Emerging market focus: Global trade and its future !

The technology, trade liberalization, environmental friendly policies, and consumerism that brought the winds of change

Over the past many years the developing world has adapted environmentally friendly high technology and focused on its high value added products, and standard of living resulting in a shift of manufacture of many low value added and energy intensive environmental hostile products to developing countries. The initial shift that happened about 15 years ago was to South East Asia, Korea and Taiwan, which created the Asian Tiger economies, and then manufacturing shifted to China. The low value added service activities, back office functions including software development was outsourced to India.  
The developing countries also experienced an increase in their population, income and consumption, while trade liberalisation took root with the preferential trade agreements (PTAs) and international treaties championed by World Trade Organization (WTO), which in turn freed the movement of goods and services between participating nations and created a more connected global economy.
The other forces that have driven global integration have been technological innovations, broader political changes, economic policies, and the mobility of people and information. These changes have ensured that the overall costs associated with trade, such as financing, risk mitigation, logistics, insurance and communications, have steadily fallen in recent years. Given that trade is easier and less expensive, trade between countries– especially in sectors where demand is expected to remain strong – is likely to be bolstered further.

These changes have support from trade, investments and economic activity
World trade is expected to rise over US$125 billion in 2030 and US$287 billion by 2050, accounting for 61 percent of world GDP in 2030 and 76 percent in 2050.  In the early 1990s South-South trade accounted for only 10% of world trade, and now it has risen to 25 percent. 
South-South trade emerged from the latest worldwide economic slowdown more or less unscathed. Emerging markets (EMs) have gained influence in the post-global financial crisis world, and today account for almost 50% of global exports. South–South trade between EMs has risen to 24 percent of global flows, with China being responsible for much of the increase.
Foreign Direct Investment (FDI) flows to developing economies reached US$759 billion in 2013, which is about 52 percent of global FDI flows.
The global poverty rate had been cut in less than half in 20 years. In 1990, 43 percent of the population of developing countries (1.9 billion people) lived in extreme poverty and now it is estimated to be less than 21 percent (or less than 1.2 billion). The largest decline is in China.
By 2016, Asia-Pacific (excluding Japan) private wealth will top the world list and will displace North America. Asia-Pacific wealth is expected to hit $57 trillion in 2016, compared with a $56 trillion target for North America. By the numbers, China saw its millionaire count soar to nearly four million in 2014, up from three million just a year earlier.
By 2050, world population in emerging Asia will rise to 47 percent of the total world population, and the share of emerging Asia’s GDP to 46 percent of the world total, with the lion’s share being by China, India and Indonesia. 

Contagion of trade and investments spreads to China, India and commodities countries
The 1990s saw China’s economy opening up and transforming it into a global manufacturer and marketer of manufactured goods, and also the creation of a complex supply chain to acquire resources and trade in competitively priced goods. China’s growing demand for commodity products to fuel its manufacturing base has massively strengthened trade links with commodity producers in Latin America and Africa. The highly productive and competitive labour force and infrastructure, attractive tax incentives, the opening of the economy, and good infrastructure attracted a lot of multinational companies to invest and set up their manufacturing bases in China.
India also emerged as the leading exporter of high-end information technology services as it capitalized on its competitive and educated labour force. Indian and Chinese companies also capitalized on the political and cultural linkages of their large diaspora in the Middle East, USA, and UK.
Trade between countries in the Southern hemisphere was sparked by a series of national and continental trade agreements (e.g., MERCOSUR, ASEAN, COMESA, and SAARC) and by a growing need for greater cooperation to enable these countries.
Within the Middle East-Asia trade corridor, India has emerged as the largest trading partner, with volumes reaching $135 billion in 2012 compared with less than $10 billion in 2004. The Middle East, with its energy supply, will remain at the heart of South-South trade flows. 
The money multiplier effect later translated into a dramatic transformation of emerging markets consumers, economy, infrastructure, financial services, defence and manufacturing facilities that are now modern, automated, and sophisticated. The ensuing consumer and economic boom has also resulted in China and India sourcing more for their own domestic consumers.
Diversification by MNCs and local manufacturers out of China, the rise of Asian MNCs, and expansion of consumer markets for Chinese manufacturers also ensued that manufacturing bases or infrastructure were created in rest of Asia, Africa, Middle East and OECD countries to facilitate trade and investments.  
China’s and India’s emergence as trade and service powers, and the  rise of their consumer forces, led to the expansion of their sourcing of resources from Australia, Indonesia, Peru, Brazil, the Middle East, Sub-Sahara Africa, Russia, and Africa, and then marketing into OECD countries and rest of the world. 

