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     Jul 12, 2006
The battle to secure demand
By Max Fraad Wolff

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

The growing interest of China and other regional powers in securing access to key commodities, and exerting influence to that end, has become increasingly apparent.

The most discussed examples have been oil and gas ventures, followed by metals, minerals and bilateral trade deals. These developments well deserve the effort, ink and chatter they have been receiving. Supplies are essential to production, distribution and the realization of revenues. It is necessary to explore the

political implications as well.

However, there is another side to the supply-securing activities which has languished in the darker recesses of public awareness: namely, the efforts of key economic players to secure demand.

Many diplomatic visits and signed agreements in recent years have been primarily concerned with emerging states and regional players securing demand for their products. This is equally urgent for the players involved, and represents a defensive response to today's global imbalances and an inevitable eventual rebalancing.

The 14% increase in the size of America's negative net international investment position (NIIP) in 2005 alone to negative US$2.7 trillion underscores the existing lack of equilibrium. The NIIP measures the net difference between US ownership of foreign assets and foreign ownership of US assets.

What are the needs of some of the big demand-seekers? China, reliant on manufactured exports, needs contacts, agreements and trade relations to facilitate a reduction in its dependence on US consumer demand.

India, Russia and Brazil need to secure supplies and effective demand for their exports. Diversifying the consumer portfolio is a pressing and central need for all exporters of raw, intermediate and final goods.

The US has been consuming well beyond its sustainable capacity for years. Thus, massive foreign capital is required and massive influence achieved with these borrowed monies. Those with regional - or greater - aspirations must find a way to mitigate US influence and risk exposure to America's overdue correction. This can come in any number of forms.

The increasing discussion of official reserve diversification away from dollars is a hunt for yield, monetary policy independence and reduced reliance on the US currency. A falling dollar implies a risk of falling global purchasing power from earnings born of exports to the US.

Rising savings and falling debt-fueled and home refinancing spending must be factored in by those who export to the US. Thus, the search for other sources of demand, domestic and international, is slowly emerging as an urgent political and looming economic requirement. Revenue and growth promises to be more robust outside of the US in the years to come. Thus, establishing ties, cutting deals and seeking influence will be required of any regional or global economic power.

Oil price increases since 2002 have redistributed $125 billion in purchasing power from the US to oil exporters. Oil exporters have received an estimated $400-$500 billion in increased income over the past four years.

The energy exporting region of the Middle East and North Africa is presently endowed with an increase of $250 billion in revenue from oil and gas price increases according to a 2006 World Bank report, "Prospects for the Global Economy".

The same report forecasts developing-world economies will grow at twice the rate of developed economies over the next four years. Those enjoying the windfall receipts from high commodity prices cannot domestically produce enough to absorb the extra income being generated. They must import vastly more, and are. This is occurring in a world economy long on excess capacity and short on effective demand.

Rising energy and commodity prices and redirection of foreign direct investment are shuffling likely sources of future demand as well as production and jobs. All the much-discussed outsourcing creates demand for products where the jobs migrate.

At some point, this phenomenon should put downward demand pressure on the places the jobs are leaving. Thus, theoretically, the search should be on for bottom-of-the-pyramid products to sell to the developing world. It is: and this is one manifestation of the hunt for demand, which is driving many of the new initiatives toward oil exporters and developing nations. The urgent search for demand especially ahead of a protracted rebalancing away from US consumption is central.

The addition of demand to presently supply-dominated analyses of the evolving international economy is required. Falling free trade momentum and globalization support in the US and globally makes this process more urgent and politically tense.

Investment by multinational corporations, foreign direct investment flows and bilateral and regional pacts increasingly reflect the desire to establish and maintain common markets for goods. Thus, the urgent search for demand lurks in the shadows behind the endless discussions of energy supply, outsourcing and free trade momentum.

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst and managing director of GlobalMacroScope. This work was written for www.GlobalMacroScope.com.

(Copyright 2006 Max Fraad Wolff. Used by permission. )

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

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