Growth projections for nearly every emerging market and developing country have been reduced in recent months. At the same time, the prospects of many advanced economies, including the U.S., have improved. And the trends are strengthening. For example, in the first three quarters of 2013, U.S. gross domestic product (GDP) growth registered 1.1, 2.5 and 4.1 percent, according to the Bureau of Economic Analysis.

Overall, U.S. GDP is projected to reach 2.2 to 2.3 percent this year, and 2.8 to 3.2 percent in 2014, the Federal Reserve says. And although these estimates may fluctuate, the U.S. economy appears to be on the upswing. Nevertheless, although downgraded, emerging markets and developing countries are still growing quicker than the U.S. and most advanced economies, and in many cases, providing sound opportunities. As a result, pursuing these markets is an attractive option.

Why Emerging Markets Are Down

Why have growth projections for emerging markets and developing countries been revised downward? For starters, the tremendous credit and commodity booms are over, says Anders Aslund, Senior Fellow at the Peterson Institute for International Economics, a Washington, DC-based think tank. Since the Great Recession began, credit has been severely curbed in the United States and abroad. Plus, as interest rates rise, an inevitability moving forward, credit will be impacted to a greater degree. And the recent strong demand for commodities, especially by the Chinese, has decreased as the Middle Kingdom’s economic growth continues to level off. This is unlikely to change in the near future.

Additionally, high levels of volatility and financial problems continue to plague emerging markets and developing countries. Plus, governance problems have re-surfaced. And many of these countries are less open to the implementation of economic reforms that have proven beneficial in the past, Aslund says. Other primary reasons include a decrease in emerging market and developing country exports to advanced economies. This also is unlikely to significantly change in the years ahead. Why?

Future import demand by advanced countries is unlikely to resemble past demand for some time. Furthermore, many emerging markets and developing countries didn’t always reciprocate with advanced economies in terms of trade. As a result, moving forward, many advanced economies are negotiating free trade agreements without developing country participation. An example is the Transatlantic Trade and Investment Partnership currently being negotiated with the European Union (EU). Yet, many emerging markets and developing countries, including Mexico, China, India and Brazil, still offer growth opportunities for U.S. firms in the coming decade.

The Mexican Partnership

Mexico is the second largest U.S. export market. And surprising to many, last year, Mexico, a country of 116 million people with a per capita income of under $10,000, imported the same amount from the U.S. as the 27-member EU, less Germany. (In 2013, the EU expanded to 28 members with the addition of Croatia).

Due to very strong North-South economic relationships, much of Mexico’s growth is tied to that of the United States’. And moving forward, Mexico is likely to be a beneficiary of backshoring, which involves American companies relocating previously offshored production back to the U.S. and surrounding countries from China due to rising costs there. This is anticipated to further boost U.S.-Mexican trade, which already supports 6 million U.S. jobs, according to the Woodrow Wilson International Center for Scholars in Washington, D.C.

And very importantly, 40 percent of U.S. imports from Mexico are comprised of U.S. original content, the Wilson Center estimates. This includes U.S.-made components and parts originally exported to Mexico and then imported in finished Mexican products. In comparison, only 4 percent, 3 percent and 2 percent of U.S. imports from China, Brazil and India, respectively, are comprised of U.S. content. On the economic output scale, Mexican GDP growth is projected by the IMF to rise to 3.8 percent by 2018.

China: The Land of Opposites

U.S.-Chinese trade continues to grow. Last year, China ranked as the United States’ third largest export market. What’s more, since China joined the World Trade Organization (WTO) in 2001, U.S. exports there have increased 477 percent while U.S. exports to the rest of the world have increased 112 percent, according to U.S. Department of Commerce data. Yet, troubling issues continue to dominate bilateral relations, especially complaints by American firms of discriminatory treatment. What’s ahead?

In The Spotlight

Newly selected President Xi recently released his first economic blueprint, which many analysts say is replete with contradictions. For example, the blueprint calls for market forces to play a larger role, a reduction in inbound investment restrictions, the opening of Chinese financial markets to some degree, the reforming of property laws, and a more independent judiciary. However, at the same time, state-owned Chinese enterprises, which the World Bank says number 100,000, likely will retain the same level of disproportionately strong influence as in the past. And analysts see little or no improvement in political reform in sight with the Communist party retaining its supreme position.

Tensions caused by Chinese territorial issues in the East China Sea, most notably over the Senkaku Islands claimed by both China and Japan, continue to escalate. The fear that a miscalculation between the Chinese and others in the region will result in a military response poses a real concern. Is this scaring American companies away?

China’s GDP growth rate is projected to level off at 7 percent through 2018, according to the IMF. Although this is down from double digit growth rates over the past few decades, it still is one of the highest in the world, offering increasing opportunities many companies can’t ignore.

India: One Step Forward, One Back

India’s growing population of 1.22 billion consumers, which the U.S. Census Bureau says is projected to top China’s by 2025 with 1.4 billion, along with India’s world famous high-tech service sector, continues to provide much opportunity around the globe. And with a median age of 26—meaning half the population is older and half younger than this—millions of the country’s consumers are predicted slowly to rise to middle class status with relatively strong purchasing power.

Today, however, the world’s biggest democracy only remains the United States’ 18th largest export destination. Why is this? India continues to protect several of its industries from international competition, a strategy that often leads to low efficiencies and poor use of resources. And unlike China, South Korea or Taiwan, India has not subscribed to the Asian economic growth model. This is reflected in the country’s lack of a sizable lower-tech manufacturing sector that may be traced to the Indian government’s implementation of excessive labor regulations.

With the help of market reforms from 2000 through 2010, India’s annual economic growth averaged 8 percent, the United Nations said. In the years ahead, the IMF projects India’s GDP growth rate to increase to 5.1 percent in 2014 on its way to 6.7 percent in 2018.

Brazil: A Growing Potential

Over the long term, Brazil has made progress on many fronts. According to the WTO, “Brazil weathered the global economic crisis well, supported by strong domestic and foreign demand and sound macroeconomic policies. Brazil has also contributed to global economic recovery by substantially increasing imports. Solid economic growth and active incomes policies have allowed Brazil to make progress towards reducing poverty, unemployment, and income inequality.”

However, following the eight-year rule of President Lula da Silva from 2002 through 2010, President Dilma Roussef has made some policy errors and protectionist moves that have resulted in a less-friendly business environment, some analysts say. And new problems surfaced this year in a string of protests focusing attention on rising fees for various services, and demands for better infrastructure, greater government accountability, and the elimination of state corruption. Nevertheless, the country continues to remain an attractive destination for business.

Brazil is the second largest importer of U.S. goods in Latin America and the United States’ seventh largest market worldwide, according to the U.S. Department of Commerce. Overall, there is little doubt that Brazil’s potential is big. Stated by Boston Consulting in a 2013 report, “Few observers doubt the immense potential of Brazil, one of the world’s most significant emerging economies... It is the largest nation in Latin America, with one-third of the region’s population generating 44 percent of its GDP. Already the sixth largest economy in the world, it could become the fifth by 2020.”

In 2014 and beyond, Mexico, China, India and Brazil likely will continue to gain economic strength and global influence. And although market disruptions may occur, their long-term trajectories offer U.S. firm’s much opportunity.

This article appeared in Global Impact, A Great American Insurance Group Publication, December 2013.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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