Globalization dilutes impact of U.S. downturn

RIO DE JANEIRO, Brazil - When stock markets across the globe fell like dominoes last week on fears of a U.S. recession, it raised an important question: Hasn't the global economy grown less dependent on the United States as its main engine?

Plunging global stocks suggested that the answer was no.

However, important developing nations such as Brazil seem to have weathered the storm well. Thanks to China, they've been able to withstand the U.S. downturn, at least partially.

"Today, the global economy has two motors - China and the U.S.," said Welber Barral, trade secretary at Brazil's Ministry of Development, Industry and Foreign Trade. "There's been a diversification away from depending just on the United States."

That is an upside of globalization, which Americans more often associate with lost jobs and unfair competition. But the fact that other countries are no longer as economically dependent on the U.S. economy as they once were matters to ordinary Americans.

Here's how. If the global economy slumps in tandem with the U.S. economy, that would be terrible news for U.S. exports, which grew 12.3 percent to $1.48 trillion over the 12-month period that ended in November.

Exports accounted for 12 percent of U.S. economic activity in the third quarter of 2007, according to the Commerce Department. That's about double the importance some economists say exports play in China's economy.

Growth in the world economy has averaged about 3 percent a year since 2000. One sign of that is last week's financial report from Caterpillar Inc.: The Peoria, Ill., maker of construction equipment and engines said its 2007 sales fell 11 percent in the United States, but rose 8 percent overall, thanks to strong international sales.

A decade ago, when the U.S. economy sneezed, Brazil and other developing nations caught colds. In 1999, Brazil's exports to the United States totaled $10.7 billion, and its exports to China were a minuscule $676 million.

In 2007, its exports to the United States totaled $25.1 billion, more than twice the value of 1999. But its exports to China mushroomed nearly 1,500 percent to $10.7 billion.

"It's a completely different picture than it was just 10 years ago," said Ricardo Cotta, an executive with the Agriculture & Livestock Confederation of Brazil. "We're much better prepared for an American crisis than before."

That is because of China. Over the last decade, China's booming economy has devoured steel, copper, soybeans, minerals, and a vast range of other commodities from around the world - and fueled a global economic expansion, especially in Brazil and Argentina.

Many of the resources exported to China help create the consumer goods that China exports to wealthy North America and Europe.

But Albert Keidel, a former top Treasury Department expert on China and now a scholar at the Carnegie Endowment for International Peace, believes that exports accounted for only four percentage points of China's 11.4 percent growth last year. Much of what China buys from the world stays there to meet the needs of China's sizzling domestic market.

Global economic growth has led record trade surpluses and swelling foreign reserves in countries that long had been economic basket cases. It's a historic shift because, during prior U.S. downturns, countries had most of their eggs in one basket and suffered hyperinflation, capital flight and investor panic.

"Our direct links to the U.S. crisis are relatively small," said Daniel Artana, an economist in Argentina, where exports to China for the first nine months of 2007 totaled $4.6 billion and exports to the United States about $4 billion. "Argentina is much better-prepared this time, although not as well-prepared as I would like."

Since August, when the U.S. economy began bucking headwinds from the sagging housing sector and from turmoil in credit markets, economists have debated the degree to which the so-called BRIC nations - Brazil, Russia, India and China - are insulated, or decoupled, from problems in the United States.

"The strong reason for thinking there might be decoupling is that some of these big economies have a lot of internal momentum, and they have a lot of foreign-exchange reserves," said Gary Hufbauer, a leading trade expert and researcher at the Peter G. Petersen Institute of International Economics, a nonprofit research organization in Washington.

He's skeptical, however, that the world economy won't suffer if the U.S. economy falls into recession. That's because demand for commodities and natural resources would fall, China's appetite notwithstanding. This could drag down global prices that in recent years have allowed developing nations to become wealthy.

"You don't need much of a slowdown in growth to get pretty big drops in commodity prices," Hufbauer said, ". . . and this will have particular impact on Latin America."