Trading Up

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Making waves Emerging markets fueled China's exports during the downturn

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That pattern began to change after China jumped into the globalization game in the 1980s. Factories in Shenzhen and Shanghai became the centerpieces of "borderless-manufacturing" networks in which parts for TVs, mobile phones and other goods were produced across Asia, then shipped to China for final assembly, spurring greater trade within the region. As rapid growth in China, India and other emerging markets turbocharged local incomes, they became export destinations in their own right, with fellow emerging-nation companies selling to one another's consumers. The connections continue to draw in more and more parts of the emerging world. Trade between the developing economies of Asia and Latin America, for example, grew sevenfold over the 10 years ending in 2010, to $268 billion. China and India, seeking access to raw materials and new customers, have become patrons of Africa. Trade between India and Africa has exploded from a mere $1 billion in 2001 to $50 billion in 2010. Last year, Indian telecom-service provider Bharti Airtel acquired operations in 15 nations in sub-Saharan Africa for $10.7 billion in one of the biggest cross-border deals in Indian history. Ganeshan Wignaraja, a specialist in economic integration at the Asian Development Bank (ADB) in Manila, says these emerging-market ties are creating a "third pillar" of growth within the world economy, alongside the U.S. and the E.U. "We're heading toward a multipolar world," he says.

The consequences of that go well beyond the mere movement of goods. The more important trade and investment within the emerging world become, the less important the West becomes to the global economy, a trend accelerated by the Great Recession. While the economies of the West sag under high debt and joblessness, China, India and much of the rest of the emerging world have powered through the downturn and are looking more and more to one another. And as the major emerging economies grow closer economically, they are discovering shared political interests. The BRICs — Brazil, Russia, India and China — have already started to hold regular summits to coordinate their efforts on major issues like reforming the global financial system. (South Africa joined the latest conference as well.) They are also challenging the established economic order. China and Russia, for example, have led a charge to replace the U.S. dollar as the world's No. 1 reserve currency. If the supersonic trade and investment among emerging economies continues, "the importance of the U.S. and Europe economically and politically would diminish," says HSBC's King.

Corporate executives are discovering new opportunities in their emerging compatriots as well. Companies that might not have broken into developed markets with little-known brand names have found success in emerging markets, where loyalties aren't as fixed. Chinese mobile-phone maker G'Five saw its sales in India surge more than 75% in the past fiscal year; its trendy phones appeal to Indian consumers with thin wallets. Chery, a major Chinese carmaker, would likely struggle in the competitive U.S. market, where Chinese-made goods suffer from a reputation for shoddy quality. Instead, Chery has invested in emerging economies and has 16 factories either operating or under construction in countries such as Russia, Egypt, Iran, Indonesia and Brazil. Chinese PC maker Lenovo decided in 2009 to focus more on emerging economies, believing its experience at home could give it an advantage in other developing nations. In India, for instance, the firm replicated sales techniques that worked in poor areas of China, like showing free movies to villagers as part of PC-marketing road shows. The strategy has paid off. Revenue in emerging markets (excluding Lenovo's Chinese base) ballooned 46.5% in the quarter ending in June, compared with only an 8.5% increase in developed countries, helping the company gain PC market share globally.

Building Bridges (Literally)
The continued integration of the emerging world is far from assured. Developing countries have higher tariffs and stiffer restrictions on capital flow than developed ones. Roads and transport networks have been designed to deliver goods to the U.S. and Europe, not from one developing country to another, often making the shipping of products slow and expensive. As a result, the flow of trade and money is still small compared with that between North and South. Despite its eye-popping growth, trade between India and China amounts to a mere sixth of that between China and the U.S. Persistent political tensions could also flare up and impede economic relations in the future. China and India, for example, still spar over unresolved border disputes, while New Delhi's support for the Dalai Lama irks leaders in Beijing who consider him a dangerous separatist.

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