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Tariffs

Developing Countries Risk Being Casualties of Global Reset, But They Can Use Shocks to Recharge Their Economies

Strategic Insights

— 2 min read

The current global disruption, characterized by tariffs, trade diversion, and technology, is poised to have a disproportionately significant impact on emerging markets and developing economies. The growth of these emerging markets, which have relied heavily on international trade for 25 years, is now threatened by rising protectionism and economic balkanization. As the US imposes tariffs on China, China is redirecting its exports to developing economies, further exacerbating the issue. This perfect storm of tariffs, trade diversion, and technology poses significant challenges to developing economies, particularly those with younger populations.

Key Takeaways:

  • Emerging markets, far more open and export-reliant than the US, are likely to face severe challenges amid rising protectionism and economic balkanization.
  • The growth of emerging markets is correlated with global trade volumes, which are experiencing one of their most acute crises.
  • The effective tariffs in the US have increased from 2.7 per cent to almost 18 per cent, levels last seen in the 1930s.
  • China has begun to redirect its exports to developing economies from Latin America and Africa to Asia, accelerating after the US tariffs on China hiked from 10 per cent to 42 per cent.
  • Emerging markets must brace for the influx of Chinese imports, which threaten their domestic manufacturing bases.
  • The rapid evolution of AI will broaden pressures from blue-collar to white-collar jobs, with developing economies at risk.
  • Only 13 economies since the Second World War have grown at 7 per cent for 25 years or more, and they all had strong exports and global engagement.
  • India must not despair, as its share of global manufacturing is still less than 2 per cent, and it needs to increase its share within the global pie.
  • Reforms are necessary to make Indian firms more competitive, productive, efficient, and innovative, particularly in land, labour, power, health, and education.
  • Bending the capital-labour ratio is crucial to job creation, which requires education, health, skilling, and flexible labour laws.
  • The sheer pace of technological dynamism and diffusion demands that societies and economies are re-wired to enable creative destruction.

Statistics:

  • Global trade volumes are experiencing one of their most acute crises.
  • Effective tariffs in the US have increased from 2.7 per cent to almost 18 per cent.
  • 85% of India's exports are labour-intensive.
  • India's share of global manufacturing is still less than 2 per cent.
  • 13 economies since the Second World War have grown at 7 per cent for 25 years or more, and they all had strong exports and global engagement.
  • The US accounts for less than 15 per cent of global imports.

Sources:

  • [Adam Smith's Wealth of Nations, 250th anniversary]
  • [US-imposed tariffs on China, 2017]
  • [Trump tariffs on China, hiked from 10 per cent to 42 per cent]
  • [IE Online Media Services Pvt. Ltd.]
  • [J P Morgan]

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