Is Economic Growth Endogenous U S Supply Chain

Is Economic Growth Endogenous? U. S. Supply Chain Theory J. D. Han

1. Is Economic Growth • Exogenous, • Endogenous, • or both?

Perspective Combining all the Growth Theories that we have covered, we can say that the East Asian Miracles, including Japan, the HPAEs, and China, tell us that a Rapid Economic Growth may be both Endogenous and Exogenous at the same time.

It can be compared to • Chick and Mother Chicken break egg shell together for hatching • 啐啄同機 「如果小雞要孵出蛋殼，母雞和小雞必須裡 應外合地齊喙蛋殼」之意的「啐啄同機」

• Chick: Asian Countries (Japan in the 1950 -60 s; Korea and Taiwan in the 1960 -70 s; HPAEs in the 1970 -80 s; China in the 1990 s) • Chicken: U. S.

2. The Ultimate Exogenous Factor • U. S. ’s Influence/Control of the International Economics • This has been the ‘American Century’ ( by Harold Evans). • Economic growth of a country needs some economic cooperation with the U. S.

Exogenous Factor of Economic Growth: Partnership with U. S. Has different stages of • Trade Partnership • Investment Partnership in the Structured Supply Chain of the U. S.

The long-term sustained economic growth of the U. S. economy means that i)the U. S. has been a source of fundamental technological innovations; and ii) The U. S. has growing ‘Buying Power’ or strong consumption demand from the world.

Note that 1) A Rapid Economic Growth has been shifting from one country or area to another over time (Japan 1960 -1975; HPAEs 1975 -1997; China 1997 Present) • Growth rates are strongly correlated with Exports, and Trade Surplus, particularly, with the U. S.

In addition, the U. S. has unlimited means to buy goods from other countries: - U. S. is a source of infinite international wealth due to its currency being the Key Currency which it can print out without limits - East Asian countries have become the trade partner produce and supply Outputs to U. S. over time in exchange for the key currency - Assigned roles in the partnership for each specific economy changed over time: Korea of the 1970 s took over Japan’s roles in the 1950 -60 s, and gave it to China of the 1990 s.

International Division of Labor • U. S. exports services of R & D, Finance, Education, Fashion, Culture, and Military • East Asia becomes ‘Factory of the World’ • The Factory needs ‘inputs’ from elsewhere

What is the U. S. Economic ‘Design’ in the East Asia? - The U. S. Supply Chain in the East Asia

The U. S. needs a source of Massive Supply of Manufacture Goods at the Lowest Possible Prices. The best partner for this need is the East Asia: Not a single country, but a few countries bound together.

A complete circle of the U. S. Supply Chain in the East Asia and the Division of Labor • Linking the U. S. as the source of Purchasing Power, Liquidity, and Fundamental Technology • Japan as the supplier of practical/industrial Technologies • Korea and Taiwan as the supplier of processed materials • China as the producer of Final outputs and exporter of them. • China as the supplier of Capital to the U. S. • U. S. as the manager of Capital and Investment.

(2) International Finance Goods flow from the partner countries to U. S. , and capital (U. S. dollars) flows the other way around. - It would be best for the U. S. if the capital flows back to the U. S. - East Asia has high savings ratio, but relatively low investment ratio. - A large portion of savings flow out of East Asia into U. S. securities market.

(2) Endogenous Factors: Why were HPAEs and China chosen? • Product /International Trade Side - “Best Quality” at “Lowest Cost” - Disciplined workers; High Quality Workers - successfully integrating Human Capital and Physical Capital - social stability(orderly society) • Macro /International Finance Side - High Savings - Low Domestic Investment - Relatively large Investment in U. S.

Why is the East Asia chosen as the partner for the U. S. Supply Chain? • Neo-Confucian work ethics provides discipline for assembly line workers for massive production required for the U. S. Market • Social capital based on Neo-Confucianism provides domestic political/economic stability of the supply chain. • The Neo-Confucianism provides a common Cultural Binding for the East Asian countries and Practicality as well: Because of these, international political conflicts do not interfere with trade and economic relations.

