I am in the U.S. this week, speaking at the State Department, Columbia University and CSIS. I intend to use the opportunity to test drive one of my favourite themes.
In a globalized world it is time to view China and the Middle East as part of the same policy challenge, rather than two distinct challenges.
How so? The growing commercial relations between the two mean that a change in one affects the other. I am thinking specifically about jobs. The rise of China has resulted in a historic shift of manufacturing from the industrialized to the industrializing world. It is a shift that is unlikely to reverse.
However, the consequences have been mixed for the Middle East. A flood of cheap imports to the region has meant factory closures in low-cost countries, such as Egypt and Syria. And that’s a problem given that two-thirds of the region’s population is under the age of thirty. And many are unemployed.
But it could all change, and for the better.
It is increasingly expensive to manufacture goods in China. The currency has strengthened eighteen percent in the past three years, and is expected to strengthen further in the coming years. Land costs and environmental costs are also rising.
Now, some manufacturers will simply move further inland. But others will look for cheaper locations.
The problem is that after arguing hard for a stronger currency, U.S. Congress cannot stop there. The factories are never likely to return to the United States. But there is an opportunity to try and influence where they go next.
Laos and Vietnam are two possibilities. But why not Egypt and Syria? Sound crazy? Sure, there are major challenges to investing in two countries — red tape, low productivity, and weak infrastructure are just a few.
But there are some attractions. The two countries have next door to Europe, one of the world’s largest consumer markets. And with oil prices back at $70 a barrel, and likely to rise higher, cheaper transport costs matter.
The two also enjoy preferential trade agreements with Europe. And there is growing evidence that Chinese manufacturers are looking to produce and export from other countries in order to avoid attracting protectionist measures.
Now, I am not arguing that either Egypt or Syria are about to capture a large share of Chinese manufacturing. Far from it. In fact, they only have to capture a small share in order to make a big difference to their economic prospects.
Take Syria for instance. If the country had captured just 1 percent of the increase in trade between China and Europe during the last decade it would have added half a percentage point to economic growth every year. And that would have meant a lot of jobs for the country’s unemployed youth.
But the region will need help. And that’s why it’s time for U.S policy to start looking at region as a whole, rather than dividing between China and the Middle East. Even as U.S. Treasury officials visit Beijing and argue for a stronger currency, their colleagues should be laying the groundwork in Egypt and Syria.
And it is important to get the groundwork right, rather than rely on market forces to do the job.
Jordan’s industrial zones are an example of what happens when market forces do take the lead. The zones enjoy tariff free access to the United States as part of Jordan’s peace agreement with Israel. They employ an estimated 50,000 employees. But up to 25,000 are foreigners, mainly Bangladeshis.
It is a disappointing result that does little to solve Jordan’s unemployment problems.
I would also suggest calling on China to support economic reform in the Middle East. It is Chinese construction companies that have the experience, and appetite, to build the roads, ports, and power plants necessary for Egypt and Syria to emerge as export manufacturers in their own right.
The Chinese could also offer technical, and practical, advice on the issue of economic reform. For all the talk that China has discovered a new growth model. In truth, its growth model is not dissimilar to that of the United States, as it is built on a free market, free trade, and capital markets.
Sure, China’s influence in the region would grow, but potentially accompanied by greater economic stability. And then everyone wins.
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