New “friend-shoring” policies could adversely impact shaky EM markets

“If you’re a U.S. company that usually builds these hub and spoke distribution centres, it’s not clear exactly what it means. So, there remains a lot of uncertainty, and you my delay your investment unless it’s meant to address the local market,” said Tan.

“For instance, if you’re a consumer goods company – let’s say China is 20% of your revenue – you might continue to invest in China to address the Chinese market. But, whereas, before, you might have expanded that capacity because there’s scale as opposed to building brand new plants elsewhere to expand your capacity to sell to other parts of Asia, now you’re not sure what kind of implications that could have. So, if you’re the CEO or CFO or Board of Directors, the most prudent thing is to say: ‘let’s hold off on any incremental investment that’s meant for expanding capacity other than for the local market’.”

Tan said the IMF warned in its most recent World Economic Outlook that “friend-shoring” could reduce global economic activity (gross domestic product), by 2%. But, smaller emerging countries that are more reliant on trade and foreign money could be hit by up to 6%.

“It’s already started seeing that over the last few months,” said Tan. “It started seeing foreign direct investments between what it calls geopolitically friendly countries go up and those between geopolitically opposed countries go down. In other words, companies and countries re being told to invest not based on what makes sense, like the most efficient supply chain, but more in their friends.

“From one perspective, that does reduce your risk because if one of the core components that you need is with the country that you don’t fully agree with and might one day become your rival, or might one day cut you off, that’s a risk. But, it may actually increase your risk because you suddenly don’t have the diversification. Your friends might also be exposed to the same underlying drivers, so your economies will go up or down at the same time. So, you don’t have that natural diversification.

Tan said it was interesting that the IMF issued that rare rebuke, but she said, “it’s saying, ‘what you’re thinking of doing is going to hurt the world’.”