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The Japanese economy has the following traits:

a. It is very large. b. It has an extremely high savings rate.

c. It has a moderately high rate of investment in physical capital.

d. It has relatively few large economies that are geographically very close to it.

e. It has a tradition of limiting imports.

Based on these traits, would you expect the level of trade of the Japanese economy to be high or low? Which traits are especially relevant in reaching this conclusion? Also based on these traits, would you expect Japan to have trade surpluses or deficits? Which traits are especially relevant in reaching this conclusion

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Paramjeet Chawla
Paramjeet ChawlaLv8
28 Sep 2019
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Related questions

After reading the February 19th, 2009 Economist article, "Turning their backs on the world," do you believe it is wise for world governments to shy away from globalization during a period of economic crisis?

Globalisation

Turning their backs on the world

Feb 19th 2009 From The Economist print edition

The integration of the world economy is in retreat on almost every front

Illustration by Claudio Munoz

THE economic meltdown has popularised a new term: deglobalisation. Some critics of capitalism seem happy about it—like Walden Bello, a Philippine economist, who can perhaps claim to have coined the word with his book, "Deglobalisation, Ideas for a New World Economy". Britain’s prime minister, Gordon Brown, is among those who fear the results will be bad.

But is globalisation really ending? The world’s economies are certainly slowing fast. And the speed and scale of this recession are raising doubts about the assumptions that had underpinned the drive to integrate world markets. At the end of 2008 the IMF said the world economy would grow 2.2% in 2009, less than half the rate in 2007. Now it thinks growth will be just 0.5% this year, the lowest for 60 years. Even that may be optimistic; in the last quarter of 2008, some economies shrank at annualised rates of over 10%.

Nobody ever said globalisation had ended economic ups and downs, but this feels different: prima facie evidence of big problems at least, and possibly of the failure of globalisation to deliver many of its advertised benefits, especially to the poor. True, economic slowdown is not the same as deglobalisation. And the slowdown has yet to affect one thing. For years, poor countries have been growing faster than rich ones; so far, they still are. The gap between real GDP growth in emerging markets and in rich countries widened from nothing in 1991 to about five points in 2007—

and, says the IMF, it will stay at 5.3 points in 2008 and 2009. Helping poorer countries catch up has long been among the benefits touted for globalisation.

And yet the process is going into reverse. Globalisation means the global integration of the movement of goods, capital and jobs. Each of these processes is now in trouble. World trade has plunged. As recently as the first half of 2008, boosted by rising commodity prices and a falling dollar, trade was growing at an annualised 20% in dollar terms. In the second half of 2008, as commodities sagged and the dollar rose, growth slowed fast; by September, says the IMF, it was in reverse. In December, says the International Air Transport Association, air-cargo traffic (responsible for over a third of the value of the world’s traded goods) was down 23% on December 2007—almost double the fall in the year up to the end of September 2001, a result affected by the 9/11 terror attacks.

The downturn has been sharpest in countries that opened up most to world trade, especially East Asia’s tigers. Singapore’s exports are 186% of GDP; its economy shrank at an annualised rate of 17% in the last three months of 2008. Taiwan’s exports are over 60% of GDP; and its economy may fall as much as 11% this year. The downturn has also hurt rich countries that specialise in staid old-fashioned manufacturing—supposedly a safer activity than the reckless delusions of finance. On average, says the IMF, rich countries will contract 2% this year. But Germany and Japan, big exporters of capital goods, cars and electronics, will do worse, their economies shrinking by 2.5% and 2.6% respectively. In the last quarter their economies contracted alarmingly, falling at an annualised rate of 8% in Germany and by 13%—the worst since 1974—in Japan.

Small countries which went into businesses that grew in globalisation’s wake, like tourism, are also suffering. The World Tourism Organisation says international tourist arrivals fell 1% in the second half of 2008, which may not sound bad, but compares with growth of more than 5% a year for the previous four years. In the Caribbean, visitors may fall by a third this season; in some islands hotels are half empty, flights are being cancelled and national budgets, reliant on tourism, are strained.