The unquantifiable, economic and human multiplier!
Modern-day trade has created jobs, grown economies, helped raise global living standards, improved demand for services, raised nutrition standards, and helped political stability, world peace and harmony.   Favourable spinoffs of trade include tourism, travel, migration, expansion of educational skills and services. There is an increase in demand for ancillary services – hotels, air and surface transportation, food and educational services. Information asymmetry and cultural barriers are collapsing.  The trade trends seem irreversible as population demands for a developed market lifestyle, education standards, and a significantly improved quality of life continue to increase.
Government participation has also helped build bilateral regional partnerships, cooperation agreements and free trade agreements (FTA), though multilateralism is limping and that regional partnership agreements have ended up creating a ‘noodle bowl’ of FTAs. Bilateral trade agreements are strengthening interdependencies among countries, leading to peace. China-Taiwan relations have improved significantly, driven by trade and investments.
Regional central banks are cooperating to take concerted actions that intend to stabilize the impact of volatility in financial markets and systems.
Political institutions recognize that trade is creating jobs, economic growth, a higher standard of living and higher nutrition levels. A highly engaged and employed population promotes social and political stability. Political support empowered people, and helped reduce both natural and man-made barriers. Natural barriers are falling with education, ICT, cultural exchanges and travel, and man-made barriers are falling as stakes in growth increase and regional partnerships emerge.  
Investments are displacing aid. The Chinese model of investing in Africa is gaining ground, displacing developed markets’ aid. The Africans love it as it is helping develop skills, infrastructure and jobs – it’s teaching to fish versus giving a fish!

The opportunities galore as prosperity spreads
Rising GDP and growth of consumers in emerging markets, and a share in demographic dividends, is fuelling trade, infrastructure development, falls in tariffs and trade barriers, expanding trade-related services and expansion of economic activities to newer markets. The population in developing economies is experiencing improved standards of living, social and economic development. Growth in services is linked to trade. Millions have been lifted out of poverty in China, India, Indonesia and other Southeast Asian countries.
The accelerated use of information communication technology (ICT) is also improving awareness of goods, services and opportunities. For example, Indian is leaping forward from no technology to smart phones and tablets.
For the past 10 years, the world has seen a significant reduction in man-made and natural barriers to trade, transportation and packing costs. There is a surge in bilateral free trade agreements, and increases in a highly educated and mobile population, and extensive use of information and communication technology for exchange of information.
The growth opportunities for emerging multinationals are also supported by availability of risk management tools, financing, and pricing benchmarking on local and international futures exchanges. Sovereign wealth funds, export credit agencies and banks from Asia are establishing their footprints with emerging multinational companies. 
In order to diversify risks, companies increasingly partner with sovereign wealth funds, government-linked companies, private equity funds, and developed market MNCs. Companies also increase outbound foreign investments to acquire resources, technology and suppliers. 
Emerging market brands and multinational companies are a force to reckon. There is a convergence of process, value systems, capabilities and corporate governance standards of EM companies with that of the developed market companies. The cash hoard of developed market companies is also fuelling organic growth and M&A in emerging markets.
Every company is playing to its strength or weakness in developing growth strategies in emerging markets. There are a few important strategies that are being played out daily. Companies are building future models that are orchestrated for high performance where the multi-polar world and technology meet. Companies adopt single or multiple strategies, each of which is handled by a separate vertical such as Go to Market, Go for Technology and assets, Go for Talent, Go for Infrastructure, Go to Partner, Go for Funding, Go to Mitigate risks.  Companies also build world standard execution capability. Strategy does not succeed without execution, and execution delivers customer value and brings sustainable profits.
As scale is achieved, companies partner for innovation, technology, customer acquisition, and diversification of Emerging Market risks.  Sourcing of capital equipment coupled with long term financing and sourcing investments from international markets helps deepen financial pockets. Companies also set up global hubs and offices in countries with bilateral FTAs to take advantage of treaties and tax benefits, and to harness talent.
As trade helps local economies, companies also invest in infrastructure in the local markets and participate in spinoffs from trade with increasing investments in hotels, infrastructure, services, local trade and banking.

