100 days Biden: US President’s policies separate wheat from chaff in emerging markets

US President Biden’s policies will have a multifaceted impact on emerging markets. While he might display less capricious behaviour towards China than his predecessor, he will remain equally vigilant over matters of digital supremacy. Increased US fiscal spending is likely to drive demand for EM goods, whereas fast and strong US yield increases could be bad news for emerging markets. 

Biden is equally hawkish but more prudent towards China than Trump

One of the advantages of President Biden’s approach on China is that it is more predictable and less disruptive to global politics and trade. Contrary to the Trump administration, which followed a “shoot-first-talk-later” strategy, Biden seems more consensus-driven by promising to repair natural alliances that have been damaged under Trump. For example, Biden wants to strengthen his relationships with countries that have common interests in the South China Sea, like Australia, Canada, Japan and India.

Digital supremacy will remain a matter of high strategic importance to Biden. This is why two former members of the US State Department, Jared Cohen and Richard Fontaine, could be knocking on open doors as they propose their case of forming a tech alliance of likeminded democracies in order to devise joint responses to contemporary digital issues such as data protection and privacy.

Moreover, Biden’s policy tools will be markedly different as he is less likely to use tariffs to manage the relationship with China, since tariffs are ultimately damaging to the US economy as well. Instead, he will focus on strengthening the US’s competitive position via the infrastructure program.

US inward focus unlikely to result in big reshuffling of global supply chains

Even if the US continues to have a strong inward focus on strengthening its competitiveness and autonomy, it is rather unlikely that the encouragement to repatriate supply chains will lead to a massive shift in production capacities away from Asia. The main reason is that the Chinese consumer market is too important to US companies. US information technology companies for example are generating approximately 25% of revenues in Asia. While it is true that some companies have partly moved their production capacities to the US over recent years, internationally operating corporations generally have a strong interest in having production capacities at least nearby its most important distribution markets. The last few years have shown that even though some production capacities have been withdrawn from China, they have not moved out of Asia as a whole. In fact, most facilities have merely been moved to other countries around China, Vietnam being one of the main beneficiaries over the last few years.

US fiscal spending it a double-edged sword for emerging markets

While the US infrastructure investment plan is geared more towards increasing the competitiveness of the US, the fiscal stimulus packages announced earlier this year, i.e. the American Rescue Plan, are likely to have a pronounced effect on emerging markets. This is because the rescue plan directly targets US consumption, which is likely to increase US demand for foreign goods. However, increased US growth expectations can also negatively impact emerging markets, especially when US yields go up as fast as they did in February and March this year. This triggered a selloff in emerging markets, since the yield difference between the two regions decreased and risk aversion spread among market participants. A significant rise of US yields beyond 2% in the remainder of this year may force more emerging markets to tighten monetary policies with negative implications for growth.

Asia more robust than Latin America

In terms of regions, Asia is likely to prove much more resilient to a rise in US yields than other regions. Latin America, for example, will not be able to digest US yield rises as well due to its much higher debt burden, even if the region normally tends to benefit from a growth spillover from the US. Since Mexico is the number one exporter of labor to the US, remittance payments of Mexicans working in the US are an important driver of consumption in Mexico. These transfers usually increase if the US economy is doing better. During the pandemic crisis, remittances from the US surged to 4% of Mexican GDP. Moreover, Mexico signed a North American Free Trade Agreement with the US in 2018, which is a reflection of deep gearing of the US and Mexican economies. Despite such positive impulses, countries south of the US still show only meager growth rates. This is due to the fact that the entire Latin American region has handled the pandemic rather badly. While stretched fiscal finances in Brazil and Bolsonaro’s ignorance of the pandemic crisis have been in the way of a faster recovery, Mexico’s administration is undermining foreign investors’ investment sentiment. Among other things, the current President Andrés Manuel López Obradors' reversal of his predecessor's energy reform let to the weakest inflows of foreign direct investments in the second half of 2020 since 1997.