Slowing global trade growth is forcing emerging economies to rethink their growth model
EM countries, particularly those that are reliant on export-led growth models, are being forced to adjust to weak external demand, low commodity prices and a rebalancing China. As a result, EM exports have been very weak over the first half of the year. Most of the weakness can be attributed to lower commodity prices and a stronger US dollar, but, stripping out those effects, it is still evident that weak external demand is playing a role. Data from the CPB showed EM trade volumes slowed sharply over the early part of the year and country data show exports have remained weak in the second quarter. Weak domestic demand from China is playing a role – Korean exports fell 6.8% this quarter versus 2.9% in Q1 and Taiwan experienced similar weakness with exports falling 9.8% versus 4.1% in Q1. That said, exports rebounded a little in June, with stronger data in China, Korea, Vietnam and Brazil suggesting a strengthening US economy and recovery in Europe could support EM exports over the second half of the year.
China’s role as a driver of intra-EM demand has greatly increased over the past decade. Because of this, as China’s economy rebalances and its role in global manufacturing supply chains changes, EM countries that relied on strong demand from China will be forced to adjust. China’s integration into the global economy had an enormous effect on both the volume and structure of world trade. China’s emergence was a reason why trade growth through most of the 1990s and 2000s was so rapid, and growth in processing trade ensured that countries exporting components or raw materials to China would also experience rapid export growth. The change in China is twofold; slowing growth and rebalancing will change the composition of China’s imports, while movements up the value chain and import substitution have decreased China’s processing imports. Whereas in 2000 imported components made up nearly 55% of China’s exports, imported parts now account for roughly 35% of exported goods (see Chart 10). As China is increasing its value added, global supply chains are becoming less relevant and more is being produced in regional Chinese production networks. This is having a chilling effect on overall global trade growth as gross trade flows fall, but also on countries that have traditionally relied on China as an export market for intermediate goods.
China may be an exporting juggernaut but as it moves up the value added chain, it is surrendering market share, particularly in traditional light manufacturing, which is good news for neighbouring countries Vietnam and Cambodia. These countries have been rapidly gaining export market share and their economies have been growing at 6%-plus as a result (see Chart 11).
While it may be harder for countries to experience the same rapid export-led growth as the East Asian tigers did over the past four decades, it’s important to keep in mind that geography still matters. History has shown that when labour-intensive industrial capacity moves from one country to the next, it tends to stay in the same region and along the same shipping and logistics lanes. Countries that sit along the same shipping lanes as China, Japan and the original Asian tigers are at a natural advantage, as are countries immediately adjacent to developed Europe and the U.S. However, India, Africa and the Middle East are fighting an uphill battle.
Alex Wolf - Emerging Markets Economist - Standard Life Investments Ltd