Emerging Markets Insight

How to think about Geopolitics
and Trade related risks?

Jul 18, 2018

Emerging market highlights

  • The global economic expansion appears to be at risk with the US Administration threatening the established global trade order.
  • But beyond the intensity of recent headlines specific actions have so far been relatively small.

Market overview

Over the past 50 years global trade has gone from representing less than 10% of GDP to almost 60% today, underpinning a period of human history of unprecedented peace and prosperity. The US has played a particularly relevant role in creating and shaping the institutions that have provided oversight to the growing complexity of trade interactions among nations.

Now the US has been consistently undermining the rules-based system that took so many years to create. It remains unclear what the new objectives of the US trade policy are. But the US has already cancelled its participation in the Transpacific Trade Partnership (TPP), has threatened to withdraw from NAFTA, is undermining the WTO by blocking the appointment of judges, has imposed a set of tariffs on solar panels, washing machines and a set of Chinese imports. Additionally, the US has threatened to impose tariffs on car imports, based on national security grounds.

Our own estimations of Trade related risks have remained elevated since the US presidential election in 2016 (see graph below). Financial markets have turned more volatile as a consequence, in particular Emerging Market equities which have declined by more than 7% in the first half of the year.

But beyond the noisy headlines, reality is more nuanced. While the US has threatened to withdraw from NAFTA, they have been in formal negotiations with Canada and Mexico to improve the trade agreement. And even with the recent tariffs for Chinese imports worth $34bn, the US has decided not to proceed with investment restrictions. There is a relevant number of constituents in the US, mainly corporates and consumers, which have benefited from trade growth over the years and are likely to become more vocal to avoid further escalation.

The underlying fundamental momentum of the global economy remains in strong footing, as evidenced by our Macro GPS indicator which shows that growth appears to have stabilized at above trend levels. This implies recent market setbacks could be an attractive entry opportunity for investors, even with the Fed continuing with its announced path towards policy normalization.

North American Trade Risks

North American Trade Risks

Source: BlackRock Investment Institute, with data from Thomson Reuters. Data as of June 29, 2018.

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