The Regional Economic Impact of the Asian Currency Crisis

The Regional Economic Impact of the Asian Currency Crisis

Analysis by Mark Zandi, Chief Economist
Written December 15, 1997

The Asian currency, financial and economic crisis is deepening. To date, the trade-weighted currencies of Pacific Asia have fallen some 30% against the dollar. The growth prospects for Pacific Asia also continue to erode, with expectations for real GDP growth next year falling from 4% before the crisis to near 2% currently. Whether conditions deteriorate further in Asia will depend in large part on the forthcoming Japanese bank bailout plan and just how the soon-to-be-elected Korean president manages Korea’s new relationship with the IMF. All of this will become more clear by year’s end.

The impact on the U.S. economy of events in Asia to date will be to shave between .25 and .5 percentage points from real GDP growth both next year and in 1999. Most of this impact will be felt through a deteriorating trade balance, which RFA estimates will be some $50 billion greater by the end of the decade as a result of events in Asia. U.S. consumer price inflation will also be some .1 to .25 percentage points weaker in the next two years due to the stronger dollar and more aggressive pricing by Asian producers. Prices of imported goods from Asia are already declining quickly.

The Asian crisis will affect the nation’s regional economies very differently. The most significant negative economic fallout from Asia will be felt in the Western U.S. due to the relatively large share of exports from the region going to Asia. Western states with the greatest export exposure to Asia are Washington, Oregon, Arizona, California, Alaska, and to a lesser extent, New Mexico and Utah. Merchandise exports from these states are dominated by aircraft, semiconductors, microprocessors, electrical equipment and processed foods. The Western U.S. economy’s links with Asia also extend to service exports such as computer software, tourism and direct investment.

While Washington has the largest export exposure to Asia---exports to the Asian NICs account for over 6% of the state’s gross product and over 10% of GSP including exports to Japan---it will likely not experience the most significant impact from the Asian crisis. Nearly two-thirds of the state’s exports to the region are Boeing-made aircraft. While Asian buyers will likely delay delivery of aircraft, it is unlikely that they will cancel their orders. The long-term demand for aircraft in Asia will remain strong. Moreover, the delay in aircraft deliveries may actually be a blessing for Boeing, which is struggling to meet its production deadlines. Regardless of what happens in Asia, Boeing’s production levels will not be significantly affected through the end of the decade. By that time, the Asia economy and demand for aircraft will have likely recovered.

The impact of the Asian crisis on the Oregon, Arizona and California economies will be more substantial given that exports from these states to Asia are predominantly semiconductors, microprocessors and other electronic equipment. Many of these goods are used in the production of other electronic products that are ultimately purchased by Asian governments, businesses and households. As the Asian economy weakens so will the demand for these products. Moreover, falling Asian currencies will make Asian producers of semiconductors and microprocessors more competitive on world markets, putting further pressure on U.S. exporters.

Parts of the farm belt, industrial Midwest and southern U.S. economies will also experience some negative fallout from the Asian crisis. The farm belt will be hurt by reduced exports of foodstuffs to what will now be much more price-sensitive Asian households. Stiffer price competition from Asian vehicle producers, particularly the Japanese, will also put pressure on U.S. vehicle producers to hold the line on prices. This will lower profitability in the industry and may affect domestic vehicle production, which is largely concentrated in the industrial Midwest. The southern U.S. economy may also feel the pinch from lower-priced Asian textiles and apparel. These industries are already suffering from severe Mexican competition.

If any region of the nation stands to benefit from the Asian crisis, it will be the Northeast. The region’s exports to Asia are a very small share of the region’s economy. States such as New York, New Jersey, Pennsylvania, Connecticut and Maryland export close to only 1% of their gross product to Asia. Moreover, there are relatively few industries in the region that compete directly with Asian imports. Northeastern households also stand to benefit significantly from lower prices for imported and importing-competing goods. The lower interest rates resulting from the Asian crisis will also disproportionately benefit debt-laden households in the region.

The Asian crisis in its current incarnation will have a measurable but moderate negative impact on the U.S. economy through the remainder of the decade. The Western U.S. economy stands to lose the most as a result of the crisis. Job growth in the Washington, Oregon and California economies will slow to 2.2% next year, for example, from the 3% growth expected prior to the crisis. This is still well above expected national job growth next year of 1.4%, however. Much of the rest of the U.S. economy will be negatively affected by events in Asia, but to a much smaller degree.