The scenario of a slowdown in the emerging economies in 2023 is based on two hypotheses: 1) a slowdown in global trade and 2) the recessionary impact of inflation and monetary tightening. The first hypothesis is now a certainty: exports have clearly contracted in recent months, in both the advanced countries and emerging economies. Hello and welcome to this new edition of Eco TV week.
Most of the impact of inflation and monetary tightening has yet to come as savings accumulated during the pandemic and measures to boost household income have compensate for the loss in purchasing power due to the acceleration in inflation. Moreover, higher interest rates have yet to have a very visible impact on lending.
In contrast, the slowdown in world trade is already at play. According to estimates by the Netherlands Bureau for Economic Policy Analysis (CPB), if we compare the average for November 2022-January 2023 with that of the three preceding months, exports contracted by 2.7% in volume (1.6% for the advanced countries and -4.3% for the emerging economies), whereas in mid-2022, total exports were still increasing by 3% a year.
In March and cumulated over a 12-month period, chinese exports were down by 2% compared with their peak in September 2022. Likewise, the PMIs for export order books were significantly below 50, the threshold separating contraction from expansion.
There has been a particularly sharp decline in exports for the Asian countries excluding China. This can be explained by the downturn in the global electronics cycle. Yet structural factors could also be at work, notably the so-called trade and technological decoupling between the US and China.
Since the outbreak of the trade war between the US and China in 2017, there has been a real break-off in external trade according to the Petersen Institute for International Economics. For transport equipment, the decoupling effect was very strong; aircraft and engine exports were down threefold between 2017 and 2022, while exports of cars, trucks and spare parts were cut by 2.5. Besides, exports of services were down by about 30% during the period.
When it comes to trade, the China structural decoupling is not necessarily negative for third countries True there is a negative impact on the foreign trade via the multiplier effect of world trade - whether due to higher trade barriers or bans/restrictions on trade. Regarding the impact of the reshuffling of value chains, the consequences may differ. It should be negative depending on the country’s status. Namely, countries that are simple links in existing supply chains, without the capacity to strengthen their position among suppliers, will be hit at least by the repercussions of higher trade tariffs, or at worst, they will be evicted from new supply chains.
But the value chains reshuffling may be positive for countries that can substitute in for the United States or China as a supplier in new supply chains or if countries strengthen their position among intermediate suppliers.
One might assume that the more industrialised countries with a diversified production base and that are geographically close to China or the US would rank among the winners. Yet the IMF study shows that between 2018 and 2022, Japan and South Korea both reported a decline in their share of Chinese imports, whereas India, Malaysia and Vietnam reported increases. As to the US, Mexico is a priori a potential winner, but it is not the case so far: between 2018 and 2022, exports of Mexican manufactured goods increased only moderately as a share of total American imports excluding oil (from 14.8% to 15.6%).
