Economic Frontiers Shaping up as Battlegrounds in Escalating Trade Conflicts

Economic Frontiers Shaping up as Battlegrounds in Escalating Trade Conflicts

Hopping Across the Globe: The Role of China in Shaping Developing Economies

China's economic reach is leaving a significant mark on developing nations, owing to a shift in global trade dynamics often overshadowed by US-China tariff squabbles. This metamorphosis is characterized by not only Beijing's relocation of exports, but also by China increasing investments in low-cost manufacturing in these regions, gearing up for an escalated trade war with the US.

This transformation is evident in the footsteps of multibillionaire investor, James Johnstone, who navigated Pakistan in a Chinese-made BYD automobile, visiting Xiaomi production facilities spitting out budget smartphones.

As the US-China drama unfolds, the story behind the scenes is one of Beijing's potential weapons in response to Trump's crippling tariffs, reaching over 100%. If the tariffs render many Chinese goods out of reach for the US consumers who fueled China's export machine for decades, China is poised to sell to the global population of 7.5 billion, excluding the US.

"China is interested in selling to the masses who don't live in the US," remarks Johnstone, co-head of emerging and frontier markets at Redwheel. "And China is putting in the manufacturing capacity to cater to the global consumption base."

The increasing significance of China in developing economies corresponds with a steep rise in Chinese exports to major emerging markets. From below $670 billion in 2017 to $1.35 trillion in 2023, these exports have more than doubled, accounting for over a third of China's total exports. In contrast, China's exports to G7 economies have dwindled below a third in the same period, according to Jefferies analysts.

The US administration's determination in its tariff war with China may inadvertently compel China to distribute its economy's manufacturing capacity to bypass U.S. tariffs, targeting new sources of demand. In response, these countries' trade surpluses are likely to escalate. "Targeting just China implies the US trade deficit with key partners will likely rise further," says Gabriel Sterne, head of global emerging markets at Oxford Economics.

Yet, a large-scale trade war fought between the US and China can inflict collateral damage on the developing economies whose growth has followed global trade volumes for years. These nations find themselves braced for another influx of Chinese goods, diverted from American markets due to the steep tariff increase.

"Over the last 25 years, there have rarely been occasions when the two haven't been inextricably tied," says Jahangir Aziz, emerging markets economist at JPMorgan. "China and [emerging markets outside China] stand directly in the firing line: not just through near-term cyclical damage, but also damage to their growth models that are still fundamentally based on trade."

China's broadening economic influence also stirs mixed reactions in developing economies. While many are content to have access to cheaper goods, a sense of frustration emerges as China's market share seeps into domestic markets. Some countries, such as South Africa, Brazil, Turkey, and India, have taken measures to protect their local industries by imposing anti-dumping duties and erecting barriers to low-value imports.

Yet, China's role as a major supplier of clean energy technology aids the rollout of renewable energy projects in countries like Pakistan and Saudi Arabia. Chinese-made solar panels and batteries even facilitate the deployment of solar power in Saudi Arabia with costs among the lowest in the world as the kingdom diversifies beyond oil.

In summary, China's evolving trade tactics are altering economic dynamics in developing nations with a blend of competition and reliance on Chinese goods and technology. Policy adjustments become essential for these countries to avoid negative repercussions while taking advantage of accessible Chinese manufacturing and technology.

1. The economic reach of China in developing nations is escalating, as evidenced by the increase in Chinese investments in low-cost manufacturing in these regions, according to James Johnstone, co-head of emerging and frontier markets at Redwheel.
2. If the US-China trade war continues with crippling tariffs, China might choose to sell to the global population of 7.5 billion, excluding the US, as a potential weapon against the tariffs, remarks Johnstone.
3. China's exports to major emerging markets have more than doubled from 2017 to 2023, accounting for over a third of China's total exports, according to Jefferies analysts.
4. South Africa, Brazil, Turkey, and India have taken steps to protect their local industries from China's market penetration, by imposing anti-dumping duties and erecting barriers to low-value imports.
5. In contrast to these protectionist measures, China's role as a major supplier of clean energy technology supports the rollout of renewable energy projects in countries like Pakistan and Saudi Arabia.
6. Gabriel Sterne, head of global emerging markets at Oxford Economics, suggests that a large-scale trade war between the US and China could lead to further growth in China's economy's manufacturing capacity being distributed to bypass U.S. tariffs, targeting new sources of demand.

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