The U.S. Economy Faces the Guillotine

"Our growth is not export driven," India Trade Minister Kamal Nath told NEWSWEEK. "It's driven by domestic demand. We have not been growing on the back of the United States." He says that China has displaced the U.S. as India's largest trading partner, and that exports to the U.S. are concentrated in areas like information technology and pharmaceuticals. Exports, while important, make up about 23 percent of India's gross domestic product. Still, Shankar Acharya, an economist with the Indian Council for Research on International Economic Relations, suggests that a recession in the United States could cut growth by 0.5 percent in India this year.

Chinese economists are similarly sanguine about their country's prospects. "China is in a good fiscal position, and we have strong domestic demand," said Yu Yongding, director of China's Institute of World Economics and Politics. Due to falling demand for exports to the United States, China's overheating economy will likely slow, however. Yu believes China's growth rate will fall in 2008 to 9 or 10 percent, down from the current rate of about 11 percent, "and I'm very conservative."

To be sure, Chinese manufacturers of toy cars who export all their production to the U.S. could be hurt. But manufacturers of real cars in China—and elsewhere—are producing for the emerging markets. In 2007, for the first time, Audi sold more cars in China than in Britain or the U.S.; it has set up its first joint venture in India. "We've worked on diversifying our export markets away from being dependent on just one major region," Audi chief executive officer Rupert Stadler told NEWSWEEK. He is confident "growth in the emerging markets is going to compensate for slower regions elsewhere."

Not everyone is convinced that the economies of the United States and the rest of the world are headed for divorce. "The headwinds facing the U.S. economy right now are mainly the housing downturn, capital market turmoil and rising energy prices," David McCormick, Treasury under secretary for international affairs, told NEWSWEEK. "For the decoupling theory to work, you'd have to make the case that these issues are not, at least to some extent, ones impacting economies outside the U.S. I don't think that case can be made."

One thing that is certain is that the United States is now dependent on the kindness of foreigners, instead of the other way around. With the dollar sagging, many American businesses are being buoyed by exports. "At least up to the end of 2007, exports compensated for the drag on growth coming from the housing sector," said Edward Gresser, trade project director at the Progressive Policy Institute. Exports have risen from $980 billion in 2002 to $1.62 trillion last year, up 65 percent. Nina Kaplan, founder of Summit Metals Recovery Corp., a scrap-metal dealer in Leonia, N.J., saw her income double last year, thanks to booming demand from China, and just hired a Mandarin speaker. "Right now there is an insatiable demand for scrap metal due to globalization and worldwide industrialization," she said.

But the increase in exports hasn't stopped the slide in the U.S. economy, which is why Washington has had to step in to deliver a jolt. Under the bipartisan deal between President Bush and the House, taxpayers making less than $75,000 as individuals or $150,000 as families will receive $300 per person and $600 per couple, plus $300 per child. In addition, some 35 million families that don't pay federal income taxes would also receive checks for $300; the checks should push $100 billion into the hands of tapped-out consumers. Companies would receive $50 billion in tax cuts in the form of a temporary increase in deductions for certain business investments. The plan also boosts for one year the size of loans Fannie Mae and Freddie Mac can buy, from $417,000 to $625,500, which will translate into lower mortgage interest rates for many homeowners.