Trading Up

By Michael Schuman / Manzhouli Sunday, Oct. 30, 2011
    • AP

    Making waves Emerging markets fueled China's exports during the downturn

    For decades, the Chinese town of Manzhouli, perched on the desolate border with Russia, was frozen in a remote corner of the Cold War. As an ideological schism between the two Communist giants escalated into a full-blown conflict — bloody clashes erupted along their 4,300-km border in 1969 — the poor residents of Manzhouli had little contact with their Russian neighbors huddled in the Siberian cold only a few steps away. A mere trickle of state-sponsored trade passed through the heavily fortified border, leaving Manzhouli's citizens dependent on a local coal mine for jobs.

    Today, however, Manzhouli is a testament to the wealth that can be created by connecting the world's great emerging economies. As relations thawed between Moscow and Beijing after the 1991 collapse of the Soviet Union, the border opened, private businessmen jumped into importing and exporting, and the fortunes of the two communities merged. Trade between Russia and China reached $55 billion in 2010, seven times more than in 2000. Timber and oil flow into resource-hungry China, while China's roaring factories ship machinery, textiles and other manufactured goods back in return. About $9.8 billion of goods passed through tiny Manzhouli in 2010, more than twice the amount just five years earlier. In downtown Manzhouli, Russian tourists troll for cheap Chinese-made boots and winter coats in shopping arcades, where the signs are in Cyrillic and the official haggling language is Russian. With money to be made, Manzhouli became a magnet for northern China's eager and entrepreneurial. The town's population has surged by a factor of 15 since the end of the Cold War, to 300,000. "Before, trade was zero, but now it is booming, and people's quality of life has benefited," says Li Yongsheng, a manager at the Manzhouli Border Economic Cooperation Zone, an industrial park founded by the government to foster business with Russia. "The old hostilities are basically gone."

    Manzhouli's success story is being re-created again and again across the emerging world. Flows of goods, people and capital among major developing economies are becoming a larger and larger source of exports, jobs, financing and economic growth for these up-and-coming nations. The trend — a move away from trade and investment flows dominated by Western consumer demand — could reshape the world economy. Tightening economic ties within the emerging world can provide a badly needed boost for a global economy still searching for a route out of the Great Recession — the primary concern of November's Asia-Pacific Economic Cooperation (APEC) summit in Hawaii. The growing linkages are redirecting patterns of investment, trade and migration, altering the role of the U.S. in the global economy, redrawing political alliances and sparking new geopolitical rivalries. And we're just at the very beginning of this history-altering process. Stephen King, chief economist at banking giant HSBC, figures that trade and capital flows between emerging regions of the world — Asia, Africa, the Middle East and Latin America — could increase tenfold over the next 40 years. He calls these new connections "a 21st century version of the original Asian Silk Road" that is "set to revolutionize the global economy."

    The signs are apparent everywhere. China, not the U.S., has become India's largest trading partner, with the exchange between the two countries surging 28-fold over the past decade to almost $62 billion in 2010. When Chinese Premier Wen Jiabao visited New Delhi last December, the two sides inked $16 billion in trade and financing deals; when U.S. President Barack Obama journeyed to India a month earlier, he managed only $10 billion. India and Brazil already export more to fellow emerging markets than to the developed world. China is the largest foreign investor in Brazil, challenging the historical dominance of the U.S. in Latin America, while a $3.1 billion investment by Chinese oil company CNOOC in Argentine energy firm Bridas was the biggest acquisition in Argentina in 2010. Last year, Russia's Rusal, the world's largest aluminum producer, chose to launch its initial public offering not in London or New York City but on the Hong Kong Stock Exchange, becoming the first Russian firm to do so.

    The New World Trading Order
    The burgeoning trade and investment among emerging countries is a dramatic shift in how the world economy has worked for several centuries. Traditionally, trade has flowed between "North" and "South" — the developed and developing worlds. Natural resources, from spices to cotton, were shipped into the industrialized West, which in return exported textiles and other factory-made goods. After World War II, this system became more complex, thanks to improved transport and communications. Asian upstarts like South Korea and Singapore grew rich off of outsourcing. Their plentiful, cheap labor assembled clothes, shoes and electronics, often with design and technology from the West, then shipped the goods to Walmarts for U.S. consumers. With shoppers in places like India and Indonesia still poor, there was little incentive to reach out to them. Tense relations between developing nations — such as the border conflict between Russia and China that paralyzed Manzhouli — often created more hurdles. The U.S. and Europe dominated the world's trade and capital, and everyone depended on them for growth and jobs.

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