Global Disruption and Emerging Markets
The focus of the current global disruption is often on the US and China; however, the real impact is more profound on emerging markets and developing economies. These regions are grappling with the combined effects of tariffs, trade diversion, and rapid technological change.
Tariffs
- Role of International Trade: For 25 years, international trade has been crucial for emerging markets (EMs).
- Current Crisis: Global trade faces a severe crisis initiated by a slowdown post-global financial crisis, compounded by non-tariff barriers from Covid, and amplified by US tariffs.
- US Tariffs Impact: US tariffs have surged from 2.7% to nearly 18%, reminiscent of the 1930s levels.
- Challenge for EMs: With EMs more export-reliant than the US, they must navigate rising protectionism and economic balkanization.
Trade Diversion and China Shock 2.0
- Protectionism Effects: As the US imposed tariffs on China, China redirected exports to developing economies.
- US Tariffs on China: Increased from 10% to 42%, accelerating trade redirection.
- Chinese Excess Capacity: Potential flooding of EM markets, leading to domestic manufacturing challenges in countries like Thailand, Indonesia, and India.
- China Shock 2.0: EMs must prepare for increased competition from Chinese imports.
Technology
- Technological Change: Rapid change poses the risk of shifting from labor-augmenting to labor-substituting.
- Pressure on Jobs: Rising capital-labor ratios threaten blue-collar jobs and are extending to white-collar jobs.
- Impact on Developing Economies: Younger populations are most at risk in regions like South Asia and sub-Saharan Africa.
Policy Response and Recommendations
- Against Protectionism: Turning inward and resorting to import substitution could be detrimental.
- Export-Led Growth: Historical evidence shows that strong exports and global engagement are vital for sustained growth.
- India's Position: India occupies less than 2% of global manufacturing, offering room for growth without needing a larger global trade pie.
Reform Imperatives
- Competitiveness: Essential to counter rising protectionism and Chinese imports.
- Foundational Reforms: Focus on land, labor, power, health, and education. The recent GST simplification is a positive start.
- Capital-Labor Ratio: Need for policies that help labor effectively compete with capital.
Conclusion: Strategizing for Emerging Markets
Emerging markets face a pivotal moment, with multiple reinforcing shocks. To thrive, they must embrace reforms and resist protectionism. These strategies will involve creative destruction, re-skilling, robust safety nets, and a supportive tax system. This is an opportunity for transformation rather than regression.
