Page 42 - STRATEGY Magazine

ing markets is therefore likely to be indirect, as weaker British import demand ripples across the global economy.
TRUMP THUMP
A greater risk comes from President Trump’s protectionist rhetoric, which raises the specter of retaliatory trade prac- tices engulfing the globe. The United States is not simply the world’s largest economy, but it is also the largest importer for one-fifth of the world’s countries. Further, it is the leading des- tination of goods from more than half of the emerging markets and developing economies in Latin America and South Asia.
The trade dependence is most stark for Mexico, a country that exports about 25 percent of its GDP to the United States. Hardy countercyclical investors may see opportunities in Mexico as concerns about Trump’s policies weigh on the peso and investors hesitate. However, with an economy singular- ly geared toward exports to the United States, most analysts emphasize the unequivocal risks to Mexico’s outlook from any new trade restrictions, specifically renegotiation of aspects of NAFTA.
However, such a move would also have a negative impact on the United States, which sold about US$231 billion in goods to Mexico in 2016. An estimated five million jobs in the coun- try are dependent on trade with Mexico, and 40 percent of the value of the goods that Mexico ships north of the border comes from inputs bought from the United States. Retaliation is also a risk. In 2009 the United States barred Mexican trucks from its roads to protect the jobs of American drivers. Mexico re- taliated by imposing tariffs on nearly 100 American products, including strawberries and Christmas trees.
ASIA ASCENDANT?
If U.S. trade barriers lead to slower global growth, all countries would be impacted to some extent. However, nearly 60 per- cent of emerging markets’ exports now head to other emerg- ing 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 Mal- colm Turnbull said in January that “certainly there is poten- tial 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 emerg- ing 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 Da- vos in January 2017, Chinese President Xi Jinping made an eloquent speech in defense of globalization and free trade, say- ing 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 Region- al 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 poli- cy 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 thriv- ing domestic economies, it may be that the advanced nations are the biggest losers of all.
40 STRATEGY
At a May 2017 summit in Beijing on China’s “One Belt One Road” initiative
,, Chinese President Xi Jin- ping told world leaders, “We need to improve pol- icy coordination and re- ject beggar-thy-neighbor practices.”
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