In contrast, the biggest emerging markets are doing less badly so far. In India, where exports are around 15% of GDP, the government recently said growth in the year to April 2009 would be 7.1%; most forecasters put growth for the 2009 calendar year lower, but still about 5%. In Brazil the economy has been harder hit by falling commodity prices and declining exports. Most economists still think output grew a bit in the year to the fourth quarter, and put growth for 2009 at 1.5% to 2%. China was still growing by 6.8% in the year to the fourth quarter, though like Brazil it is probably stagnating. Chinese exports fell 18% and imports 43% in the year to January. All three countries have large domestic markets and relatively stable banking systems, which have not been liberalised.

The gap between toothless tigers and friskier BICs (ie, BRICs minus Russia, a special case because of oil) raises questions not so much about globalisation as a whole—after all, Brazil, India and China have been beneficiaries—as about particular aspects. Can one be too dependent on trade? How far should one liberalise banking? Is there a trade-off between taking advantage of good times and providing shock absorbers for bad ones?

Emerging markets’ trade problems have been worsened by shifts in capital flows, globalisation’s second big plank. According to the World Bank, net private debt and equity flows to developing countries will fall from $1 trillion in 2007 to $530 billion in 2009, or from 7.7% to 3% of those countries’ GDPs. The Institute for International Finance sees an even steeper fall; it says that this year banks will extract more from emerging markets in debt repayments than they inject in new loans. Bond markets in those countries collapsed in the last quarter of 2008, doing less than $5 billion of business; in the second quarter, they had issued about $50 billion of bonds.

As with trade, financial deglobalisation is hitting countries in a variety of ways. In this case, East Asia has been less affected because most countries there are net creditors. But eastern Europe and Russia have been hammered because local banks went on a foreign-borrowing binge, foreign banks piled into their markets (and piled out again) and because some countries lacked insurance policies against tough times. Although many big emerging markets have built up foreign-exchange reserves and cut their external debts, in eastern Europe reserves have been flat, external debts have risen and current- account deficits have grown considerably in the past decade. In these countries, the reversal of globalisation has exacerbated problems that were building up anyway.

People in emerging markets have mixed feelings about financial liberalisation and may not regret its reversal. But foreign direct investment (FDI) is different. Most people welcome new factories and new jobs. FDI is also one of the commonest routes by which skills and technology are transferred from rich to poor countries.

This, too, is falling. The United Nations Conference on Trade and Development (UNCTAD) says worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion. The World Association of Investment Promotion Agencies says FDI will contract by a further 12-15% this year.

In contrast to trade, the investment impact of the global downturn has so far been hardest on the countries where the woes began: rich ones. They have seen FDI falls of one-third on average and by half or more in Britain, Italy and Germany. Finland and Ireland have seen net outflows. FDI flows to developing countries were still growing in 2008, albeit by only 4%, after a rise of 21% in 2007. Flows to big South American countries were up by about a fifth; those to India more than doubled, though they may ebb as GDP falters.

The third of the three main aspects of globalisation—jobs—is following the other two, with a lag. The International Labour Organisation forecasts that unemployment worldwide will rise by around 30m above 2007’s level in 2009. Most of that rise will be the result of recession, not deglobalisation, but some will be attributable to the fall in trade (exporting companies will lay off workers) and some to declining investment (if expansion plans are cut, new jobs will not be created).

Deglobalisation will have a dire impact on migrants. In the past decade, more people have been moving voluntarily than ever before; now, some are going home. Those who provided labour for the housing boom in America (notably Latinos), Ireland (Poles) and China (rural Chinese going to cities on the eastern seaboard) have been among the first to be laid off. In Spain newly jobless builders are competing with migrants there for jobs picking fruit.

This will surely have an effect on the flow of remittances from rich countries to poor ones, although it has so far (see article) been quite resilient. In any case, economies that absorbed large numbers of foreign workers may take fewer. Some of the millions of South Asians who work in the Gulf, or the young Africans who flock to South Africa, or the Central Asians who work in Russia, may have to stay at home.