Enablers have deepen market opportunities
·    Significant demographic dividends and growth markets: Opportunities for companies are growing, with better access to markets, improved communication, interaction, and confidence, political and institutional support, investments and breakdown of cultural barriers.
·    New currencies are being used to trade replacing dollar which is helping manage foreign exchange volatility: RMB use is supported by the Chinese government, INR is used for settlement of oil exports from Iran, and bilateral lines of credit for trading in local currencies are being established, replacing the US dollar. 
·     Emerging markets export credit agencies and banks are increasingly providing risk management solutions: they are assuming risks via financing of exports and long term capital whilst in the past that was a feature that was concentrated with western banks. Increasingly, Chinese banks and ECA’s have been providing financing to Indian steel mills, ICT companies and power plants. Export-Import banks of China, Korea, Japan and the Middle East are taking long term credit exposures on emerging market companies, which buy equipment, goods and services that have significant export content.
·    Outbound investments by government-owned or linked companies is surging, creating comfort for corporates to invest: GIC and Temasek of Singapore, China Investment Corporation, Dubai Investment Corporation, Khazana of Malaysia, Russian state-owned investment companies, and Abu Dhabi Investment Corporation have significantly increased their investments on the back of government reserves.  The focus has been around resource acquisition, technology transfers and contract farming.  Asia Infrastructure Investment Bank that is primarily supported by Southern nations and will focus on growing infrastructure that will support South- South trade.  
·     Easy to leverage on the international bank’s knowledge, capability and network: International banks with vast international network and historical ties and emerging market banks where their diasporas (e.g. Indian banks in Africa and the Middle East) are located are helping trade and supply chain financing, and managing counterparty and financial risks. These institutions provide valuable information on legal frameworks, import export regulations, credit and financial risks, helping manage risks and open up opaque markets.
·    The popularity of emerging market multinationals and brands is significant: Samsung’s popularity has impacted both Nokia and Sony. Infosys, Samsung, Toyota, Tata-Nano, HTC, Lenovo, and Huawei are gaining significant market share in the emerging markets.
·    Countries with multiple FTAs, such as Singapore, are also becoming bespoke hubs for trading and value addition: Infrastructure, transport and shipping, insurance, information communication technologies (ICT), banking and financial services have become powerful catalysts of trade for these hubs.
·    Developed market companies are learning from EM and also changing their business models: Developed market companies are increasingly going local to adapt to local demand, predominantly hiring local talent, and are also creating local structures with little interference from head office.  McDonald’s and Pizza Hut are increasingly providing foods to meet local preferences, there is an all vegetarian Subway, and Microsoft is delivering local language capability. Some of the highly successful MNCs in India, such as Hindustan Unilever, P&G, Cadburys, Cargill and Philips, have historically adapted to local business demands and have been exporting products or technology to other emerging markets from India.

Conventional trading strategies and business approach still remain unchanged
Not much has changed in the modern day in terms of the approach to trade, though the nature, pattern and routes of trade have changed substantially with information technology, education and modern modes of travel making trade easier, efficient, reliable, and transparent.
Modern day trade involves an exchange of goods and services that emerges from value specialization, a quest for resources and new markets, and acquisition of new technologies. Modern day trade still places heavy emphasis on integrity, trust, exchange of information, risk-taking, dealing with different cultures and society and valuing differences.

The cornerstone of sustainable success is a change in mind set and building a multinational brand
Corporates have to have changes their mind-set while exploring frontier markets.  Companies have to invest and develop world-class talent, processes, and systems. They have to adopt international corporate governance systems that help in creating a learning and adaptable organization coupled with ability to manage global complexities, ambiguity, risks, and volatility. Investments in talent and information communication technologies are essential to building a multinational. A truly multinational company should have values, systems and people that bind the company together, helps operate the business 24x7, and manage operations that are spread thousands of miles away from the headquarters.
Companies and their employees must view the world as a giant supermarket and the company as a multinational. A single-minded focus on building trust and a reputable brand earns sustainable growth and rewards. Doing business the right way not only attracts people to a company, but creates loyalty to the organization as well.  
Corporate reputation stems from a strong brand image that is backed by every employee’s commitment and adherence to honour its obligations, compliance with guiding principles, and commitment to corporate social responsibility and environment. 
New market developments may result in companies spreading their resources in multiple directions.  A laser-focused, robust strategy calibrated to return, risks and execution capability is necessary.
A good corporate citizen that cares and invests in the local community and follows environmentally-friendly practices achieves sustainable and long-term success.   Initiatives on social and environmental projects help build brand and reputation.
As international trade increases, the growth of trade and services within home markets provides a scale that cannot be ignored.  As strategies of many companies flatten out, a right balance between global and local strategies is essential.
Emerging markets are developing at a phenomenal pace and are set to reshape world trade patterns in the coming years. Many companies will need to gear up to manage complex and volatile socio-economic, political and legal systems, and to manage demanding consumers in a highly differentiated market.  
The market footprints, opportunities, and challenges of Southern markets, most of which are emerging, are no different than a complex and diverse local market.  With the right approach and attitude, companies and managers will be equipped to succeed in emerging markets.  

