Newly Industrialized Countries

By GLENN GARELIK

While the mighty exporters of Japan and Western Europe draw most of the attention, about one-quarter of the U.S. trade deficit is the work of a pesky group of second-tier nations known as the newly industrialized countries. Once dismissed as marginal producers of chintzy clothes and toys, the NICs, which include South Korea, Singapore, Hong Kong, Taiwan, Mexico and Brazil, have gone upscale, producing everything from VCRs and computers to cars and commuter planes. By importing technology and deploying armies of low-paid but often well-educated workers, the NICs have been able to undercut competitors' prices in markets all over the world. From 1980 to 1986, NIC exports jumped 56%, to $175 billion.

Such a pace will not be easy to sustain, however. Mexico and Brazil are overburdened by debts that threaten to crush their economies and throttle their ability to export. Even the stronger Asian NICs face perils ranging from political unrest at home to protectionist barriers abroad.

None of the other NICs has been more successful or volatile than South Korea. The government has directed the growth of such huge industrial conglomerates as Hyundai and Daewoo, which manufacture cars, computers and other high-tech goods. Following the example of the giant Japanese manufacturers, the Korean companies have launched a determined U.S. invasion. Hyundai's subcompact Excel, which reached American shores last year, is the hottest-selling new imported auto in history. This summer, General Motors started selling small Daewoo cars under the Pontiac LeMans nameplate.

While scoring business triumphs, Korea has been racked by political and social unrest for much of the year. In the summer, massive and violent street demonstrations forced Korean President Chun Doo Hwan to speed up the process of democratic reform. Then a series of strikes temporarily shut down virtually all major Korean companies and many minor ones as workers demanded -- and won -- higher wages. Amid the turmoil, the Korean economy has proved resilient; growth for the year is expected to be 12%.

In contrast to Korea's large corporations, Taiwan's companies, which churn out products as diverse as calculators and vaccines, tend to be small. But they make big waves in world trade. With the U.S. alone, Taiwan piled up a $16 billion surplus last year. That has stirred anger in Washington, which has forced Taiwan to raise the value of its currency, and is threatening protectionist retaliation because the country keeps its domestic market closed to U.S. imports.

Hong Kong, which has perhaps the most freewheeling economy in the world, readily lets in imports and ships out exports like stylish clothing just as fast. Despite uncertainty about what will happen to the former British colony when China assumes sovereignty in 1997, business confidence is strong and economic growth is expected to reach 12% this year. Leaving many high-tech fields to the other NICs, Hong Kong is concentrating on being a financial center. Virtually all the world's major banks have offices there. Hong Kong is also developing its role as the gateway to the largest potential market in the world: China.

Singapore, which has been a leading oil refiner and supplier of drilling equipment, is still coming back from an economic slump that was exacerbated by last year's drop in petroleum prices. Nonetheless, the tiny island country did well enough to run up a $1 billion surplus with the U.S. in the first six months of the year. Singapore is strong in electronics and is trying to establish a biotechnology industry. It also aims to be a service center for Asia, specializing in banking, insurance and communications.

Whatever problems the Asian NICs face pale beside the difficulties plaguing Latin America. Mexico was already staggering under foreign debt of more than $90 billion when oil prices collapsed last year and decimated one of its major sources of revenue. In the meantime, the government has been conducting a surprisingly successful crash campaign to diversify the economy. Mexico has become an exporter of chemicals, aluminum, medical instruments and cars (built by Chrysler and other foreign companies).

Fighting recurrent bouts of triple-digit inflation, Brazil has accumulated an unsupportable foreign debt of $110 billion. In February, President Jose Sarney declared that the country would stop making interest payments on its medium- and long-term commercial bank loans, a stunning action that sent shock waves through the international banking community. The financial crisis has forced Brazil to curb imports and go all out on the export front. So far, the results have been unexpectedly impressive. In July alone Brazil achieved a record monthly trade surplus of $1.4 billion. The Brazilians still rely on sales of such basic goods as orange juice and coffee, but the country has also become a prominent exporter of manufactured items, including steel and small aircraft.

The greatest threat to Brazil, and all the other NICs, is that the U.S. will try to slash its trade deficit by erecting new trade barriers. To prevent that from happening, the NICs will need to open their own markets wider, buying sophisticated goods and technology from the U.S. Unfettered global competition may be unsettling, but it can boost trade in every direction, and that will ultimately benefit all the players.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Charts by Cynthia Davis

CAPTION: NICs'* EXPORTS In billions of dollars

DESCRIPTION: Shows exports from Newly Industrialized Countries 1980-1986: color illustrations show tape deck, boot, bolt of fabric.

With reporting by Jay Branegan/Hong Kong and Laura Lopez/Mexico City