Yet for all the economic pain, the social and political fallout from deglobalisation has not yet been severe. Protests may still come. Or maybe national governments are absorbing most of the ire. In December, Greece saw riots after a police bullet killed a teenager. In France, unions brought over 1m people onto the streets for a one-day strike, and a riot in Latvia over economic policy ended in more than 100 arrests. But only in Britain, where workers have picketed refineries and power stations over the hiring of foreigners, has protest had a very anti-global tone.

This lag may be explained by residual support for globalisation, especially in emerging markets. A poll in 2007 by the Pew Global Attitudes Project found that majorities in 47 countries saw international trade as good for them; majorities in 41 out of 46 welcomed multinational firms; in 39 out of 47, most felt better off with a free market. In more than half the countries where changes could be tracked, support for free markets was rising.

When consensus wobbles

But is that still true? Last summer, on the eve of the meltdown, European Union pollsters reported that two-thirds of EU citizens saw globalisation as profitable only for large firms, not citizens. In 2002, according to the Pew poll, 78% of Americans thought foreign trade helped the country; by 2007 it was only 59%. A CNN poll in July 2008 showed that, for the first time, a small majority of Americans saw trade as a threat, not an opportunity.

Of the few worldwide polls to have been completed since then, one by Edelman for the World Economic Forum found that 62% of respondents in 20 countries said they trusted companies less or a lot less now. Manifestly, popular opinion backs more state regulation.

So far, this has mostly taken the form of pouring public money into banks and selected industries, notably cars. Last week Barack Obama set out plans for another vast bank rescue, and the French government promised €6 billion ($7.8 billion) in preferential loans to Renault and Peugeot-Citroën in return for pledges that no car factories would be closed in France.

There has been somewhat less evidence of trade protectionism. India has raised some steel tariffs. The EU has reintroduced export subsidies for some dairy products. Russia has raised import duties on vehicles. But there has also been movement the other way. The American Senate softened the "Buy America" provisions of the stimulus bill. Mexico said that by 2012 it would cut tariffs on thousands of kinds of manufacture. And some countries have sought a safe harbour, rather than embracing pure nationalism. East Europeans are even keener on the shelter of the euro; Iceland has applied to the EU; the Irish are more likely than they were to vote for the EU’s Lisbon treaty.

Despite the downturn, the nations of the world have not shunned globalisation. It has been protected by the belief of firms in the efficiency of global supply chains. But like any chain, these are only as strong as their weakest link. A danger point will come if firms decide that this way of organising production has had its day.

After reading the case that is below, how can a foreign company entering China ensure that it tackles the most important little€ things that end up being huge barriers to success as we approach the year 2020 when China is expected to have significantly increased purchasing power among its middle class? Write your opinion, as a manager, on how to face cultural issues like those described in the case, when entering foreign markets.

The People's Republic of China opened up to foreign investments in the late 1970s. Since that time, numerous companies have tried to establish operations and sell their products to customers in China. Many more companies will try in the years to come China is expected to have some 190 million people in the middle- and upper-income categories by 2020. This is an increase from only about 17 million people in these income brackets as recently as in 2010. China's purchasing power for virtually all products and services has strong potential, and foreign companies will seek these market opportunities. What have we learned culturally that can help Western-based companies in China's marketplace?

Some background on China can serve as a starting point for a better understanding of the culture in China and what some well-known companies such as Best Buy and eBay have done to target the Chinese marketplace. The motivation for many foreign companies to enter China beyond those that have been there for a few decades for reasons of low-cost production was the triple growth of the Chinese economy that was seen from 2000 to 2010. China overtook Japan to become the second-largest economy in the world behind only the United States, and its large population makes for an enormous target market. Investment from foreign companies was the largest driver of China's growth in the decade from 2000 to 2010. However, many companies also increased their exports to China. The United States, for example, saw its companies increase exports to China by 542 percent from 2000 to 2011 (from about $16.2 billion to $103.9 billion), while total exports to the rest of the world increased by only 80 percent in the same time period.

