Donald Trump's efforts to set right the US' trade balance with the rest of the world will impact global capital flows. Here's how it works now: the US runs up trade deficits with emerging markets (EMs), which then park their export surpluses in US equity and debt. The size of the US economy and the proclivity of its governments to overspend corner an oversized slice of global capital. Driving global growth, EMs tend to get by on less capital than they need. This might change if Trump manages to wean EMs off their export addiction. A US economy less dependent on imports would not allow EM trade surpluses to balloon, and would not need matching capital flows to maintain its BoP. EMs, on their part, will have to raise their domestic consumption to keep growing faster than advanced economies.
BRICS has acquired a reasonable economic heft in relation to G7 and, tellingly, has quite a way to go in reaching the latter's consumption levels. An economic structure that requires EMs to focus on domestic demand also frees up global capital for that specific purpose. Faster-growing EMs should build their capacity to absorb capital, as Morgan Stanley's Gokul Laroia said in an interview to this paper. Otherwise, they will remain stranded in slower-moving advanced economies. This becomes a drag when EMs pull in better metrics on indebtedness than their rich cousins.
This economic reset will not be painless, though. EMs may have to confront difficult choices over slower export growth, without a guarantee of a faster rise in living standards. Turning economies inward also imposes productivity costs and may potentially affect momentum. Capital-chasing EM growth could be rerouted. These are tough calls for EM governments, but they have no choice but adapt to the new limits being set for globalisation. Trump's reciprocal tariffs should shake EMs out of their complacency over rising trade surpluses. His trade rebalancing effort is, however, likely to be drawn out, providing EMs some space to adjust policy.
BRICS has acquired a reasonable economic heft in relation to G7 and, tellingly, has quite a way to go in reaching the latter's consumption levels. An economic structure that requires EMs to focus on domestic demand also frees up global capital for that specific purpose. Faster-growing EMs should build their capacity to absorb capital, as Morgan Stanley's Gokul Laroia said in an interview to this paper. Otherwise, they will remain stranded in slower-moving advanced economies. This becomes a drag when EMs pull in better metrics on indebtedness than their rich cousins.
This economic reset will not be painless, though. EMs may have to confront difficult choices over slower export growth, without a guarantee of a faster rise in living standards. Turning economies inward also imposes productivity costs and may potentially affect momentum. Capital-chasing EM growth could be rerouted. These are tough calls for EM governments, but they have no choice but adapt to the new limits being set for globalisation. Trump's reciprocal tariffs should shake EMs out of their complacency over rising trade surpluses. His trade rebalancing effort is, however, likely to be drawn out, providing EMs some space to adjust policy.
