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[JimWillieCB]

Asia Pacific: Pacific Lockdown
by Andy Xie (Hong Kong) -- MorganStanley website

[ME: boldfaced below he talks about the squeeze on Asian exporters on price, due to the dollar decline... it will get much worse... if US doesnt absorb the higher price due to US$, then Asians will be seeing the profit margin squeeze... I discussed this ad nauseum in June... now it is happening... the result will be a combination of rising US import prices and failed Asian companies and banks... the Calif Longshoreman strike is now forcing the issues, pushing the Asians against the wall, and will lead to political stress... Tokyo/WashDC has a large vested interest in maintaining the yen/$ ratio... the US$ decline this spring hurt Asians badly, since they absorbed the loss in profit margin]

Xie: The 29 ports on the US West Coast have been shut down, as the dispute between the port operators and the labor unions has intensified. The US imports over $1 billion worth of goods per day, mostly shipped through the ports on the West Coast, from East Asia. These imports account for 10% of East Asia ex-Japan's GDP. The export-led economic recovery this year has been driven by the strong US Imports (see Exhibit 1).

If the port shutdown lasts, it will inflict severe damage on the region's economies, in my view. Indeed, I believe that, if the shutdown lasts for more than a month, East Asia would be in recession. The consequences for the global economy are extremely serious, in my view.

I believe that what's going on in the US is a fight among rich people at the expense of poor people in Asia. The US imports $24 billion worth of consumer goods per month, mostly from Asia. The factory-gate prices for such goods are already as low as Asian producers can bear. These producers often receive a fixed margin from their US buyers. Further squeezing Asian producers will drive many of them out of business.

US distribution costs, on the other hand, remain extremely high relative to the cost of the goods. Oftentimes consumer goods imported from Asia sell at retail for three to four times the Asian factory-gate price. At the same time, deflationary pressure in the US economy is putting pressure on the retail price. The fight for a share of the pie in the US distribution chain is heating up as a result.

For example, the US urban CPI rose by 1.4% in the first eight months of 2002 from last year compared with 2.8% for 2001. The import price for goods from the Asian Newly Industrialized Economies fell by 3.9% in the first eight months of 2002 compared with a 4% decline last year. While US import prices for goods from Asia are showing the same pattern as in the past, the US retail environment is becoming more difficult. The margin squeeze for distribution in the US is probably intensifying. Hence, disputes over the distribution channel are also becoming more likely.

The fight between the port workers and operators is one such example. When it was easier to squeeze Asian workers or when American consumers were willing to pay up, the inefficiencies at the ports could be paid for. US port inefficiencies have long been a tax on Asian trade. A US port worker is paid about one hundred times what a Chinese worker at an export factories receives. I suspect that the skill difference between the two is minimal.

If this fight continues, it will undoubtedly have terrible consequences for the economies in East Asia, and the disruption could wreak havoc on the region's industrial production. The logistical problem could also turn into a demand problem if the US economy suffers as a result. The robust Asian export recovery of the past two quarters may come to a premature end. However, it is possible that the US retailers have stocked up in the past two quarters in preparation for the strike. This would imply that the region's export recovery in the past two quarters has been exaggerated by the excessive inventory demand in the US and that East Asia's export performance could decelerate quicker than expected.

The impact of this disruption is greater on bulky products. China and Korea stand out in that regard: These two economies have been more resilient than others in the region so far. The disruption may diminish their economic outperformance in the fourth quarter.