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 globalisation’. However, aided by a rebound in emerging markets (EMs), world trade growth has actually picked up in 2017. The weakness in EM trade since 2013 has partly reflected soft economic activity among commodity exporters. We 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.
In the near term, there are three key reasons that we expect emerging markets to support world trade growth. First, in contrast to the advanced economies, EMs enjoy political and public support for further trade integration. Second, most of the negative effect from slumping commodity prices on major exporters such as Brazil and Russia has passed. Finally, EMs stand to benefit from a rosy global backdrop, and in particular, China’s efforts to ‘double down’ on its investment-led growth model.
Globalisation remains popular in EMs
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 favour of open economic policies than their Western counterparts. EMs have benefitted from freer 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.
The gains to EM economies from trade are partly a result of prior shifts in policy. The weighted average tariff rate in twelve of the largest EMs was 13% in 1999. That figure declined to 4% in 2015. While that is still more than double that in 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 US involvement.
Commodities slump has weighed on EM trade
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% in 2013 to 16.1% last year. That is less severe than the equivalent 33.5% to 26.4% 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% to 30% range from 1970 to 2000, intra-emerging market exports, as a share of total emerging market exports, jumped from 24% in 2000 to 40% in 2012. However, as the second chart below shows, that ratio has flatlined over the past few years.
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% in 2012 to 0.5% in 2016. Other EM economies only slowed by 0.4 percentage points over that period – from 6.0% to 5.6%. We 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.
EMs, particularly China, driving world trade
The combined EM trade balance, relative to world GDP, has dropped from a 1.0% surplus in 2006 to a 0.2% figure last year. If China is excluded, that figure has gone from being in surplus to the tune of 0.7% of world GDP in 2006 to a 0.6% 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% in 2006 to 47% in 2016.
Receding trade risks have supported EM assets
We 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 benefitted. EM equities and EM FX are up 18% and 6% year-to-date, respectively – outperforming most of their peers.
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