Asia's economic woes won't necessarily create chaos for U.S. business.
The effects of the current economic crisis in Asia on the U.S. economy have been in the forefront of the news recently, with forecasts ranging from benign to disastrous. What is it about the situation that lends itself to such a wide range of expectations from reasonable sources?
To begin with, a major devaluation in currency can affect the domestic economy, as well as foreign trade. The cost of oil in Asia will increase, for example, since the international market is based on U.S. dollars. And as the purchasing power of discretionary income falls, people are likely to buy less fuel and other goods and services.
One of the ways Asian consumers can deal with price increases is to dip into savings to maintain buying patterns. This will reduce available capital, however, and lead to increased interest rates. Consumers can also become more militant in their demand for wage increases. The political situation in South Korea, for example, is such that it will be very difficult for employers not to acquiesce to these demands. Wage increases there will lead to inflation, which will in turn lead to a further deterioration of the currency.
In most situations, however, consumers are likely to cut back on spending until they have more confidence in the future of the economy. This will result in a reduced demand for imported and domestic products. For many Asian countries, a decline in demand hurts their domestic producers more than foreign ones because they have kept foreign goods out of the marketplace already. The only goods consumers can not buy are domestic ones.
One benefit of the currency devaluation in Asia for our economy is lower prices, based on U.S. dollars, for goods that we import from Asia. However, if our import prices decrease, and their import prices rise, Asia will have a temporary trade surplus, while the U.S. will have a corresponding deficit.
If the cost of U.S. goods in Asia becomes too high, though, our economy could experience a backlash. Airplanes are a good example. Since the demand for this item is fairly "elastic," price will play a roll. We can expect cancellation of aircraft orders as long as the situation in Asia remains in flux.
Other products have relatively "inelastic" demand, meaning that price increases have little impact on buying levels. Oil required for domestic energy consumption in Asia is one such example. Consequently, the demand for oil will not decline as much as that for airplanes.
Just as all countries will be affected differently by the Asian economic crisis, so will various industries within a country. This helps explain why we have seen such divergent opinions on its impact on the U.S. economy.
The greatest obstacle to overcoming the current problems may be the reluctance of Asian regulators to allow the market to resolve the imbalances. Not letting the market sort itself out only prolongs the adjustment period and can cause further disruptions in the future. Let's look at domestic energy prices. Since the market typically does not allow for modest adjustments, the regulators must make substantial changes, which can be quite disruptive to domestic commerce. Making those adjustments now would make it difficult to survive politically.
The more obvious market restrictions will be the restraint on foreign investors to provide needed capital to ailing companies in exchange for increased ownership positions. In the long run, that would be in the best interests of their economies. But it's not clear that the powers that be would accept such a diversion of ownership.
Taking into account these various scenarios, the outlook for the U.S. economy in 1998 remains good. Although the overall impact of the Asian situation on the U.S. will be more than a ripple, it will be nowhere near chaos. Because some of our other trading partners have strong economies, they can help offset our trade imbalances with Asia. For those U.S. companies that are dependent on trade with Asia, however, the consequences of the Asian crisis could be quite severe.