The winds of change are blowing across the Pacific.
In a dramatic shift of trade flows this decade, Pacific economies now export more to Europe and inter-regional markets across Asia than to America. And this dynamic trend is not a recent phenomenon as inter-continental trade between the U.S. and Asia has been slipping since 1990 at the expense of booming inter-regional trade driven largely by China’s incredible economic growth over the last decade.
In September, the European Union overtook the United States as Asia’s primary destination for exports for the first time in history as China and other regional markets logged record trade surpluses with the European Union (EU).

Congressional Bashing: Japan in the 1980s, China in the 2000s
In the 1980s and 1990s, Japan was the target of rising protectionist sentiment in Congress as imports flooded the United States. For years, Japan continued to record massive trade surpluses with America while Japanese imports declined. Today, the winds of protectionist sentiment have changed as Congress grows increasingly frustrated; but unlike twenty years ago when Japan was a hot target, the United States is now vehemently accusing China of unfair trade practices mainly at the expense of a cheap and undervalued yuan currency.
Last week, Japan confirmed the trend in non-U.S. export growth announcing that despite a record trade surplus in September, its exports to the United States tumbled, underscoring the growing importance of regional trade and rising exports to Europe.
In 1990, Japan was the United States' dominant trading partner in the Pacific, and Asia accounted for 38 percent of all American imports. In 2005, China was the dominant Asian trader. Its trade with the United States has risen some 1,200 percent since 1990, even as the Asian share of American imports slipped to 36 percent.
Japan’s trade surplus with the United States shrank by a hefty 13% last month as exports fell 9.2% -- the first decline in five months. But exports to fast-growing Asia surged 59% while rising 26% to Europe.
Indeed, as the Pacific continues to accumulate wealth this decade, the region is relying less on the United States for its exports, a marked shift based on historical trends in the post-WW II period.
China Rules with Cheap and Abundant Labour
From 1990 to 2005, a manufacturing revolution occurred in Asia as China spearheaded an export powerhouse, mainly to the world’s developed economies.
With wages a fraction compared to those in the expensive developed economies, China and other Asian exporters increasingly commanded a greater share of the world’s factory floor, or manufacturing prowess. Although the United States, Germany and Italy, for example, still manufacturer excellent high-end goods, namely machinery, China can produce virtually every low-end item for just pennies on the dollar.
Trade Envy and the War of Words
Like the 1980s, the threat of trade sanctions is simmering as the United States and the European Union continue to increase pressure on China to revalue the yuan and make her currency fully convertible. With the U.S. dollar in a virtual freefall since 2002, China’s currency -- still semi-pegged to the dollar in a trading band since 2005, has benefited enormously from a cheap currency. But the war of words to pressure China to revalue her currency is a vein and flawed effort to correct chronic and irreversible trade imbalances.
In reality, a sharply revalued Chinese yuan won’t cure the trend in global trade imbalances; in an effort to boost margins and reduce labour costs, global multinationals (MNCs) continue to establish a major manufacturing presence in China because unit production costs are simply much cheaper compared to factories in the West. That is a secular event that will last for decades to come until China and other regional manufacturing centers eventually lose their export competitiveness.
Currency Revaluations not the Cure
Instead of targeting and relentlessly blaming China, the United States and the EU should focus the blame on multinationals earnings gargantuan profits in Mainland China.
Governments have distorted the facts as currency misalignment is not the cure. Rather, the problem lies with major American, European and Japanese MNCs, powerhouses that have established major manufacturing operations in China and to a large extent, have created the distortion in trade imbalances. Companies are in business for one reason: profits. And any CEO worth his salt will continue to establish a manufacturing beachhead where labour costs are competitive. That means China.
Until China becomes a mature and expensive manufacturing hub later this century -- similarly to the United States, Germany and other mature economies over the last thirty years, capital will continue to find a home that offers a high return on equity and low input costs. Trade should remain free, currencies should float and big business should seek the highest return on equity regardless of trade imbalances.