Trade wars and emerging markets
The latest shots in an escalating trade dispute were fired earlier this month as China announced a potential retaliation to US measures.
Tensions are certainly higher than they have been for years, with the US Secretary of the Treasury Steven Mnuchin taking a trade delegation to China later this week.
Schroders Emerging Markets (EM) Economist, Craig Botham, argues that it is important to remain focused on how damaging the current measures are likely to be, for the rest of EMs, as well as China. For now, at least, the pain is likely to be concentrated in Asia, but that will not hold if the conflict engulfs the rest of the globe.
We do not think it is beyond the realms of possibility that the current spat could escalate further and ultimately drag on other economies.
A report earlier this month suggested China was looking at currency devaluation as a tool to counter the impact of US tariffs. Taking a simplistic approach, let us assume that China decided to aim for a 25% devaluation to directly offset the price effects of the tariff.
This would not be an isolated move against the dollar, but would likely see the renminbi fall by similar amounts against the euro and yen (depending on how the central bank conducted its intervention). We might expect, in this scenario, European economies and Japan to implement their own defences against a suddenly much more competitive China. We might then also expect China to respond with tariffs against those countries. This would naturally have a greater impact on global trade flows, with many global supply chains adversely affected and even breaking down.
The chart below shows the relative importance of exports to EM GDP; a good way to rank vulnerability to a true trade war scenario. As might be expected, economies in Asia are among the most exposed, with Hungary and Poland also likely to be badly hit.
Emerging market reliance on global trade
However, there are some caveats. Malaysia, Mexico and Russia are all oil exporters, and it seems unlikely that oil will face tariffs in any scenario. This protects at least some of the exports for those economies. Similarly, we could argue that the risk to Hungary and Poland is overstated given that the bulk of their exports will be within the European Union (EU), and so not subject to tariffs even in a trade war. They will still be hit, given they are part of the German export supply chain which will face tariffs outside the EU, but the pain will be less than the raw data might suggest. Meanwhile, economies like Brazil and India, with limited external demand exposure and large internal markets, should be better insulated from a downturn in trade.
Collateral damage bears watching
While headlines focus on the damage to China in the event of any trade war, our analysis here shows that other EM economies could suffer almost as much. In some cases, governments in those other economies will also lack the resources of Beijing, and will face greater domestic political pressure to act.
However, we did also find some economies less exposed to the first round effects of tariffs; the immediate damage is focused chiefly on EM Asia, while relatively closed economies like Brazil and India should be more insulated than other economies in the event of a more global trade war. Furthermore, there can be some limited gains from tariffs. Mexico, Thailand, South Korea, Malaysia, Indonesia and Brazil all have potential gains to be realised in the event of tariffs, which could help offset some pain.
Schroders' Chief Economist Keith Wade has also explored the implications of a US-China trade war. Click here to read his research.
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Notes to Editors
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