S&P Global — 30 October 2024
Daily Update: October 30, 2024
Bridging Geopolitical Divides, Some Countries See Growth
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
Trade is increasingly becoming a tool of statecraft. Protectionism is intersecting with geopolitics to produce barriers to trade unlike anything we have seen post-Bretton Woods. However, this can create opportunities for arbitrage. Some emerging market economies have stayed studiously neutral between geopolitical adversaries, allowing them to trade on both sides of a conflict — sometimes acting as an intermediary and sometimes using cheap imports to offset lucrative exports of similar domestic products. These countries could be called “liminal states,” as they occupy a position on both sides of a boundary or threshold.
Vietnam is driving economic growth by trading with countries across geopolitical divides. Its economy is projected to grow by 6% this year on the back of strong exports. The second-largest source of US containerized imports, Vietnam saw its share rise to 8.7% from 8.2% last year, thanks to increased sourcing of electronics, footwear and apparel. According to S&P Global Market Intelligence Purchasing Managers’ Index survey data, 37% of manufacturers in Vietnam saw an improvement in demand over the past 12 months because of reshoring. Some Chinese companies are investing in Vietnamese companies and building manufacturing plants in the country that are not subject to US and EU tariffs on Chinese goods.
Mexico also has advantages as a liminal state due to its proximity to the US. According to recent PMI data, the highest proportion of Mexican companies expecting growth opportunities in the year due to nearshoring is in the machinery and repair segment (82%), followed by electrical and electronic equipment (74%) and chemicals and pharmaceuticals (53%). Mexico has also attracted investment from Chinese automotive companies. Despite this optimism, Mexican economic growth has been below trend for emerging market economies. S&P Global Ratings attributes some of this lagging growth to concerns over the outcome of the US election. This brings to light a concern for these unaligned states — they can lose their advantages if a large market begins restricting trade.
Turkey is a third example of a liminal state balancing trade across neighbors in conflict. Its trade with Russia has increased while the US, EU and its allies have restricted trade in connection to the war in Ukraine. Turkey has become exceptionally active in importing natural gas via pipelines for eventual reexport to countries in southern Europe. Much of this gas comes from Russia. While European companies hesitate to buy Russian gas, they are open to buying gas reexported from Turkey that could reasonably have come from a range of sources. Turkey has also become a crucial supplier of Western-made goods and components to Russia.
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