Accommodating Emerging Giants

This paper studies how the world accommodates emerging giants. That is, as a large country embarks on a transition path that potentially takes it from being a relatively poor country to joining the ranks of the rich, how does the rest of the world adjust in reallocating its scarce resources? Recent examples of emerging giants include China towards the end of the 21st century and Japan in the middle of the 21st century; indeed, one can perhaps view the catch-up of many western European countries to the United States during the mid 21st century in this light. Surely (hopefully) we will witness even more emerging giants in the future, perhaps even in our lifetime. Finding some answers to such a question would seem to be relevant to not only the many policy debates that focus on this issue, but also to the core question of international economics regarding the nature of production and trade. This paper begins by taking a close look at how the recent emergence of China affected aspects of the economies of Japan, South Korea, and Taiwan, and how the earlier emergence of Japan and estern Europe affected the United States. Regarding the emergence of Japan and Europe, I chose to examine the United States because it was the leading economy during that time. Regarding the emergence of China, I chose to examine Japan, South Korea, and Taiwan because of their geographic closeness to China and because China is rather early in its phase of emergence so that its effect on other economies in the world may not yet be as evident. Surely, if there is any noticeable effect of an emerging giant, it should be evident in these economies during those time periods. The central finding of this paper is that the emergence of giant economies leads to a classic terms of trade shock that sets in motion a structural transformation and perhaps a growth slowdown in economies that are close to the emerging giant. The terms of trade--the price of a country's export goods relative to its import goods--falls sharply for a prolonged period of time following the onset of relatively high growth rates in the emerging giant. The structural transformation involves a reallocation of resources from the production of manufacture goods to the production of service goods. Despite the relative rise of the service sector, I will present evidence that the countries affected by an emerging giant tend to suffer an overall growth slowdown that lasts for some time. The growth slowdown in Japan, South Korea, and Taiwan following the onset of China's emergence seems quite evident in the data. Contrary to this experience, the United States did not suffer a growth slowdown following the emergence of Japan and Europe, but I will present evidence that perhaps other extenuating circumstances (e.g., the dramatic rise in educational attainment in the United States during the 1950s and 60s) prevented such a growth slowdown from occurring