3. Issues of the U. S. Supply Chain in the East Asia • U. S. Supply Chain Parallel to the Flying Geese Model claimed by Japan

Pyramid Structure of East Asian Miracle “Flying Goose Model (雁行)” suggests U. S. Supply Chain with Japan + Korea and other HPAEs + China In a Pyramid Structure.

The Model • The phase "flying geese pattern of development" was coined originally by Kaname Akamatsu in 1930 s • Saburo Okita (1914 -1993), well-known Japanese economist and a foreign minister in the 1980 s, presented the idea formally at the 4 th Asia Pacific Economic Cooperation Council Conference, Seoul in 1985. • It says that Japan is the leader of Asian countries in terms of economic growth.

Implications The flying geese (FG) model intends to explain the catching-up process of industrialization by latecomer economies. It has some special dynamics such

• Intra-industry aspect: product development within a particular developing country, with a single industry growing over three time-series curves, i. e. , import (M), production (P), and export (E). • Inter-industry aspect: sequential appearance and development of industries in a particular developing country, with industries being diversified and upgraded from consumer goods to capital goods and/or from simple to more sophisticated products. • International aspect: subsequent relocation process of industries from advanced to developing countries during the latter's catching-up process.

Problems of the Flying Geese Model • The Flying Geese model needs the regional leader(Japan) , and the followers(other EA countries) -> Japan as the Middleman Economy between U. S. and the EA.

• The followers get less; The bottom countries get the least. • This is a chain of Exploitation.

A chunk of China’s Trade Surplus get transferred to Korea, Taiwan, and Japan.

Supply Chain = Export Chain • Japan provides Technologies, Core Materials for Korea and other HPEAs. • Korea and HPEAs provides processed Materials for China • China produces Final Outputs and exports to U. S. -> In the end, China’s Trade Surplus is substaintially absorbed as China’s Trade Deficits with Korea and Japan.

• The bottom country looks for another new comer to the flying geese. • There is a relentless pursuit for lower labor costs and more profits. -> China looks to Yunnan, Xingjiang, Vietnam, Nigeria, etc.

• Is the Neo-Confucian Work Ethic transferrable to other countries? • Would China reorganize the economy/industry in the Japanese and Korean or Neo-Confucian way so that it becomes the leader in the East Asian?

4. Next Level of Economic Partnership • Next level of Economic Partnership is to extend the U. S. Supply Chain to a partner country through the Free Trade Agreement

World Trade Policy of U. S. • A “qualified” Free Trade - U. S. blocks WTO’s Global or General Free Trade - U. S. wants Bilateral Free Trade and forms Block of Free Trade with specific country or block of countries - U. S. competes with other potential Blocks

FTA with U. S. = U. S. Supply Chain • U. S. FTA is comprehensive by including Investment (by U. S. in the partner country) • FTA facilitates Intra-industry Trade of the U. S. Multinational Firms (GM U. S. and G. M. China, just as was the case of GM U. S. and G. M. Canada)

• U. S. Free Trade Agreement will capture the Flying Geese within its Net

• U. S. FTA in East Asian cover U. S. Canada Japan Korea • It competes with the China Block of FTA

* Korea as the King Maker in the East Asia • Asian countries want Viable Block of Economy independent of U. S. • China, and Japan compete for hegemony • U. S. wants to keep its hegemony • Korea is the King-maker by its size and location, and is trying to cash on its “Balancing Role in the North East Asia” (东北 亚均蘅者 理论). • For now, U. S. Free Trade Agreement offer is made to Korea, blocking potential Trade Block led by China. - China calls U. S. -Korea FTA “Pang Da Kuan” for Korea

5. Challenges Would the East Asia as a whole build a Self-reliant and Sustainable economy? -> Can East Asia continue to fast grow without U. S. ?

7. Conclusion • Economic growth is both endogenous and exogenous. • Economic growth is of International Economics. • Partnership with the U. S. determines Growth Rates • The partnership is a Structured Supply Chain of the U. S.