China And India In The Balance

Written by David Frum on Saturday February 7, 2009

Scary as this recession is for the developed world, it poses a terrible and lethal threat to the world's two biggest emerging markets.

More human beings have escaped poverty in the past 20 years than in any equivalent period in the history of the world.

Since 1990, China and India have pulled hundreds of millions of their people out of want. Their people eat better, live longer, and enjoy some measure of security. As they have prospered, they have in turn enriched the advanced world, selling us cheap goods and services and buying our food and technology.

Scary as this recession is for the developed world, it poses a terrible and lethal threat to the world's two biggest emerging markets.

Economic activity is decelerating with terrifying rapidity in both countries. Reliable statistics are hard to come by in these two countries, but here are some indications of the post-October collapse:

-In the single month of November 2009, the value of China's exports, calculated in Chinese currency, dropped by almost 10%.

-Up to one-fifth of the factories in Guangdong have closed in the past three months. Factory wages have dropped by nearly half. Millions of migrant workers have quit the industrial province to return home to the countryside.

-The big electrical-utilities companies of Guangdong province reported an 8% decline in sales in the month of December. The total drop in electrical production however is much greater.

-Corporate income tax collections in India are arriving 33% below projections, a shortfall of almost a trillion rupees.

-The World Trade Organization projects that world trade will decline by more than 2% in 2009.

Ominously, the anti-recession actions undertaken by the advanced countries may well aggravate the global trade collapse. The U. S. House of Representatives stuck a "Buy American" provision into its US$800-billion-plus stimulus package. The Senate has now extended the measure, with a requirement that "all manufactured goods" purchased with government money come from US suppliers. This protectionist amendment carries the strong backing of Senate Majority Leader Harry Reid.

In a Tuesday television interview, President Obama described Congress' protectionist turn as a "mistake." Now comes the first great test of muscle of his presidency: How hard will he work to halt this looming disaster?

Liberal economic commentators warn that the current downturn presents the gravest threat to global prosperity since the Great Depression. They are urging hyper-Keynesian spending in order to jolt the United States back into prosperity. And yet here is the party of the liberals repeating one of the very gravest policy errors of 1929-33 -- the turn to protectionism that plunged the world into a downward spiral of trade war.

In the 1930s, trade war led to actual war. Our world is very different of course, and big wars between major powers have gone seriously out of style. But the internal stability of China and India cannot at all be taken for granted. Maoist insurgencies rage across northeastern India. China is already wracked with often violently suppressed protests and disturbances --and more to come.

Since 1990, China and India have struggled with the problems that arise from prosperity: environmental degradation, rapid social change and the challenge to traditional authority. Now they will have to contend instead with the problems of economic crisis, and those are even worse and more dangerous.

With global leadership goes global responsibilities. Barack Obama is delighted to talk about global inter-connectedness when the subject is war and peace. Will he understand that those global interrelationships matter at least as much when the subject is prosperity and poverty?

More than the dialogue that so fascinates Obama, what the world needs most is trade, more trade. It is up to him to champion it, for his own country's sake, and the world's.

Originally published in the National Post.