Over the years many people have remarked to me that there is never a dull moment in emerging markets. Never were that more true than now.
The US intention to impose tariffs on imports of Chinese steel and aluminium is one story to grab the headlines just recently in a year that has already seen various highs and lows, from the departure of South Africa’s embattled President Zuma to talk of renewed sanctions against Russia. All of this can cause alarm but it always pays to scratch beneath the surface to get a sense of the outlook for emerging markets.
The US’s moves against China, and the reciprocation are a case in point. It is easy to take the US’s intention to impose about $60 billion of further tariffs on imports of Chinese steel and aluminium as the first shots in a trade war between the world’s two largest economies.
In many ways, it is a natural reaction. After all, the last 30 years have been largely defined by a mantra, led by the US, of removing barriers to trade globally. This has led to unparalleled growth and development that has benefited most countries, not least emerging markets.
China’s economic might and thirst for resources from other countries makes it a bellwether for other emerging markets. If China sneezes, the wider emerging market universe does not necessarily catch a cold but it certainly takes fright. Emerging markets more broadly benefited significantly from low trade barriers. So such an apparently brazen affront to global trade such as tariffs might be concerning.
Look beyond the surface
But these conclusions require greater scrutiny. Firstly, so far, this is not a trade war. The Trump administration is trying to rebalance the economic relationship with China, particularly the perceived unbalanced bilateral trade relationship. China knows this and its response has been measured.
The risk of escalation is there, and it would certainly damage global growth and emerging markets if it were to happen. But both parties fundamentally know how much is at stake. China is increasingly becoming a story about massive domestic demand. Growth is slowing but that domestic demand will suck in many of the world’s resources for years to come.
Secondly, there is also a need to separate words from deeds. We still do not have the detail of the tariffs and that will be critical to see whether they match up to the rhetoric heard so far.
It would not be the first time that Trump administration actions have not been as excoriating as the rhetoric.
It would not be the first time that Trump administration actions have not been as excoriating as the rhetoric. Mexico is a good example. It has fared pretty badly in recent years. US talk of repatriating industry and concerns about the North American Free Trade Agreement (NAFTA) have compounded domestic political challenges that have weighed on the currency and growth. Given the economy’s reliance on that of the US, this has led many to be pretty downbeat on the country’s prospects.
But the picture could be much less bleak than some predict. It is notable that for all the talk of getting tough on Mexico, it and Canada are exempt from the US’s tariff measures. Meanwhile, the words about NAFTA being ripped up are looking increasingly likely to be confounded by reality.
Mexico has its challenges. Its trading relationship with the US probably will change, even if the reality is less dramatic than the rhetoric. Social and economic progress is proving harder and more faltering than during the commodities boom years.
It is a challenge familiar to other emerging markets like Brazil. It has suffered a torrid period of recession, protest and the exposure of endemic corruption.
But the country is now emerging from that period with economic growth returning and inflation improving.
The fortunes of other major emerging markets are looking similarly positive. In India, the currency has been weak but inflation is improving and the wide-ranging reform programme of President Modi will have incremental benefits for years to come.
Taken as a whole, the major economic engines of emerging markets are ticking along. Politics will always be a feature for emerging markets. But politics and economics are inseparable in most countries, not just emerging ones. The key is to separate words from reality.
A version of this article appeared in Investment Week on 4th April.