Trade Tensions Surfacing Between Emerging Markets of the Global South

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Includes: DBC, EWZ, FXI, IFN
by: Private Sector Development

John Authers argues that the newsworthy economic story of late isn't dollar weakness; rather, it is the weak renminbi:

Many, if not most, hopes for global recovery are pinned on China buying goods from countries such as Brazil. Commodity prices, a key driver of equities and forex rates, also move in response to the new orders received by China's manufacturers.

This currency regime makes it far harder for such countries to sell to China. So it is no wonder that currencies are back at the top of the agenda.

China's currency is 15 percent cheaper against the dollar than it was in 1993. Meanwhile, many emerging market currencies are returning to their pre-crisis exchange rates.

China has been building stronger trade relations with the Global South for quite some time. It is now South Africa's top export destination. But many of these partnerships are built around China purchasing commodities, and selling manufactured goods. With a weakening currency, China is likely to purchase fewer non-commodity goods from its trading partners. This may lead to growing trade tensions, particluarly with countries not endowed with commodities.

Much attention has been paid to the importance of the economic relationship between China and the United States, or "Chimerica" (See this week's Economist cover story. Or Paul Krugman.). Rising trade tensions between the two economic powers could spell doom for the global economy.

Yet, one should not discount the importance of emerging market trade relations, and the possible tensions that may arise. Friday's Wall St Journal reports of Indian grievances toward China's trade practices:

Trade friction is growing between India and China. India leads all members of the World Trade Organization in antidumping cases against China. India has banned imports of Chinese toys, milk and chocolate, citing safety concerns, and has launched investigations into export surges of Chinese truck tires and chemicals, among other products.

Heavy industries minister Vilasrao Deshmukh recently told reporters, "We don't want India to be turned into a dumping ground". Yet, India's actions have had little effect on the growing trade imbalance between the two countries:

China-India

Alas, trade tensions are not only worrisome between the West and the East. They may prove problematic between the emerging markets of the Global South.