This article is an on-site version of our Trade Secrets newsletter. Premium subscribers can sign up here to get the newsletter delivered every Monday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters
Welcome to Trade Secrets. I may be tempting fate, but somehow the past few weeks have seemed like the calmest for trade policy since before US President Donald Trump was elected. Today I look at one of the disasters his trade war could have caused that just hasn’t happened, a general malaise in emerging markets. Going from emerging to submerging economies, I drop in on the UK, which prides itself on its ability to do deals with Trump but may just have caved to a decades-old demand from the US and got literally nothing in return. Charted Waters, where we look at the data behind world trade, is on US equities.
Get in touch. Email me at alan.beattie@ft.com
EM endurance
Today’s newsletter, including this piece, is not an end-of-year review. But as Christmas comes ever closer it’s creeping up on us that, despite Trump’s tariff experiment, the world hasn’t actually imploded.
Low- and middle-income countries (LMICs) — I still won’t say “global south”, you can’t make me — despite often being export dependent and subject to shifts in investor risk sentiment, didn’t face catastrophe. Although it was particularly alarming when Trump went after countries such as Lesotho with his eccentrically destructive “reciprocal tariffs”.
As a general class, emerging markets have done well: a big surge in EM stock prices in the autumn underlined their outperformance relative to advanced-economy equities. The consultancy Oxford Economics, for one, now sees the biggest upward skew risk to EM economic growth since July last year. Bond issuance has recovered from the droughts of the Covid-19 pandemic years.
Now, OK, a big chunk of the buoyancy in bond and equity markets comes from the fall in the US dollar. Trump got his weaker currency, but not exactly through the absurd “Mar-a-Lago accord” that he was touting before entering office.
It’s also true there are underlying weaknesses that will quickly re-emerge if there is a risk sentiment shift. Cheap money is hiding some hefty underlying problems. The World Bank’s International Debt Report, released last week, noted that external indebtedness had continued to increase, and with it, the vulnerability to a reversal of inflows.
But on the real side of the economy, the impact of the trade war hasn’t actually been too bad. Oxford Economics economists identified trade and tariffs as a downside risk for only five of the 23 EMs they looked at.
Why? For one, the US president has rowed back on a lot of the stratospherically high tariffs. The 50 per cent duty on imports from Lesotho was reduced to a still damaging — but not lethal — 15 per cent. Second, the artificial intelligence boom means that Asian countries that export semiconductors and electronics are doing fine, not least because Trump exempted a lot of tech goods from his tariffs.
Third, China’s shift back to an export-led model in recent years — intensified by the focus on manufacturing made clear at October’s Communist party plenum — isn’t great for the Asian and central and eastern European economies it competes with. But it is good news for African and Latin American commodity exporters. China is at least driving growth, even if not in the pattern that will rebalance global trade.
On the trade side, EMs are certainly vulnerable to an AI bust that reduces demand for electronics, as well as to any slowing in the US and Chinese economies. But it turns out they’re more resilient to lesser shocks than some might have thought.
Keir Starmer gets wobbly on drugs
There was a rather big news announcement last week in Britain. As a follow-up to the ad hoc deal he struck with the UK in May, Trump has successfully pressured the country to increase the price it pays for pharmaceuticals in return for keeping tariffs on British pharma exports at nil.
Even though the announcement concerned the NHS, once described by former UK chancellor Nigel Lawson as “the closest thing the English have to a religion”, it seemed to get overlooked. The political press was after all preoccupied with precisely when economic forecasts had been updated before last month’s Budget and exactly who had said what to whom about it, and also whether Rachel Reeves, current UK chancellor, had marginally overstated her under-14 chess accomplishments. Totally normal grown-up country.
The UK’s drugs pricing and NHS procurement system is complicated. But, broadly speaking, the agreement raises the cost-effectiveness threshold at which the NHS will pay for medicine, introduces a new way of measuring health outcomes and reduces the amount clawed back from pharma companies for selling branded drugs. Total expenditure on meds will rise from 0.3 per cent to 0.6 per cent of GDP. This is a non-trivial amount to slip into a trade deal; the increase equals the UK’s future overseas aid budget. The rules only apply to new medicines but, obviously, as old drugs go off patent and new ones arrive, that cost commitment increases.
The thing here is that people, including me, have been saying for more than a decade that a post-Brexit Britain would be subject to said pressure. From 2017, Theresa May’s and Boris Johnson’s governments got as far as scoping out a deal, though not making actual concessions. (I should, incidentally, fess up that I was utterly wrong much more recently about whether it would actually happen.)
Now, you can argue that higher prices are needed to stimulate research and production (the usual intellectual property industry spiel), and that pharma production has been leaking out of the UK. But while there was some vague talk in Labour’s 2024 manifesto of improving drug production incentives, which the pharma industry liked the sound of, there was nothing as specific and far-reaching as this.
It’s really hard to avoid the conclusion that Sir Keir Starmer’s government is bad at negotiating and so desperate to preserve the PR benefits of being the first country to do a deal with Trump after the “reciprocal tariff” threat that it caved. There’s also the problem that spending on cheaper generic and “biosimilar” drugs, which constitute the vast majority of NHS prescriptions, gets squeezed out by the cash going to whizzy new patented meds.
It might be even worse than that. Trump’s tariff campaign, as I wrote last week, looks like it’s hitting some upper limits. He’s negotiated a bunch of reductions of the ludicrously named “reciprocal tariffs” with various countries. He’s cut duties on food; there’s chatter that he’s backing off threatened semiconductor tariffs.
Trump announced 100 per cent tariffs on branded drugs in September, only to suspend them a week later. Perhaps they will never happen. It’s quite possible the UK has allowed Trump to commit sacrilege of its national religion in return for nothing — a tactical blunder that teenage chess fiend Reeves would surely have seen coming several moves ahead. It’s also entirely possible Trump will renege on the deal — or that a future US president will — by which time these changes are going to be exceedingly hard to reverse.
Charted waters
The stock markets are cruising towards the year-end in a generally optimistic mood. I’m not at all convinced it will last, but it seems any popping of the AI bubble will be next year at the earliest.
Trade links
-
Even by the high standards of Scott Lincicome at the Cato Institute, this is an absolutely terrific piece on the complexity of Trump’s tariffs, which get businesses snarled in hopeless bureaucracy even when the duties themselves aren’t that high.
-
Child deaths are likely to have increased around the world this year for the first time in decades, according to the Gates Foundation.
-
A paper for the Quincy Institute, a think-tank that urges restraint and modest ambition in US foreign policy, discusses reforming the US Development Finance Corporation to focus on commercial rather than foreign policy goals.
-
Last week, as trailed in last Monday’s Trade Secrets newsletter, the great Andy Bounds and I did an online Q&A for readers, posted here. Andy pulled out a great quote from the play A Man For All Seasons to describe US recklessness in destroying the multilateral trading system.
-
This is a great and very detailed read in the FT on Volkswagen’s attempts to reinvent itself.
Trade Secrets is edited by Harvey Nriapia
Recommended newsletters for you
The AI Shift — John Burn-Murdoch and Sarah O’Connor dive into how AI is transforming the world of work. Sign up here
FT Swamp Notes — Expert insight on the intersection of money and power in US politics. Sign up here
