Is the US no longer the economy of first resort? Changing economic relationships in the Asia-Pacific region

Abstract

This paper tests the hypothesis that the economic relationships between China and her major trading partners have changed over the past 20 years with the industrialisation of China, and the emergence of Japan as a source of investment and network trade in sophisticated manufactures, and the US as a source of finance and investment assets, supplier of services and an apparently inexhaustible demand for consumer and intermediate goods. Has this changed the size and direction of spillovers in the region, and has it curtailed or eliminated American economic leadership? We use time-varying spectral methods to decompose the links between the two leading Asian economies and the US. We find: (a) the links with the US have been weakening, while those based on China have strengthened; (b) that this is not new—it has been happening since the 1980s, but has now been reversed by the surge in trade; (c) that the links with the US have been rather complex, with the US able to shape the cycles elsewhere through her control of monetary conditions, but the China zone able to control the size of their cycles; (d) that Japan remains linked to (and dependent on) the US; and (e) there is no evidence that pegged exchange rates encourage convergence.