Trade Sentiment Lingers, Emerging Markets Face Headwinds
There is little doubt that anti-trade sentiments are clouding the future of the global economy.
For proof, look at the March G20 meeting in Frankfurt, Germany, which made headlines for excluding anti-protectionism language in its joint declaration. This clearly broke the G20’s tradition of giving a thumbs-up to trade. If public officials backpedal on their commitment to open trade, they will jeopardize prosperity worldwide, especially in emerging markets.
Three things may happen if the anti-trade train continues to gather steam. Every one of them will surely keep business leaders up at night—and not for celebration.
While emerging markets are usually volatile, they have enjoyed high growth as global growth and trade expanded. Now, the pro-trade and pro-growth environment that brought sustainable global growth could be giving way to one that is considerably more uncertain as a number of mature economies turn their attention inward. Most emerging market economies depend on demand from these mature economies, so they are especially vulnerable to rising trade protectionism.
Forecasts suggest that 2017 global economic growth could inch up to 2.9 percent – up from 2.6 percent in 2016 and slightly better than earlier projections on the back of better performance from energy-producing emerging economies and some momentum in the US, Europe, and Japan. But uncertainties—including those on the trade front—continue to weigh down growth prospects for emerging economies, especially India, Mexico, Turkey, and Saudi Arabia.
On the upside, the US, Europe, and Japan are experiencing stronger internal growth dynamics. Still, this slight boost—even if it fully materializes—will lack the economic punch to ignite emerging markets.
Trade Markets Reshuffled
The evident lack of consensus from the G20’s March meeting on commitment to free trade puts trade-boosting agreements at risk. In particular, there’s America’s marked shift in its trade stance—namely, the death of the Transpacific Partnership (TPP). To make matters worse, little prospect exists for progress on the Transatlantic Trade and Investment Partnership between Europe and the US. While the Comprehensive Economic and Trade Agreement between the European Union and Canada passed, if barely, the future of the North American Free Trade Agreement (NAFTA) moved further into uncertain territory.
How can a reversal of trade fortunes affect emerging economies? Consider Mexico. The US market accounted for more than 80 percent of Mexico’s 2015 exports, according to the World Trade Organization. While that number overstates Mexico’s reliance on the US economy (by also including US imports that are re-exported), Mexico’s reliance on the global economy nonetheless remains intense. Recent Conference Board research using the World Input-Output Database reveals Mexico’s dependence on the global economy has significantly increased in the past two decades. In fact, global demand currently helps to generate close to 20 percent of Mexico’s GDP, a major chunk of it being from the United States.
As the larger trade partner within NAFTA, the share of US demand in Mexico’s GDP that results from demand from abroad is large—about 70 percent on average during the past 15 years. The opposite is not true. Mexico’s economy will suffer both from US trade protectionism and, indirectly, from US-engendered global trade protectionism.
Productivity Puts On The Brakes
Over the next decade, the world economy looks all but certain to putter along. The aging workforce and slowing productivity growth represent structural trends that are nearly impossible to change in the near term. The world economy will find it hard to reach and maintain 3 percent growth. While emerging markets will continue to contribute the lion’s share of global growth, they are not immune to the major trends slowing global growth. Examples are China’s aging workforce and Latin America’s slowing productivity, notably in Brazil.
Emerging markets will grow on average 3.6 percent per year in the next decade, down from 4.1 percent in 2012-2015. For the medium term there are no signs yet that policy changes will alter the trend. On the contrary, signals from the G20 finance ministers’ meeting suggest the opposite.
If the global free-trade agenda gives way to greater protectionism, the repercussions could put emerging economies in limbo. Also, the potential positive effects of trade on productivity and competitiveness recede farther out of reach.
Looking ahead, the outcome of several elections in Europe this year will affect how far anti-trade sentiment will advance. The next G20 summit will take place in July, and it remains to be seen whether this twelfth meeting of G20 leaders will provide more hope for emerging markets instead of more gloom. To a large extent, their prosperity—and that of the entire global economy —depends on it.
Ataman Ozyildirim is Director of Business Cycle and Growth Research at The Conference Board. He is based in New York City.