What a difference a GFC and recession can make

Experts tip that China and India will create new trading blocs that will sideline the United States and Western Europe. A Free Trade Agreement (FTA) between the Association of South East Asian Nations (ASEAN) and China came into effect on New Year’s Day. It created the world’s third largest free trade bloc behind the European Union (EU) and the North American Free Trade Association (NAFTA), and it is set to expand. Stuart Gulliver, executive director at HSBC, has speculated about the emergence of a new economic bloc, stretching from China, Asia Pacific, the Middle East and Africa to Latin America.

And then there is the question of Chinese money. The rise in US and European government debt has accelerated Chinese influence. China has the money to soften western borrowing pain. And it has the power to influence countries on a range of issues, potentially including industry policy. In December, China dumped $US34.2 billion of treasuries. At the end of 2009, China’s holdings of US government debt stood at $US755.4 billion - a drop of 6 per cent from the peak of $US801.5 billion last May. In an interview, last year economic historian Niall Ferguson warned that China could use this money power to influence other countries. Ferguson said: “Now, politically, it might be quite tempting for the Chinese to phone up and say, 'We really disagree with you about, let's say, Taiwan and Japan and North Korea. You'd better listen to us, because otherwise, People’s Bank of China starts selling ten-year treasuries, and then you guys are dead'."

That has not happened yet but clearly the balance of power is shifting towards China and India. At the same time, it is in their interests to ensure Western powers are not hampered and curb Chinese imports.

For manufacturers, the implications are enormous. They can study the new business models and borrow from them features to incorporate in their operations. That is another good reason to set up a base in China or India. When you are running a global company, there is little choice. You need to set up operations in high growth areas.