Anti-globalisation sentiment threatens to dent global trade
Emerging markets have been a beneficiary of globalisation and therefore look vulnerable
Reversing the tide of globalisation will be extremely difficult and emerging markets may not be as vulnerable as investors believe
Emerging markets have been a significant beneficiary of globalisation: As multi-nationals have pushed into new markets, or outsourced manufacturing, it has contributed to the growth in emerging market economies. That globalisation now appears under threat as developed markets adopt more protectionist policies. Does this threaten to derail emerging markets’ nascent recovery?
President Donald Trump has led the anti-globalisation charge with his promise to bring millions of blue-collar jobs back to the US. He proposes a border adjustment tax, which would impose a 20% tariff on imported goods, while providing write-offs for exported goods. This would be a threat to those emerging markets who rely on the US as a steady market for their products.
This protectionist instinct is not confined to the US. George Osborne famously labelled the UK leaving the single market as ‘the biggest act of protectionism in history’. There has been a recent spat between China and the EU over the latter’s protectionist policies in the steel industry. It seems protectionism is all around.
The first question is clear: Can the protectionist actions of politicians reverse the tide of globalisation? To our mind, this is easier said than done. Globalisation has been a trend for some time and has survived a number of storms. President Trump may claim ‘America comes first’, but reversing the tide on global trade is a tall order.
Partly, this is simply cost considerations: It remains significantly cheaper to manufacture in many emerging markets than domestically in developed markets. Labour costs are they key factor. IHS estimates that labour costs in the US are around $25-$30 per hour. This compared to cost of under $2 per hour in some of the cheaper Asian countries, such as Bangladesh. Even within Europe, to manufacture in Eastern European countries such as Bulgaria attracts labour costs per hour of around €4. This compares to €35 in France.
Equally, emerging market currencies have fallen a long way, particularly relative to the US Dollar, leaving goods and services looking even cheaper. A report by Market place calculated the cost of an American-made iPhone 5 to be around $2000, compared to its current cost of $650-$850. If the strong Dollar persists, the hike for international buyers of iPhones would be even higher. The same would be true for clothing, cars or televisions.
US politics has historically been driven by the needs and wishes of certain institutions and special interest groups. It will be difficult to square these cost increases with the business community, or with consumer groups. There have been lots of sensational headlines, but we don’t see protectionism as a long-term risk to globalisation.
There is another, broader, question. To what extent are emerging markets dependent on globalisation for economic growth? Is intra-emerging market trade developing? Have they developed their own self-sustaining growth pattern?
Certainly, we believe that we are a long way down the road of globalisation and it is not likely to be the driver for emerging markets from here. Emerging markets are increasingly standing on their own two feet. The vast majority of drivers for emerging market economies are domestic rather than international.
There is political and economic reform. Across Latin America, for example, governments are pursuing more orthodox economic policies. In Chile, Peru and Columbia, we see very good economic management. Although starting from a low base, Brazil is also seeing improvements. We believe this will be for the long-term good of the economy in the region.
Emerging market economies are moving beyond ‘widget making’ and into more sophisticated areas. The Financial Times recently reported that China had moved from being an ‘imitator’ to an ‘innovator’ in technology, noting that venture capital investment into fintech had doubled, at the same time as it had dropped 38% in the US. Chinese companies can increasingly claim to be the equals of those in Silicon Valley, rather than just their component makers.
Intra-regional trade between emerging markets is also increasing and China is often as important a market as the US, particularly for Asian emerging markets. Certainly, some countries and companies are more affected than others, but this gradual move to self-reliance should see emerging markets less vulnerable to shifts in sentiment around globalisation.
Emerging markets have been hit by anti-globalisation sentiment, but we believe this may have gone too far. Even if developed markets do manage to enact limited protectionist measures, emerging markets have more resilience than investors may think, fuelled by domestic innovation and reform. (Source: http://www.marketviews.com/www.aberdeenemergingmarkets.co.uk)