Developing countries are struggling to increase the share of trade they conduct with other emerging markets to help lessen the impact of sluggish growth and protectionist policies in the developed world.
So-called “south-south” trade might be expected to become ever more important as an era of structurally weak growth in Europe and Japan — damping demand for goods and services — prompts faster-growing emerging markets to increasingly trade with each other.
The US-China trade war, which has slashed commerce between the world’s two largest economies, might also be expected to accelerate the trend towards south-south trade, at least in relative, if not absolute, terms.
The earlier years of this millennium did see rapid growth in intra-EM trade, with the share of emerging market exports heading to other developing countries jumping from 24 per cent in 1999 to 41 per cent by 2013.
By 2012, the value of the emerging world’s exports to China had overtaken those dispatched to the US for the first time, according to calculations by Oxford Economics.
However, the trend has largely petered out since, with south-south trade still accounting for just 41-42 per cent of emerging market exports last year.
This stagnation has occurred despite emerging market economies continuing to expand faster than developed markets, with average GDP growth of 4.6 per cent a year, versus 2 per cent in DMs, since 2013, suggesting they should be accounting for an ever larger share of global demand. The so-called “gravity model” of trade predicts commerce should expand rapidly between fast-growing economies.
Some attribute the stall in intra-EM trade to a growth slowdown in the emerging world since 2014 that is partly structural — Chinese growth, for example, has trended downwards — but partly cyclical and therefore transitory.
“That was such a bad time cyclically for EMs, especially 2017-18,” said Gabriel Sterne, head of global macro research at Oxford Economics. “It’s difficult to disentangle the cyclical from the structural stories in that half decade.”
Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners, said, “China has been growing less rapidly, India has been struggling and big economies like Brazil and Russia have gone nowhere”, in recent years.
However, Sergi Lanau, deputy chief economist at the Institute of International Finance, argued that the global web of supply chains that has been built since the 1990s was largely complete by 2013 and often put barriers in the way of additional intra-EM trade.
“In Latin America, intra-regional trade is quite low. They end up exporting really basic products to the US and the final product is not produced in the region,” he said.
“Paradoxically, that might be cheaper. Shipping goods from Colombia to Uruguay might not be that easy or cheap. Once the whole supply chain is set up through the US, you are going to see growth going through developed markets.
“A lot of value added will be in the US. It will never show up in direct trade between emerging markets.”
Moreover, Mr Lanau argued that some emerging countries, again including many in Latam, were “not very open to trade”, meaning they may not suck in many more imports from fellow EMs, even if they are growing fast.
One partial explanation of the stall in intra-EM trade may be the well-publicised shift in the composition of Chinese growth, which has become less commodity intensive.
With developing countries dominating commodity markets, this might be expected to cut EMs’ share of total exports. However Mr Bakkum noted that the total value of China’s commodity imports has continued to rise, if not as rapidly as previously.
Another factor may simply be the weakness of many emerging market currencies, particularly against the dollar, in recent years.
Although emerging markets have produced significantly faster GDP growth than developed ones every year since the turn of the millennium, measured in domestic terms, their share of global GDP measured in dollars has followed a similar pattern to the share of intra-EM trade — rising rapidly from 19.7 per cent in 1999 to 39.2 per cent in 2013, but inching up only another percentage point since.
In other words, the proportion of global dollar income being generated in emerging countries has virtually stopped rising, limiting their populaces’ ability to account for an ever larger share of global demand for goods and services, whether imported or not.
Despite this, Mr Bakkum saw scope for intra-EM trade to regain its previous trajectory and become an ever larger slice of global trade.
However, for this to happen he argued that there would need to be “positive reform momentum” in larger economies such as India, Brazil and Russia, and advances in frontier markets. Structurally high investment growth would help by sucking in more commodities from other EMs.
“The recent progress of Vietnam, Cambodia and Bangladesh in taking over low-end manufacturing production from China is clearly encouraging,” Mr Bakkum said. “The key is continuous technological progress in east Asia, so that high-end capital and consumer goods can be sourced increasingly from emerging economies.”
Thomas Costerg, senior economist at Pictet Wealth Management, was more pessimistic, arguing that many emerging countries have fallen into the “middle-income trap”, have “faltered in their export-oriented model”, and have suffered flagging productivity growth.
In particular, Mr Costerg said developing countries needed to make headway in industries such as autos, semiconductors and IT hardware in order to increase exports to other EMs.
“They are well established routes that emerging markets have yet to break into. We’ve not seen many car manufacturers in EM that have gained prominence,” he said.
Cathy Hepworth, co-head of EM debt at PGIM Fixed Income, believed growth in intra-EM trade was highly likely, suggesting that the trade cold war between the US and China could be a catalyst for this.
However, in the short term at least, Ms Hepworth said that if China is forced to import more from the US — Beijing has pledged to buy $200bn of US goods and services over the next two years — that will inevitably hit its imports from some EM exporters, such as Brazilian soyabean farmers.
Similarly, Mr Bakkum said “a lot” of intra-EM trade consisted of components for goods that are ultimately exported from China to the US, sales of which may continue to be depressed by the tariffs embedded in the “phase one” trade deal struck between the two nations.
Mr Bakkum also had a broader concern: that a rising tide of protectionism and deglobalisation, or at least the lack of further globalisation, would undermine outsourcing from developed to emerging markets, and maybe outsourcing from China to other EMs as well.
“I think it’s going to be more difficult in the future for this trend to continue because globalisation is going backwards,” he said.
Mr Lanau echoed these concerns, saying he would “be surprised if we saw another big pick-up in global trade”.
“The impact on income distribution of the increase in trade in recent years has been big, and it has become a bigger political issue in many places,” Mr Lanau said. “I think it’s well understood that trade increases the size of the pie. The big thing is that it changes the distribution of the pie and that is what has caused so much concern and uncertainty.”
In this environment, Mr Lanau said dealing with the impact of the changes wrought in recent decades would take precedence over ushering in yet more change.
“For societies and countries to grow in harmony you have to address inequality that comes from both trade and potentially even more from robotics and from making some jobs redundant. It’s a very big transition and in this transition you have to find ways to make sure that people don’t lose out completely,” he said.
“I think it’s inevitable we go through a period where globalisation doesn’t grow much and you sort out the social, political and economic issues. People are more concerned than 15 years ago over their future and the future of their children. The underlying forces are not going away and we have to do something about it.”
Source: Economy - ft.com
