Hedley Market Commentary - June 2019

Why Global Trade Matters - Market Commentary June 2019

By Neil Worsley, Investment Strategist, on 05.06.19

With President Trump seemingly bent on waging trade wars around the globe, it is worth looking at why global trade matters and why it has become such a big issue, seemingly driving share prices on a weekly basis.

Trump attempts to rebalance global trade

The escalating trade dispute between The US and China has already led to ever increasing tariffs on hundreds of billions of goods as President Trump attempts to rebalance global trade away from the developing world. However, China is far from the only nation challenging the status quo.

Emerging economies up 10 fold

At the turn of the century, just over 60% of all bilateral trade was between ‘rich’ countries, namely, US, Canada and Europe, but now that share has fallen to 47% as developing countries expand, with globalization and cheap labour, and become more prominent trading partners. The value of trade between emerging economies is up 10 fold over the same 20 years as they become less reliant on the developed world. While the share of global trade has grown rapidly in Latin America and Africa, the real dynamic emerging market counterweight has come from the East, namely, China, India and Southeast Asia. Some 53% of bilateral trade now involves an emerging market, up from 37% in 1997 and though trading between developing countries themselves remains relatively low at 14% of the total, it is thought that this will be in the majority by the end of this century.

Insatiable appetite for energy

If we look at some examples of the rise of developing markets, 78% of agricultural exports from Brazil and Argentina now goes to other emerging markets – this figure was 50% just 20 years ago. China now buys nearly 30% of all agricultural exports from Latin America, up from 6%, while in the Netherlands, its share of those exports fell from 17% to just 4%. India’s breakneck economic growth has created an insatiable appetite for energy. Over the last 20 years its share of OPEC crude exports has grown more than 15 fold, putting it behind only the US as the bloc’s largest customer.

Better investment opportunities

The conclusion to all of this is that over the course of the next few decades, emerging markets will continue to eat into the share of global trade and as they become wealthier through this process, it will spur on this shift and trading within the developing world will grow at the expense of developed economies. The latest attempts by the US to rebalance this swing may unsettle this development, but over the longer term, any slowing is only likely to be a temporary blip. It remains the case that the better investment opportunities will likely, therefore, continue to be in the developing world, albeit with the ‘speed bumps’ which we are now witnessing.

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