Since the end of the Cold War, trade liberalization and globalization have increased at a very rapid pace. As a result, the United States and Europe have become increasingly dependent on Asian imports to satisfy domestic consumer demand, aided by Asia's continuing appetite for U.S. and European financial assets, especially in the form of sovereign debt.
Two countries in particular, the United States and China, have developed a very close trade and financial relationship, but their economic strategies differ. The United States continues to borrow, import, and run up public debt, with important negative implications for the long-term sustainability of the U.S dollar as an international reserve currency. Meanwhile, China, by contrast, has been saving, exporting, investing, and purchasing U.S. debt.
China has the "comparative advantage" of production and assembly of low-value-added consumer goods, which it exports to North American and European markets. China's exports are also aided by a foreign-exchange policy that keeps its currency devalued against the U.S. dollar to encourage and sustain exports in key sectors. The United States, on the other hand, has so far opted for a consumer-driven growth model. (For more about the principle of comparative advantage, see "Monetary Matters" in the Q3/2012 issue of CSCMP's Supply Chain Quarterly.)
Until recently, infrastructure investments and exports were the primary engines of China's economic growth; since 2001, investment has been the largest contributor to the growth of the country's gross domestic product (GDP). However, in October 2012, China's National Bureau of Statistics reported that private and public consumption accounted for over 50 percent of GDP growth in 2011 and during the first three quarters of 2012. It appears that the Chinese economy is finally making the transition to a more consumption-driven economic model, with investment playing a secondary role.
A tale of two consumers
While historically the U.S. consumer has been a key driver of trade patterns, China's move toward a more consumption-based economy foreshadows its future importance as a consumer market fueled by accumulating wealth and a growing middle class. That change is happening faster than many would have anticipated. In 2011 private per-capita consumption in China stood at US $1,863. That is expected to steadily increase, as consumer spending adjusted for inflation is forecast to grow, on average, 7.75 percent per year for the next 10 years. Looked at from another perspective, the potential influence of China as a consuming market becomes even clearer. In 2001 Chinese consumers represented only 3.0 percent of global consumer spending, but by 2011 they had come to represent 6.1 percent of the total. IHS Global Insight is forecasting that by 2021 Chinese consumer spending should grow to almost 13 percent of global spending. That means the Chinese consumer gains a two-fold increase in the percentage share of global private consumption every 10 years. Further, consumer spending as a share of China's GDP is projected to increase from 33.2 percent in 2010 to 37.3 percent by 2020.
Contrast this with the United States, where consumer spending per capita in 2011 stood at US $34,347. Meanwhile, consumer spending adjusted for inflation is expected to grow, on average, slightly above 2.0 percent per year for the next 10 years. In 2001 American consumers represented 36.4 percent of global consumer spending; by 2011, however, they represented 26.9 percent. IHS Global Insight forecasts that by 2021 the United States will represent only slightly more than one-fifth of global consumer spending. Moreover, U.S. consumer spending as a share of GDP is expected to drop slightly from its current standing of 70.5 percent to 69.5 percent by 2020.
Global consumption patterns shifting
Although it is likely that U.S. consumers will still claim the highest percentage share of global consumption in 2021, the global distribution of consumption shares is diversifying beyond the mature economies that have long dominated consumer spending. India, Latin America, China, and emerging Eastern European nations will gain in terms of global GDP and consumer spending shares—indeed, China's GDP is expected to equal that of the United States in the near future—while the shares held by the United States, Japan, and Western Europe are forecast to decline. (See Figure 1.)
Worldwide changes in consumption are likely to result in some production rebalancing during the next 10 years, but those changes may not be as significant as some might expect. It is anticipated that some multinational corporations will relocate production facilities to the United States or elsewhere in the Western Hemisphere, or move operations to Vietnam from China, but this shift will be relatively minor. In addition, the expected growth in the number of consumers and their spending power in markets like China and Vietnam may help to keep production facilities nearby.
The coming changes in global consumption and production should have a major, largely positive impact on supply chain risks. During the worldwide financial and economic downturn, low-value-added production continued to be concentrated in emerging markets, while consumers were concentrated in the more economically advanced parts of the world. But as the 2011 earthquake in Japan and floods in Thailand showed, there are substantial risks associated with global supply chains that link highly concentrated production in emerging economies with consumption in developed regions.
Such risks of supply-chain disruption have not been mitigated, let alone adequately addressed. However, as the consumer base broadens and diversifies across many countries, demand-side disruptions will not be as dramatic and should help mitigate any shocks emanating from a single nation. In other words, the U.S. consumer's declining global consumption share could be interpreted as a "blessing in disguise," as it will allow for a more balanced distribution of the effects of a sudden consumption or production shock.
A final note: A key feature in the future pattern of production and consumption across nations will be the global monetary arrangements adopted by markets and policy makers. In an environment where capital and financial markets continue to become more closely integrated, currency and exchange-rate manipulations are bound to further lose market legitimacy. Therefore, market participants need to pay close attention to developments related to sovereign debt and the worldwide competition for international currency-reserve status.