The biggest threat to a revolution in emerging market trade may be the emerging markets themselves as Brazil slaps import curbs on Chinese toys, Russia claims China dumps cold-rolled steel and China keeps its currency undervalued.
Such barriers to commerce are digging potholes in the “New Silk Road,” the name given by economists to the burgeoning trade between developing nations that is forecast to be larger than that among advanced nations by 2015.
The tensions may cause intra-emerging market trade to fall short of the 10-fold increase that HSBC Holdings Plc sees as the potential for the next four decades, and thus reduce its role as a driver of world growth. Trade and other barriers may also take the “luster” off emerging-market shares, said Ed Kuczma, who helps manage about $30 billion at Van Eck Associates in New York. Emerging market equities have gained more than double those in developed economies since the start of 2009.
“Thick borders discourage capital inflows, keep people trapped in rural poverty and leave economies persistently underperforming,” said Stephen King, HSBC’s London-based chief economist and author of “Losing Control: The Emerging Threats to Western Prosperity.” “Only if they can connect with each will emerging nations be able to turbo-charge their economic futures.”
Even with restrictions, the so-called BRIC nations of Brazil, Russia, India and China are trading increasingly with each other. Commerce between emerging markets, also known as South-South trade, could account for 40 percent of world trade by 2030 from 18 percent currently, according to Standard Chartered Bank.
Tata in China
Lenovo Group Ltd., China’s biggest maker of personal computers, said May 26 that sales in emerging markets including India, Brazil and Russia climbed 14 percent in the fourth quarter. Tata Steel Ltd., India’s largest manufacturer of the metal, will increase investment in China by 5 percent in 2012 to maintain market share, Managing Director Hemant Madhusudan Nerurkar told China Daily in May.
TNK-BP, Russia’s third-biggest oil producer, plans to pay more than $1 billion for a 45 percent stake in 21 Brazilian oil and gas tracts, two people with knowledge of the deal said on July 19. China and Russia have almost completed technical and commercial talks on a gas supply contract, PetroChina Co. chairman Jiang Jiemin said May 18.
Broader benefits may still take time. Simon Evenett, who teaches at the University of St. Gallen in Switzerland, found that between November 2008 and the start of last month Russia imposed 138 protectionist measures against fellow BRIC nations. India took 85 steps, Brazil 52 and China 33. By comparison, the U.S. imposed a total of 30 measures against the group, he found.
“There’s not much evidence of a BRIC fraternity,” said Evenett, noting that the four BRIC nations were among the eight most protectionist in the Group of 20. Russia, which is still lobbying for membership of the World Trade Organization, was No. 1. China, Brazil and India are WTO members.
The annual competitiveness report of the Geneva-based World Economic Forum shows that each of the BRIC nations has higher average trade tariffs than at least 110 other countries, including Nigeria and the Kyrgyz Republic. Tariff rates in 2009 ranged from Russia’s 11.6 percent to India’s 14.4 percent.
Reducing barriers to trade would reinforce the so-called New Silk Road, a modernization of the name given to the 4,000-mile (6,435-kilometer) network of trade routes crisscrossing Asia, southern Europe and North Africa starting 2,000 years ago. Once traveled by Marco Polo, the route helped promote the growth of civilizations from Egypt to Rome.
Its new iteration refers to growing trade links between emerging markets that Citigroup Inc. economists Willem Buiter and Ebrahim Rahbari predict will power an increase in worldwide trade in goods and services to $149 trillion in 2030 from $37 trillion in 2010. They estimate that China will usurp the U.S. as the world’s biggest trader within four years.
By 2015, they said, commerce between emerging markets will overtake that within advanced economies and by 2030 that between developed and developing nations. The projections may not be met should free trade fail to take hold, Buiter and Rahbari said in a June 22 report.
While Kuczma of Van Eck identified port operators DP World Ltd. of Dubai and Sao Paulo-based Santos Brasil Participacoes SA as standing to benefit from growing trade links between emerging markets, fettered markets may still “take the luster off the emerging market growth story,” he said.
“A sound, stable and well-defined open trade policy goes a long way to instilling investor confidence in emerging markets,” said Kuczma, whose title is emerging-markets analyst.
The longer BRIC nations take to drop trade barriers and controls on capital and credit, the slower the gains for potential beneficiaries. Credit Suisse Group AG’s private banking division identified logistic companies, delivery services, building material manufacturers and port developers as winners from more open trade.
Among them: Hong Kong-based container lessor Cosco Pacific Ltd., Germany’s Deutsche Post AG and building-material supplier Lafarge SA of France, the manager of about $1.5 trillion said in a January report.
At the same time, the friction continues. Brazil in December raised to 35 percent from 20 percent a duty on imported toys after local manufacturers complained they were being harmed by a flood of cheap, Chinese-made goods.
Complaints from Brazilian unions and industry groups, including textile producers, have led its government to enact 30 anti-dumping measures aimed at Chinese-made goods, more than those against any other country and almost four times more than directed at the U.S., according to the Trade Ministry.
China was the target of a May 30 announcement that India had started an anti-dumping probe on grinding steel balls. The same month, India imposed anti-dumping duties on “certain rubber chemical” imports from countries including China.
Brazilian aircraft-maker Embraer SA failed to get China’s government to approve final assembly of its E-190 aircraft in China because of concerns it would compete with a domestic regional jet, Chief Executive Officer Frederico Curado said in April. Similarly, Indian Prime Minister Manmohan Singh pushed Chinese President Hu Jintao in April to boost imports of Indian information technology and pharmaceutical products.
Russia, meanwhile, in February began an anti-dumping probe into cold rolled steel with polymer coating imported from China after complaints from steelmakers. Prime Minister Vladimir Putin says Russia is free to keep introducing import restrictions until it joins the WTO.
Another source of tension: China’s policy of limiting the yuan’s value to support its manufacturers in the global marketplace. Echoing complaints from the U.S., researchers at the Reserve Bank of India wrote in an April report that China’s exchange rate policy “invariably and distinctly provides competitive advantage over its trade competitors.”
While the dollar has dropped about 5 percent against the yuan since the start of 2010, the Brazilian real has risen 5 percent against the Chinese currency and India’s rupee has fallen just 1 percent.
The yuan policy has drawn fire from Brazilian Finance Minister Guido Mantega, who last week reiterated that Brazil would defend itself from any “currency war” prompted by nations seeking to boost exports through lower exchange rates.
“Emerging market authorities are reluctant to allow exchange rates to move to market levels and that is part of the protectionist phenomenon,” said John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London.
Jim O’Neill, chairman of Goldman Sachs Asset Management in London and creator of the BRIC description, said the push will remain toward free trade, noting that commerce has surged in the past decade even with restrictions in place. Investors should buy into that trend even if the current regulatory climate irks them, he said.
The MSCI Emerging Markets Index has risen 102 percent since the start of 2009, compared with the 41 percent gain in the MSCI World Index of 24 developed markets.
“You can wait for the uncertainty to clear, but by the time you do it’s probably going to be too late” to profit, said O’Neill. “Acknowledging the powers of free trade for these countries is inevitable. It’s just a matter of time before they grow up.”