The changing business landscape in emerging markets
"The current dynamic of emerging markets is not one of rupture, but of diversification - a discrete evolution from dependence to equilibrium."
Vikky Chen - Credit Analyst at IVO Capital Partners
The changing commercial landscape of emerging markets: the rise of China and the growth of South-South trade
Summary:
- Since the early 2000s, emerging countries have undergone a transformation in their trade patterns. The USA and other developed economies, once major trading partners of these countries, have seen their dominance decline over the past two decades. They have been gradually replaced by other emerging markets, in particular China, which has become a key trading partner.
- One of the most notable changes is the rise of China as the main trading partner of many emerging economies, replacing the USA. At the same time, trade between emerging countries - often referred to as South-South trade - has grown strongly. It now accounts for almost half of total trade between emerging markets, compared with just 24% in 1990, illustrating the intensification of economic connections.
- In recent years, the USA has revived a wave of protectionist trade policies, expanding tariffs not only on Chinese products, but also on imports from a wide range of global partners, including key allies. Officially justified by considerations of national security, industrial relocation and industrial policy, these new tariff measures are once again redrawing global trade flows. However, after decades of trade diversification, emerging markets have become less vulnerable to US economic cycles and policy decisions. The US share of emerging market trade, which hovered between 18% and 22% in the 1990s and early 2000s, has fallen to just 12% today, signalling greater resilience in the face of changing global dynamics.
Figure 1: Emerging market trade flows
The changing business landscape in emerging markets
Chart 2: Number of countries trading more with China than with the United States
In 2000, the USA was the leading trading partner for over 80% of emerging market economies. By 2023, the trend has reversed: China has become the main trading partner for over 65% of emerging countries.
This transition is largely due to several factors:
- China's rapid economic expansion has boosted demand for global raw materials;
- Its membership of the World Trade Organization ;
- Its strategic determination to increase its influence in emerging markets, illustrated by initiatives such as the Belt and Road Initiative, which has considerably strengthened China's trade and infrastructure links with many emerging economies.
For example, Brazil's exports to China reached $104.3 billion in 2023, driven mainly by soybeans, iron ore and oil. Similarly, Indonesia exported $64.9 billion worth of goods to China in 2023, mainly iron and steel, mineral fuels and nickel.
This strengthening of trade relations with China has reduced the dependence of emerging markets on the USA for exports and capital goods, thus reducing their exposure to US economic cycles. At the same time, this development opens up significant long-term opportunities, thanks to the size and continued growth of the Chinese economy, which is increasingly driven by consumption, as well as its vast domestic market, offering attractive prospects for emerging market exporters.
Under the Belt and Road Initiative, China has significantly strengthened its economic and political ties with many emerging countries. Since the launch of the Belt and Road Initiative in 2013, China's trade with the countries involved has more than doubled, exceeding $2.1 trillion by 2023. This growth has been particularly marked in the machinery, electronics, textiles and raw materials sectors.
Growth in intra-emerging market trade
Another striking trend is the sharp increase in trade between emerging market countries. South-South trade has risen from around 5% of total world trade in 1990 to 21% in 2024, reflecting a strengthening of economic ties within emerging countries.
Figure 3: Breakdown of world trade
A significant proportion of South-South trade involves China, whose trade increased 162-fold between 1990 and 2024, now accounting for 13% of total emerging market trade. However, trade between emerging markets outside China has also grown strongly - increasing 31-fold over the same period, compared with a 10-fold increase in trade with developed markets. As Figure 1 illustrates, intra-emerging market trade (excluding China) now accounts for 38% of total emerging market trade, underlining the growing importance of South-South economic ties in the broadest sense.
Key factors :
- Regional trade agreements have facilitated the growth of trade within emerging markets; countries trading within their own region generally benefit from lower tariffs.
- Several regional trade agreements have been set up over the past 5-10 years in different regions, such as the African Continental Free Trade Area, the USMCA in North America, the Eurasian Economic Union (EAEU) in Eurasia for post-Soviet states, the RCEP in Asia and the CPTPP in the Trans-Pacific region. These are in addition to older regional blocs such as ASEAN and MERCOSUR.
- Regional trade agreements are generally considered more resilient than trade with other countries. This is partly because these agreements provide mechanisms that can contribute to economic stability and resilience.
- The withdrawal of the United States from certain key multilateral trade agreements, such as RCEP and CPTPP - particularly during the first Trump administration - has opened the way for emerging markets to take the lead in developing alternative trade frameworks and redirecting trade flows. Prior to the introduction of US tariff hikes, trade between emerging market regions was often subject to relatively high tariffs, limiting their competitiveness. For example, Latin American exports to South Asia faced average tariffs of 14.9%. However, with the recent rise in US import tariffs, emerging countries could increasingly direct their trade towards other emerging regions, thus fostering greater South-South integration.
US tariffs on China, particularly during the 2018-2019 trade war, have prompted many companies to relocate production to other emerging markets such as Vietnam, India, Indonesia and Mexico. This redistribution of manufacturing production has strengthened trade in intermediate goods between emerging markets, and has positioned several emerging economies outside China to benefit from the next wave of realignment of global supply chains.
Conclusion: A new trade map
Emerging market countries are no longer content to react to the actions of advanced economies. They :
- Increase trade between them,
- Deepen strategic partnerships with China,
- Trade dynamics dominated by the United States are gradually emerging.
Over the next 10 to 20 years, this evolving commercial architecture could strengthen the resilience of emerging markets through diversified partnerships, alter the global economic balance, and foster greater autonomy in the formulation of emerging market development policies and strategies.
The sustained momentum of intra-emerging market trade and the diversification of trade flows represent a positive structural change for investors. As this trend continues, investors and policymakers will need to revise their long-held assumptions about global trade, recognizing that emerging countries are now capable of shaping their own economic future.
DISCLAIMER THIS DOCUMENT DOES NOT CONSTITUTE FINANCIAL ADVICE:
The information contained in this document is not intended to be understood or interpreted as financial advice. It has been shared for information purposes only, does not constitute advertising and should not be construed as a solicitation, offer, invitation or inducement to buy or sell securities or related financial instruments in any jurisdiction whatsoever. CONFIDENTIALITY: the information is strictly confidential and may not be reproduced, redistributed, disclosed or transmitted to any other person, directly or indirectly. You may not copy, reproduce, distribute, publish, display, perform, modify, create derivative works from, transmit or in any way exploit such content, nor may you distribute any portion of such content over any network, including a local area network, sell or offer for sale such content, or use such content to construct any type of database.
