In the decades leading up to the global financial crisis (GFC), global trade grew roughly twice as fast as global output. But in the five years before 2016, trade mostly underperformed activity, prompting many to call the end of globalisation. We indulged in those discussions ourselves eighteen months ago. These calls, it seems, were premature.
This is highly relevant for emerging markets (EM), many of which rely on trade for economic development. The exposure to global competition is essential for EM to move up the value chain and towards the technological frontier as demonstrated again and again by the likes of South Korea, Taiwan, China, Bangladesh, and Ethiopia.
Those calling a peak in trade pointed to major structural drivers like the fall of the Berlin Wall, European integration, and China’s WTO accession, which had all run their course.
However, rising import-to-GDP ratios in developed markets (DM) after years of stagnation are the clearest sign that globalisation is advancing again. Economies hit hardest by the GFC (US, Spain, Italy) saw a bigger and longer-lasting impact on trade, suggesting that trade stagnation was cyclical in nature. The propagating factor seems to have been investment which is both more cyclical and more trade-intensive than the other GDP components.
Another school of thought saw global production chains on the retreat. Natural disasters like the Thai floods and Japanese earthquake in 2011, the argument went, had revealed the vulnerability of extended production chains. Higher labour costs in China were also to blame. But with hindsight, it looks like global production chains are also highly cyclical. This is due to the fact that demand switches towards nondurables during downturns which tend to have shorter value chains.
Protectionism also was kept in check after the GFC, in contrast to people’s fears. This may still change under President Trump, but on the other hand the commitment to free trade in the rest of the world seems as strong as ever.
All this is potentially great news for emerging markets and contributes to our team's positive short and long-term outlook.