This isn’t business as usual, the world isn’t flat!   
Inevitably, the recent stagnation of commodity prices, which few expect to be reversed in the near future given the slowdown of China’s growth, has impacted the growth of South-South trade flows, especially those involving commodity-producing regions such as Africa and Latin America.
Emerging markets are complex and fraught with a high degree of implementation risks as socio-economic, cultural and legal frameworks are different and need different approaches and spreads of corporate resources. Further, markets are opaque and may lack financial depth. Volatility in foreign exchange and prices of commodities can have a material impact on the company’s investments and exposures in emerging markets.
Trade also creates interdependence which carries higher risk of contagion and foreign shocks.  Intense competition has increased redundancies and resulted in inefficient use of resources. Competition for resources can also create inflation, shortages and geopolitical tensions. 
Urbanization is also bringing changes that governments are unable to cope with. Unplanned growth in many emerging markets is also creating pressure on the environment, usage of water, air quality and quality of human relationship and family lives.
Government intervention and policy changes can impact investments and trade as political institutions feel unsecure with volatility in their currency and foreign exchange reserves. Social and economic challenges intensify as a result of pressure on infrastructure, inflation, disparities in income and wealth.
Increased empowerment of people and challenges to socio-economic conditions of the local population makes economic and social policy making unpredictable. 
In order for companies to succeed and sustain, companies have to accept that one size does not fit all, talent is hard to find, relationships with government are unpredictable, and competition is intense from both local companies and developed market companies.
The gains of South-South trade have not been sustained, as many economies have not made structural changes the benefits have not percolated to local consumers and populations. The commodity countries focused on exports have seen the biggest drop in their economic activity. The biggest drops were in Brazil and Australia. 
Despite a positive outlook for South–South trade, significant challenges remain. A lack of transparency, persistent opacity and the absence of regulatory clarity in many EMs are cause for concern.

The change is irreversible and more trade corridors will open up!
Growing middle-class populations (particularly in Asia), greater sophistication in supply chains and the rising importance of domestic corporate sectors have all contributed to the expansion of South-South trade. The South-South flows are opening new trade corridors that are increasingly expected to characterise the 21st century’s emerging-market-led growth.
Africa is currently lagging because it is mainly trading commodities in raw form with low technology use and very little value addition. Sub-Sahara Africa has emerged as the new frontier and a competitor in agricultural and resource space. Africa has almost 60 percent of the world’s uncultivated and arable land. Africa is rich in natural resources such as copper, coal, cobalt, and diamonds. It also has a large English-speaking population with about 360 million cell phone users.  
Egypt, Morocco, South Africa and Tunisia have significant manufacturing and service industries.  Algeria, Angola, Libya and Nigeria earned about US$1 trillion from petroleum exports from 2000-2008.  Along with rich dividends, Africa is a mixed bag and is often fraught with political, financial and economic volatility.  South American countries such as Chile and Peru are also seeking increasing investments.  
Australia and New Zealand will also see a strong growth.  Investment interest in the Eastern European, MENA and Mekong regions is increasing.  The Mekong region and Africa will likely benefit from interest from manufacturing firms.

The game is not over for North-North nor for the Asian tigers as they still continue to remain important consumption markets and economic reform create more opportunities in near future.

The North and Asian tigers continue to remain important consumption markets and may become competitive with growth in standard of living and costs in China, India and other South economies.  The game is not over for North-North nor for the Asian tigers – ignore them at your peril! 

The economic and financial restructuring and employment challenges in the developed markets, the increase in standard of living and costs in developing markets and the need for diversification of supply chain may shift trade patters for North with more manufacturing occurs in North zone and near to markets. The adaptation of environment and energy efficient technologies by South economies will also see some shift in manufacturing to North.

Most governments, after the 2008 financial crisis, are short of tax revenues and has pressure to create employment opportunity in their own countries using robotics, ICT, nano technology, tissue harvesting and organ plantation, and 3D printing; the impact of which may result in creating non-tariff barriers that may again shifts pattern of trade and investments to North. 

The change is irreversible and neither politics nor trade wars will change the expansion in trade and economic activities globally that lifts the human race out of poverty, improving quality of life, and creates economic freedom.

The trade trends seem irreversible as population demands for a developed market lifestyle, education standards, and a significantly improved quality of life continue to increase.









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