20 September 2010
Ousmène Mandeng, Ashmore Investment Management
Emerging markets are set to continue to grow significantly faster than advanced economies. This rests in part on increasing reliance on domestic consumption. It reflects above all growing exports to other fast growing emerging markets. The increasing progression towards inter-emerging markets international trade is naturally a reflection of the increasing economic weight of emerging markets in the international economy. Yet, it could be the key driver of and basis for sustained higher overall economic growth. The more successful emerging markets are therefore likely to be the ones that will manage to redirect their trade to the fastest growing emerging markets. Trade divergence could become the self-propelling mechanism by which emerging markets establish the basis for faster growth even before greater reliance on domestic consumption materialises.
The international economy is changing. Emerging markets ex- ports represent 36 percent of world exports in 2009 compared with 25 percent in 2000.1 Excluding fuel exporting countries, the share of emerging markets increased from 20 percent to 29 percent of total non-fuel exports over the same time frame. The increasing market share of emerging markets illustrates the ability to penetrate markets faster. At the same token, the share of Germany, United States and Japan, traditionally the largest exporters, declined from 28 percent to 22 percent of world exports between 2000 and 2009.
Advanced economies are concerned about losing market share as illustrated by the ongoing debate between the U.S. and China about needed exchange rate realignment and the recent spat with Japan regarding its exchange market intervention. However, it merely seems to mask an underlying more secular trend by which advanced economies will find it difficult to maintain their overall market share in world exports. Over the recent three decades, the share in world exports of Germany, United States and Japan peaked in 1986 at 33 percent of world exports. The decline is simply in line with the decrease of the combined GDP of the United States, Japan and Germany in world GDP at market prices during the same period from 53 percent in 1988, but maintaining it relatively steadily through 2000 at 52 percent, to 39 percent in 2009.
Brazil has flipped around its main trading partners. China today represents Brazil’s largest export destination. Brazil’s exports to China in percent of exports to the world have increased from 2 percent in 2000 to 13 percent in 2009. During the same period, exports to the United States declined from 22 percent to 11 percent of total exports. This illustrates also a more general trend by which exports to emerging markets and developing countries for the first time in 2009 exceed exports to advanced economies. The speed at which trade is being redirected seems to point towards increasing flexibility in penetrating and exiting markets. This may be the basis for allowing countries like Brazil to maintain relatively high overall economies growth.
Exports are a function of volume and price. The increase in commodity prices undoubtedly plays a role in fostering markets shares of commodity exporters many of which are emerging mar- kets. Exchange rate changes also play an important role and may unduly favour countries that saw a depreciation of their exchange rates. However, exchange rates do not provide an unambiguous guide to import penetration. Total U.S. imports from Germany have remained broadly steady at 4.5 percent of total U.S. imports between 1980 and 2009 despite the fact that the German mark appreciated from DEM2.00 in 1980 to DEM 1.36 in 2009. Simi- larly, between 1994, following China’s large 1994 devaluation, and 2009, the share of China in total U.S. imports increased from 6 percent to 19 percent in 2009 while the renminbi appreciated against the dollar from RMB8.45 to RMB6.83.
China is fast becoming the largest export destination. While the U.S. has remained the largest importer of the world, China is catching up. In 2000, there were only 11 countries whose largest export destination was China; in 2009 there were 54. In 2000, China total imports represented 17 percent of U.S.’ total imports; in 2009 they represented 62 percent. The transformation of the composition of China’s imports by country shows that China has become a major hub for Asia and natural resources exporters. The relative decline of China’s major import sources, the U.S., Japan, Germany but also Hong-Kong illustrate both shifts in relative competitiveness and also changes in the sectoral composition of imports. Possibly more important is the fact that China’s imports have become more diversified by country hinting that China is becoming a major export destination for an ever larger group of countries.
Emerging markets imports are coming increasingly from emerging markets. The share of emerging markets in total emerging markets imports increased from 28 percent in 2000 to 41 percent of total imports in 2009. China itself increased its share of emerging markets from 22 percent in 2000 to 30 percent of total imports in 2009. Using a broader definition (see footnote 1) and including Korea, Hong-Kong and Singapore, China’s imports from emerging markets represented already 44 percent of total imports in 2009.
The U.S.’ spat with China about China’s exchange rate regime misses the big picture. China has indeed been run- ning consistently a trade surplus with the U.S. since 1994— China is running trade deficits with Korea, Japan, Germany and resources exporters. However, the U.S. has lost mar- ket share in total world imports more broadly. Between 2000 and 2009, the U.S. has lost 5 percentage points of its share of world imports from 13 percent to 9 percent. Significant losses occurred in particular in Latin America, notably in Mexico where the share of the U.S. in total imports declined from 72 percent in 2000 to 49 percent in 2009. In Japan over the same period, the U.S.’ share fell 8 percent- age points from 19 percent to 11 percent and in the European Union from 11 percent to 8 percent. In China, the U.S. lost from 10 percent in 2000 to 8 percent of total imports in 2009.
The shift in trade directions reflect the fundamental changes that have occurred in the international economy. Total exports represent US$12.4 trillion or 21 percent of world GDP in 2009 and while down from 26 percent in 2008, international trade will remain a key source of eco- nomic growth. Emerging markets are penetrating world markets fast and become themselves key destinations for international trade. This inter-emerging markets integration is likely to represent a major structural trend over the medium term. It will mean that advanced economies will lose market share. For emerging markets it will be a main driver of economic growth and one that is set help persistent higher growth going forward. Emerging markets may just need advanced economies far less than what was usually assumed. International investors will need to reflect this new reality in the composition of their own portfolios.
1 The data are based on the IMF Direction of Trade Statistics (DOT). DOT underestimates the share of emerging markets as it classifies as advanced economies: Israel, Hong-Kong, Singapore, Korea and Czech Republic, Cy- prus, Slovak Republic and Slovenia.