending. Nevertheless, China’s GDP still is projected to exceed 8 percent this year, the highest among the larger global economies, while coasting at about 8.5 percent from 2015 through 2018, the IMF says.

With China’s population of 1.35 billion, an increasing number of U.S. firms say they need to expand into China either by exporting or establishing a presence there. However, in recent years, and especially since the 2008 recession, many American business people say China’s reform process has slowed or even stopped, and indicate that the Middle Kingdom is a more difficult place to do business. This also is a frequent complaint voiced by European business people.

The Chinese government recognizes that its economy must expand quickly enough to provide jobs to a steady stream of workers moving from rural villages to cities. If not, greater social unrest is likely. With growth projected lower than in previous years, social concerns are becoming an ever larger concern among China’s leadership.

The focus on stability and job creation, which likely will continue to trump all other domestic and foreign policy concerns in the foreseeable future, is reflected in the Chinese leadership’s level of control and conservative approach to economic issues. In turn, the leadership has appeared reluctant to forge ahead with reforms. But many inside and outside China recognize the need to implement new reforms. “If China is to achieve its new model, it must introduce competition into its economy,” says former U.S. Treasury Secretary Henry Paulson Jr.

With the recent selection of President Xi, analysts speculate that bold Chinese reforms may be on the horizon. Others agree, but say this may occur only after President Xi has been able to solidify his power base. And still others are not sure.

President Xi is in a delicate position. He appears to be a defender of Communist party control and in support of state patronage, yet, at the same time, he reportedly encourages private businesses to operate in sectors traditionally dominated by state-owned firms. Reported in June by The New York Times, President Xi told President Obama in California that he was determined to remold the Chinese economy and deepen reforms to promote healthy and sustained economic development. We now may be seeing elements of this.

After several years of excessive credit, some analysts say a credit tightening effort in China, which began in later June, was a government re-balancing effort to boost interest rates and force state banks to cut lending to inefficient or risky ventures favored by local officials and politically connected investors. If true, this may be a sign that business as usual has come to an end.

China, no doubt, is entering a new and challenging era. Nevertheless, if the future is any indication of the past, Chinese opportunities will continue to present themselves. Thus, U.S. exports to China rose 477 percent since China joined the WTO in 2001. During this same period, U.S. exports to the world rose 112 percent.

India: Back and Forward

Last year, the United States exported $22.3 billion worth of merchandise to India, the world’s largest democracy. The top five U.S. exports to India included chemicals, manufactured primary metals, machinery, computer and electrical products, and transportation equipment.

India ranks as the United States’ 18th largest foreign market. And although this may not be celebratory, India’s fast-growing population is likely to improve its market position in the near future. At 1.22 billion this year, the U.S. Census Bureau says India’s population will top China’s with 1.4 billion by 2025.

Plus, with a U.S. Census Bureau estimated 2015 median age of 26—indicating half the population is over and half under this age—India’s demographic trends project a growing workforce with greater earning years ahead, and in turn, higher levels of consumer spending. In comparison, China’s older population, with an estimated 2015 medium age of 36, will grey at a much faster rate while its workforce shrinks. In addition, with a 2013 IMF projected GDP of $1.98 trillion, a figure 55 percent greater than Mexico’s, India’s young and growing population is almost certain to continue expanding its economy.

With the help of market reforms from 2000 through 2010, India’s annual economic growth averaged 8 percent, the United Nations said. Unlike other developing countries, India developed a service-led economic growth model, which represented an atypical approach to the traditional manufacturing economic development model. As a result, India’s service sector is significantly larger than its manufacturing sector. And from 2000 through 2010, India’s services industry, measured by value-added output, grew by a factor of four, while the average size of the world’s services industries only doubled, according to United Nations data.

Since the 1980s, India began liberalizing its telecommunications services and equipment manufacturing sectors, and opened them to private sector participation. Recognizing the importance of the industry to the economy, in 1999 the government established the Ministry of Communications and Information Technology to facilitate growth and foster cooperation between central and state governments, academia and the private sector. This has been a major success and model moving forward.

However, since the Great Recession, India has encountered many of the same problems other countries incurred. Consequently, its growth this year is projected at 5.7 percent, and likely will increase to 7 percent by 2018, the IMF estimates.

But other factors may be at work. In March 2013, Arvind Subramanian, Senior Fellow at PIIE, said U.S. business faces three major challenges in India. These include:

  1. A weak and uncertain Indian regulatory and tax environment that affects the civil nuclear industry, infrastructure, pharmaceuticals, and more broadly, the operations of foreign multinationals in India,
  2. Indian protectionism in selected sectors has re-surfaced as the country favors domestic providers of inputs and equipment over foreign providers, and
  3. India is in the process of completing free trade agreements with many of America’s competitors that are anticipated to put U.S. firms at a competitive disadvantage.

But overall, Subramanian said the potential for U.S.-Indian trade and investment remains enormous, and “this potential will be determined and realized, above all, by India’s domestic reforms to re-vitalize investment and growth and to restore macroeconomic stability.”

Strategies To Consider

Although India, China and other emerging markets face obstacles, problems, and present risks, they nevertheless continue to offer American companies countless export and investment opportunities. And with the U.S. Chamber of Commerce indicating that outside the United States lies 73 percent of world purchasing power, 87 percent of economic growth, and 95 percent of consumers, American firms are highly encouraged to expand beyond U.S. borders.

While planning your next step, consider the following strategies:

  1. Design products and value propositions specifically for your target countries’ needs and budgets,
  2. Emphasize customer loyalty through improved customer support and branding strategies, and
  3. Establish a customer-centric focus by offering faster delivery and customized production runs.
This Special Report appeared in International Insights, a Fifth Third Bank publication, August 2013.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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