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Emerging markets help silence globalization doubts

Fathom Consulting

13 Jul 2017

A labourer winnows rice at a market yard at Bavla, west of the western Indian city of Ahmedabad January 7, 2011. Photographer: Amit Dave

It’s not all over yet for globalization. These charts and the accompanying commentary from Fathom Consulting show how emerging markets are playing an important role in supporting world trade growth.

All commentary and opinion is that of Fathom Consulting and any views expressed are not those of Thomson Reuters.

A decline in the ratio of world trade over world GDP, alongside the electoral success of isolationist politics in 2016, spurred talk about the “end of globalization”.

However, aided by a rebound in emerging markets (EMs), world trade growth has actually picked up in 2017.

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The weakness in EM trade since 2013 partly reflected soft economic activity among commodity exporters.

Fathom think that cycle is now turning. With little desire in emerging markets for increased protectionism, and supportive demand from China, EMs will provide a tailwind to world trade this year and next.

Trade integration

In the near term, there are three key reasons that Fathom expect emerging markets to support world trade growth.

  • In contrast to the advanced economies, EMs enjoy political and public support for further trade integration.
  • Most of the negative effect from slumping commodity prices on major exporters such as Brazil and Russia has passed.
  • EMs stand to benefit from a rosy global backdrop, and in particular, China’s efforts to ‘double down’ on its investment-led growth model.

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Globalization remains popular

While emerging markets have contributed to the slowdown in world trade growth in recent years, there has been no sign of support for unilateral moves towards increased protectionism.

Indeed, polls show that residents in the emerging economies are far more in favor of open economic policies than their Western counterparts.

EMs have benefited from the opening up in trade in goods and services.

Foreign demand and investment inflows have led to substantial increases in economic growth and average living standards, particularly in Asia.

chart of the week
Chart of the week — Views on trade vary significantly by region

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Further integration

The gains to EM economies from trade are partly a result of prior shifts in policy.

The weighted average tariff rate in 12 of the largest EMs was 13 percent in 1999. That figure declined to four percent in 2015.

While that is still more than double the average advanced economy, the spread between the two has been significantly reduced.

Moreover, the will in emerging economies — political and public — is for further integration. The next major multilateral trade deal will probably emerge from the Asia-Pacific region, without EU or U.S. involvement.

Weighted average of twelve large EM economies
Weighted average of twelve large EM economies

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Emerging market exports

Emerging economies have continued to drive world GDP growth in recent years, but have nonetheless been a drag on the world trade ratio.

The share of total EM exports and imports in world GDP has declined from a peak of 19.4 percent in 2013 to 16.1 percent last year.

That is less severe than the equivalent 33.5 percent to 26.4 percent drop experienced by the advanced economies, but it still marks a substantial shift from the fast-rising pre-crisis trend.

After staying in a 20 percent to 30 percent range from 1970 to 2000, intra-emerging market exports, as a share of total emerging market exports, jumped from 24 percent in 2000 to 40 percent in 2012.

However, as the second chart below shows, that ratio has flatlined over the past few years.

Merchandise trade (goods) chart

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EM exports (godos) chart

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Commodities slump

The observed slowdown in emerging markets trade since 2013 is, in large part, a reflection of the slumping price of commodities, which itself was partly attributable to weakened Chinese demand.

The weighted-average GDP growth rate in commodity-exporting EM economies slumped by more than three percentage points — from 3.6 percent in 2012 to 0.5 percent in 2016.

Other EM economies only slowed by 0.4 percentage points over that period – from six percent to 5.6 percent.

Fathom expect the slowdown in commodity-exporting EM economies to have ended in 2016. That will support rising EM trade over the next couple of years, and lead to a return to the rising share of intra-EM exports within total EM exports.

EM GDP, including Fathom forecast chart
EM GDP, including Fathom forecast chart

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China impact

The combined EM trade balance, relative to world GDP, has dropped from a one percent surplus in 2006 to a 0.2 percent figure last year.

If China is excluded, that figure has gone from being in surplus to the tune of 0.7 percent of world GDP in 2006 to a 0.6 percent deficit last year.

While some of that reflects the impact of weaker commodity prices, that shift is also consistent with EMs becoming a more important source of global demand.

Indeed, the share of EM imports within total world imports, increased from 37 percent in 2006 to 47 percent in 2016.

Trade balances (goods) chart
Trade balances (goods) chart

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Receding trade risks

Fathom continue to expect the gap in GDP growth rates between the emerging economies and their advanced economy peers to widen.

Financial markets appear to agree, and EM assets have benefited.

EM equities and EM FX are up 18 percent and six percent year-to-date, respectively — outperforming most of their peers

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