This Blog Post

Strategic Outlook: Emerging Markets

Davos, Switzerland – Emerging markets are losing out as the result of the recent signing of Phase 1 of a trade deal between the United States and China because they will see trade volumes decline, and will have to negotiate their own trade deals.

Addressing a meeting at the World Economic Forum on Wednesday, panel member Jin Keyu, Professor of Economics, London School of Economics and Political Science, said the recent trade deal had increased risk aversion to emerging markets, which are suffering as capital flows move back to safe havens.

Bill Winters, Chief Executive of Standard Chartered, called Phase 1 a “truce” and a good sign in a battle that had been escalating as China has committed to open up some sectors, and the United States is partially rolling back tariffs. “It’s a step in the right direction.”

However without a second phase, the current deal will come under immense pressure, said Winters.

American farmers, who had previously been big losers, are now the winners, said Winters. While China was never going to run out of soybeans, they will now buy them from farmers in the United States.

Another impact will be that supply chains across the world will have to reconfigure with the volume of anticipated trade. But many manufacturers are hedging their bets when it comes to facilities outside China and are looking at countries such as Vietnam, where investment has been accelerated.

Keyu pointed out that, as part of the deal – and as an example – China has agreed to buy $2.4 billion in nuts from the United States. This meant that other countries will lose out as sales go to China. Countries such as Australia, New Zealand and others will need bilateral trade agreements.

Alicia Bárcena Ibarra, who serves as the Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), added that the trade war and subsequent deal had affected Latin America substantially and had resulted in lower commodity prices, with the exception of oil, the price of which has been driven higher due to tension around Iran.

Ibarra said Latin American countries, who enjoyed a short term by selling soybeans to China may lose out now as trade shifts from Latin America to the United States. “The impact is big.”

In addition, the Mexican trade deal with the United States is good for that country, but may discourage inward investment from other countries like China and Germany, said Ibarra.

Mohammad Al Tuwaijri, Saudi Arabia’s Minister of Economy and Planning said it was important for emerging markets to address corruption in order to attract inward investment.

Another issue emerging markets have to grapple with is inequality, which has led to protests across Latin America. Ibarra explained these protests were because the bulk of wealth is in the hands of the few, which means that there is a lack of buying power in areas such as transport, education, and pharmaceuticals. As a result, household debt has escalated.

If the product of economic and trade growth is going to the top ten percent of the population, then this is problematic, Ibarra added. This extends beyond income, to wealth and opportunities.