The new mood of protectionism in Washington, D.C., is bad news for some emerging markets, but for others it may be an opportunity to boost regional trade agreements and move up the value-added chain.
The 2008–2009 global financial crisis and recession triggered a range of protectionist responses around the world, culminating in the 2016 withdrawal, known as Brexit, of the United Kingdom from the 28-nation European Union, and U.S. President Donald Trump pulling the United States out of the Trans-Pacific Partnership (TPP), an agreement between 12 countries that covered some 40 percent of the global economy, and triggering the clock to renegotiate NAFTA in 2017. While the advanced economies pull away from the global stage, what does this mean for the world’s emerging economies?
Although the World Bank and other organizations anticipate a moderate global economic recovery in 2017, risks to the forecast are tilted to the downside, not least because of policy uncertainty around trade in the major economies.
Between 1985 and 2007, the world enjoyed substantial globalization and rapid economic growth. As the IMF noted in October 2016, “There is strong consensus among economists that international trade contributed to the rise in overall prosperity.” Recently, however, the organization warned that the trend of protectionism in advanced economies is one of the factors creating a more challenging environment for emerging and developing economies. This in turn has implications for the global economic outlook; emerging and developing economies now account for more than 75 percent of global growth in output and consumption.
Whom Does
Protectionism Protect?
Numerous studies have shown that free trade boosts international growth, as well as the growth rate of individual countries. Yet not all communities and producers have benefited equally, leading to calls for trade protection. Such policies vary from the imposition of quotas and providing state aid to producers, to import tariffs and regulations that discriminate against imports, to the 20 percent border tax that President Trump threatened to impose on Mexican goods entering the United States. In sum, one country’s “legitimate policy to nurture domestic producers” is another’s “egregious trade restriction.”
Most economists who study global trade agree that trade barriers reduce aggregate output and threaten to damage all the involved economies should a trade war ensue. Conversely, research shows that a reduction of tariffs from one side alone can raise growth rates of all affected nations.
Brexit Bump
The first protectionist shock in the past year was the United Kingdom’s vote in June 2016 to leave the EU, although the impact is not yet clear. Restricting the free movement of people, a form of protectionism, was central to the vote. Nevertheless, Prime Minister Theresa May has insisted that the UK is eager to sign trade deals with other countries. Much depends on the agreement that the nation negotiates with the EU; a “hard” Brexit that leaves the UK locked out of preferential trade deals with the EU27 would have negative impacts on the British economy, but the long-term consequences are still murky.
From the point of view of emerging markets, Brexit may not be very meaningful; emerging market exposure to trade with the UK is not very high. On average, emerging markets send only 3 percent of their exports to the country. The nation is the second-largest export market for Turkey, but only 7 percent of Turkish exports are destined for the UK Any negative impact Brexit might have on emerging markets is therefore likely to be indirect, as weaker British import demand ripples across the global economy.
At a May 2017 summit in Beijing on China’s “One Belt, One Road” initiative, Chinese President Xi Jinping told world leaders, “We need to improve policy coordination and reject beggar-thy-neighbor practices.”
Asia Ascendant?
If U.S. trade barriers lead to slower global growth, all countries would be impacted to some extent. However, nearly 60 percent of emerging markets’ exports now head to other emerging markets, many of whom are no longer just assemblers of Western goods. It is not yet clear how much of this nascent emerging market trade is ultimately dependent on the United States as the final consumer, but as countries such as South Korea and India move up the income chain, they will become major consumer markets in their own right.
The regional trade trend is strongest in Southeast Asia, where trade is the lifeblood. South Korea derives 38 percent of its GDP from exports and Taiwan, about 70 percent. Even Vietnam, the least-developed TPP signatory, is committed to a path of economic liberalization. This helps explain why the 11 remaining signers of the TPP are exploring ways to proceed without the United States. Australian Prime Minister Malcolm Turnbull said in January that “certainly there is potential for China to join the TPP.”
China Cheers
Any discussion of emerging market trade, particularly in the Asia-Pacific region, comes back to China. The largest emerging economy and the second-largest global economy (indeed, the largest by some purchasing power parity measures), China could be the big winner if the United States withdraws behind protectionist barriers. At the World Economic Forum in Davos in January 2017, Chinese President Xi Jinping made an eloquent speech in defense of globalization and free trade, saying that “pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air.”
China is stepping up its support for the 16-nation Regional Comprehensive Economic Partnership (RCEP). Focused on expanding Southeast Asian trade ties, this multilateral deal has been in negotiation since 2012 and does not include the United States. It would cover about 30 percent of the global economy and close to one-half of the world’s population. At its core is the 10-member Association of Southeast Asian Nations (ASEAN), a trade bloc that is also working to boost economic growth within the region. The RCEP includes the ASEAN 10 plus Australia, India, New Zealand, Japan, and South Korea.
China faces significant challenges, however, to taking on the role of a linchpin global trade market. It is in the a troubled transition that will take years to complete. The country also faces a demographic time bomb; decades of the One Child policy have resulted in a rapidly aging and contracting population. This will make it harder to convince others in the region that China can replace the United States as a major consumer of trade goods.
All told, there are few winners if the advanced economies throw up protectionist trade barriers, and potentially many losers. But as more emerging markets develop their own thriving domestic economies, it may be that the advanced nations are the biggest losers of all.