Interestingly, while foreign investments grew, domestic consumption as a share of the Chinese economy declined from 46 percent in 2000 to 33 percent in 2010. This consumption decline—coupled with slower growth globally and, ultimately, the worldwide economic downturn that started in 2008—raised questions about China's momentum. Right now, around 85 percent of mainstream Chinese consumers are living in the top 100 wealthiest cities. By the year 2020, these advanced and developing cities will have relatively few customers who are lower than the middle- and upper-income brackets by Chinese standards. The expectation is that these consumers will be able to afford a range of products and services, such as flat-screen televisions and overseas travel, making the Chinese customer much more of a target for a wide variety of consumption. This begs the question, can the unprecedented Chinese growth really continue, and would it come from increased consumption?

The resounding answer is yes according to research conducted by McKinsey & Company. McKinsey found that barring another major economic shock similar to what we saw in 2008, China's gross domestic product (GDP) will continue to grow, albeit not at the historic levels seen between 2000 and 2010 when it grew about 10.4 percent annually. The growth from 2010 to 2020 is expected to be about 7.9 percent per year, which is still far above the expected growth for the United States (2.8 percent annually), Japan (1.2 percent annually), and Germany (1.7 percent annually) the three countries among the top four worldwide economies along with China. And, the key is that consumption will now be the driving force behind the growth instead of foreign investment. The consumption forecast opens up opportunities for foreign companies to engage with Chinese consumers who are expected to have more purchasing power and discretionary spending. But culturally translating market success from one country or even a large number of countries to the Chinese marketplace is not necessarily as straightforward as it may seem. Often, a combination of naivety, arrogance, and cultural misunderstanding has led many well-known companies to fail in China. Lack of an understanding of issues such as local demands, buying habits, consumption values, and Chinese customers' personal beliefs led to struggles for companies that had been very successful elsewhere in the world. Let's take a brief look at Best Buy and eBay as two examples.

Best Buy, the mega-store mainly focused on consumer electronics, was founded in 1966 as an audio specialty store. Best Buy entered China in 2006 by acquiring a majority interest in China's fourth-largest appliance retailer, Jiangsu Five Star Appliance, for $180 million. But culture shock hit Best Buy, best described by Shaun Rein, the founder of China Market Research Group. He pointed to a few reasons for this culture shock and lack of success. First, the Chinese will not pay for Best Buy's overly expensive products unless they are a brand like Apple. Second, there is too much piracy in the Chinese market, and this reduces the demand for electronics products at competitive market prices. Third, like many Europeans, the Chinese do not want to shop at huge mega-stores. So, these three seemingly easy-to-understand cultural issues created difficulties for Best Buy. Solving these issues, Best Buy believed that it would have to develop and implement a different business model for the Chinese market than it has used, for example, in the United States. Now, how far should a company go outside its normal business model to adhere to the cultural values and beliefs of a new market? Strategically moving forward, Best Buy opted to close all of its Best Buy branded stores in China and focus on its wholly-owned local Jiangsu Five Star chain of stores. But will this new strategic business model be successful with the new makeup of customers in China expected by 2020?

eBay, the popular e-business site focused on consumer-to-consumer purchases, was founded in 1995. The company was one of the true success stories that lived through the dot-com bubble in the 1990s. It is now a multi-billion-dollar business with operations in more than 30 countries. But China's unique culture created problems for eBay in that market. Contrary to the widespread cultural issues that faced Best Buy, one company in particular (TaoBao) and one feature more specifically (built-in instant messaging) shaped a lot of the problems that eBay ran into in China. Some 200 million shoppers are using TaoBao to buy products, and the company accounts for almost 80 percent of online transaction value in China. Uniquely, TaoBao's built-in instant messaging system has been cited as the main reason for its edge over eBay in China. Basically, customers wanted to be able to identify a seller's online status and communicate with them directly and easily function not seamlessly incorporated into eBay's China system. Clearly, built-in instant text messaging is a solvable obstacle in doing business in China. It sounds easy now when we know about it, but may not always be the case when we take into account all the little things that are important in a market.

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