Hopes that Asia's export-led economies would successfully "de-couple" and generate enough domestic and intra-regional demand to offset weakness in North America and Western Europe have proved over optimistic.
The best way to track global manufacturing activity and changing trade flows in near real-time is through data on container shipping.
Almost all the world's trade in manufactured items moves in intermodal containers. The number of loaded containers handled by major ports and railroads provides the most accurate and timely measurement of manufacturing activity and the direction of flows.
Container data is faster than official estimates of manufacturing production (available with an average lag of 1-4 weeks) and captures volume changes better than monthly trade figures (which focus on declared customs values rather than quantities).
The severity of the U.S. downturn and its adverse impact on Asia's exporters has been readily apparent for more than a year in the data on loaded shipping containers imported into the United States via the west coast ports of Los Angeles and Long Beach (most of them containing manufactured items and semis from Asia).
Container imports peaked in H2 2006 and have been trending down for two years, as a weakening dollar, falling construction activity and stagnating manufacturing output cuts demand for everything from imported steel pipes to electronic components
But until recently, it appeared Asia was weathering the downturn better. There were hopes strong demand within the region for infrastructure and consumption might enable it to de-link growth from its major export markets.
Some even dared hope the global train could be recoupled in reverse order - with Asia replacing the United States as the locomotive and the advanced economies tagging along behind as the carriages. Strong demand in Asia might allow the western economies to export their way out of recession.
As recently as August 2008, container exports from the United States across the Pacific back to Asia were 18 percent higher than in the same month twelve months earlier.
Crucially, the number of containers handled in Hong Kong (one of the key entrepots for China and terminal for the country's exports) and Singapore (the key regional trans-shipment hub) was still increasing year-on-year as late as August, indicating the region's economy continued to expand.
But as the banking crisis intensified in September, the region appears to have slipped into recession. U.S. exports across the Pacific are now falling sharply, down 18 percent on year-ago levels in November
Containers handled in both Hong Kong and Singapore are falling for the first time in more than five years
Container data showing a sharp downturn in global manufacturing output is consistent with the weekly data on railcar loadings in North America showing the number of intermodal containers hauled on U.S. railroads down 11 percent compared with the same period last year
A reasonable estimate is that global manufacturing output is running 5-10 percent below the level at the end of 2007, making the current downturn broader and deeper than anything since the demobilisation of the wartime economies in 1946.
DE-COUPLING AND INTEGRATION
While Asia's export-led economies have not been able to avoid the slump spreading out from the United States and Western Europe, there is a risk the global economy will de-couple in another, altogether less healthy, way.
In a development that will worry policymakers concerned about rising protectionist pressures, recent data on trade and financial flows suggest the world economy is becoming less integrated.
For the past two decades, the volume of both manufactured items moving across international borders and financial flows between investors and banks in different countries has been increasing rapidly.
Integration accelerated notably in the last five years as corporations outsourced an increasing proportion of component and assembly activity to emerging markets.
Trade integration has been accompanied by financial integration, as exporters in Asia and the Middle East accumulated claims on deficit countries such as the United States, while investors and businesses in North America and Western Europe increasingly diversified their portfolios and operations by buying assets in emerging economies.
Commentators have tended to focus on the "imbalances" accompanying these global flows - with the United States running a large current account deficit, while Asia and the Middle East ran surpluses and accumulated U.S. Treasury and mortgage-backed debt.
But a focus on the imbalances, which are relatively small in comparison with the total flows, risks obscuring the more important point that all economies have become much more open to trade and finance over the last 20 years. The world economy is more integrated than at any time since before the outbreak of the First World War in 1914.
However, shrivelling trade flows in the face of a worldwide recession, liquidation of overseas asset holdings by U.S. investors, and unwinding of carry trades involving the yen, all suggest these increased linkages are fraying.
Activity is pulling back as businesses and households batten down the hatches to ride out the storm.
While that is probably inevitable in the short term, it risks weakening business and investment support for further liberalization of trade and investment flows in future.
It is easy to exaggerate the risk of a new protectionism. But the dis-integration of global manufacturing and investment flows will make it harder for senior politicians to resist pressure for protection in specific cases, probably granted under the label of industrial adjustment and restructuring, with the risk this could snowball into the tit-for-tat defence of sensitive sectors.
A re-run of the Smoot-Hawley Tariff and Imperial Preference of the 1930s is unlikely. It will, however, take a considerable act of political courage next year to complete the modestly ambitious but much-delayed Doha Round of trade talks, and maintain political consensus for progressive integration rather than call for a temporary "time out" on further liberalization.
By John Kemp (John Kemp is a Reuters columnist)
US EXPORT COUNCIL PROVIDES ASSISTANCE TO US COMPANIES SEEKING ACCESS TO HIGH GROWTH MARKETS OVERSEAS. http://usexportcouncil.com/
