Insight

Re-globalization is creating opportunities for emerging markets

Re-globalization is creating opportunities for emerging markets

Threats to globalization challenge the core investment thesis of emerging markets (EMs) – to capitalize on the economic and financial convergence of lower income countries with developed markets (DMs). However, we do not expect “de-globalization”. Instead, we believe the world is undergoing “re-globalization” – a revamp of a single system to a multipolar economy with trade/investment patterns based on geography (“near-shoring”) and geopolitics (“friend-shoring”).

Drivers of global trade growth are shifting from goods towards services and technology. In short, we see a reconfiguration of global supply and value chains, not their elimination. And that implies a redistribution of economic activity and investment rather than undercutting of EM as a whole.

Despite efforts to reduce dependence on China, US-China bilateral trade is still growing. Yet, China is no longer the US’s largest foreign trade partner. Mexico has now taken over as the US’s largest single trading partner – which was the case from the early 1990s-early-2000s before China’s WTO accession. 

US-Mexico trade exceeds US-China, USDbn/month

Source: IMF, OECD, Macrobond, Invesco. Monthly data as at 14 June 2023

The Mexico / China dichotomy is a useful test case for deglobalization vs. re-globalization. Mexico has long been highly integrated into the US economy, and this relationship deepened with NAFTA implementation from 1994. This integration took a back seat to China’s when the latter joined the WTO. In contrast, from 2004, Central Europe and Eastern Europe experienced rapid convergence in per capita incomes and capital asset prices/risk premiums with EU. China’s catch-up shows that globalization can contribute to significant economic outperformance. Central Europe’s rise shows that re-globalization can have a similar effect, even for much smaller economies.

Meanwhile, EU-China trade shows a more nuanced story. The EU is imposing EV tariffs on China, just as Brazil, India and other have imposed steel tariffs and other non-tariff barriers. Yet, the EU tariffs are believed to be too low to discourage Chinese EV exports to the EU. This implies that the competitive pressures will persist. EU-China bilateral trade data dropped from all-time highs, in both directions. The data also suggest that EU-China trade is normalizing after a surge during COVID. However, there are still risks of further trade friction between EU and China and other EMs. These concerns may escalate should President Trump be re-elected. 

EU-China trade on pre-2019 trends, USDbn/month

Source: IMF, OECD, Macrobond, Invesco. Monthly data as at 14 June 2023

The rising role of services trade in globalization supports the notion of re-globalization too. For example, India’s services exports have exceeded China/EU exports and are now around US$30bn/month. We expect this trend to continue even as global goods trade flatlines. Domestic political pressure, economic resilience, climate change and even national security are generally more focused on goods than services. Furthermore, the services component of goods trade is rising with technology becoming increasingly embedded in our lives. 

India services export boom, USDbn/month

Source: IMF, OECD, Macrobond, Invesco. Monthly data as at 14 June 2023

Finally, the climate transition depends on critical raw materials. Main deposits of which are found in EMs or Frontier Markets (FM), which are willing to export those products to large markets in the West, China, India and other EMs. Altogether this suggests that the re-globalization will create both challenges and opportunities in many EMs. We would expect this to be reflected over time in risk premiums across EM economies. 

A version of this article appeared in South China Morning Post on June 28, 2024.

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