In the 1990s, the global economy stayed afloat thanks to American consumption. Japan was in recession, growth in Western Europe came in fits and starts and the Warsaw Pact/USSR economies suffered contractions and turmoil.
But the US stayed in growth mode from 1992-2000. Buoyed by the psychological buffers of booming stockmarkets and strong job expansion, America's consumers maintained negative personal savings rates even though the US government came out of deficit and Bill Clinton exited with a massive surplus.
American spending drove growth across a number of economies. China, Korea, Taiwan, Malaysia, Thailand, even India, benefited immensely. All these nations logged positive trade balances with the US.
The wonderful thing about profligate US spending is that it doesn't affect the dollar much. Any other country with massive trade deficits would worry about drastic devaluation.
But since global trade is largely dollar-denominated, the US need not worry. If the Fed wants to protect the dollar, it raises domestic rates. If it wants to devalue, it cuts rates or prints more money!
Even now, America continues to spend more than it earns though the US economy hasn't seen a sustained recovery since mid-2000. Actually, the individual US consumer has throttled back but the government has spent its way to a record deficit and shows no signs of easing off.
Yet the last two years suggest that this is no longer the only global growth driver. China's domestic growth has picked up some of the slack. In the past two years, metals in particular have boomed because of Chinese consumption.
The Chinese are also on a massive power-plant building spree and of course, they haven't stopped building roads and airports. Chinese tele-penetration is now past the 300 million mark and still growing.
Fuel demands have also grown at a record rate. In fact, the Chinese economy has grown so fast the government has tried to cool things down to control inflation and manage power shortages.
Suppose China's influence as a global economic arbiter grows. Projection suggests it will -- a Chinese growth implosion or currency twitch would already be disastrous.
There are worrying aspects to that scenario for India and I'm not referring to strained diplomatic relations. India has massive competitive advantages in terms of trade with the US; it doesn't have any to speak of in terms of trading with China. Indians speak English, there is a large, wealthy, expat Indian community in America, Indian labour is magnitudes cheaper than American labour for the same skills, etc.
So far, the Chinese influence has been beneficial for India. Indian companies have gained from higher metal prices and higher freight rates. They have held their own in industries like automobile and spare parts manufacturing.
But by 2010-2015, Indian trade will need a substantial Chinese component to survive. And, it doesn't have competitive advantages in that market.
There is another frightening trend -- for over two decades, FDI has poured into China. But no TNC has yet emerged with serious profits from its Chinese operations! Can Indian entrepreneurs break into China in a big way? And after they've done that, will they be capable of registering profits in such an intractable market?