The US-sponsored trade war has spread all over the world, and NATO ally Turkey has become the latest victim, falling into the worst economic crisis in 17 years. On August 13, the Turkish lira broke below 7 against the US dollar, hitting a record low and triggering a plunge in various currencies in emerging markets. After the corresponding measures were taken in Turkey and India, the market was slightly eased. On August 14, the Turkish lira rose sharply by more than 8% against the US dollar, and investors’ concerns about the Turkish crisis were slightly relaxed.
Turkey has become a “victim” of the deterioration of the international trading environment and the changes in the geopolitical situation. This is not an accidental factor, as Turkey has been classified as a “fragile country” several years ago.
In 2013, Federal Reserve Chairman Ben Bernanke hinted that the Fed would cut bond purchases. Following that, emerging market currencies plummeted, and the global market panicked. This incident was later called “tapering tantrum”. The US investment bank Morgan Stanley evaluated the “fragile five countries” based on the performance of emerging markets in this wave of market shocks: India, Brazil, Indonesia, South Africa, and Turkey. The common feature of these countries is that the current account deficit is high and continues to grow, and thus increasingly dependent on foreign capital inflows. Morgan Stanley pointed out that in order to cope with the impact of “tapering tantrum”, emerging economies, especially the “fragile five countries” have adopted the monetary policy of following the Fed, but have selectively ignored the deeper problems of the domestic economy and the current account. Morgan Stanley compared the response of emerging markets during this period with the subprime crisis and found that while emerging markets have taken effective measures to maintain their economic growth at that moment, they have led to a more imbalanced economic endogeneity. The result is that although there has been a mild recovery in export growth, the domestic economy has not undergone structural changes.
In 2017, Standard & Poor's released the “new fragile five countries” report, Turkey ranked first in the “new fragile five countries”, the five countries are Turkey, Argentina, Pakistan, Egypt and Qatar. Standard & Poor's pointed out that the common features of the “new fragile five countries” are large-scale current account deficits, and the domestic savings rate is insufficient to support domestic investment. Fragile countries survived the past few years “safely”, mainly because of the loose global monetary environment. However, when the Fed began the process of normalizing monetary policy, the environment changed. Standard & Poor's believes that emerging market crises are more likely to stem from financial account deficits rather than current account deficits. In addition to monitoring the current account, S&P also measured foreign exchange reserves, external financing needs, and external debt as variables. After analyzing the world's 20 largest emerging market sovereign countries, S&P found that Turkey, one of the former members of the “fragile five countries”, is "the only country that has always been on the list regardless of the measurement variable." These countries have shown that foreign debt is relatively high and their external balance sheets are weak.
According to the research team of ANBOUND, from the “fragile five countries” to the “new fragile five countries” and Krugman's criticism of "Asian mythology" in the 1990s both reveal the inherent vulnerability of emerging market countries in development. Even more noteworthy is the change that Morgan Stanley pointed out – global economic growth is increasingly turning into a “zero-sum game”. This means that growth in the US and the Eurozone is at the expense of growth in other countries, including emerging economies.
In the era of globalization, the statement of economic growth “zero-sum game” is obviously untenable. This is not in line with the economic theory of division of labor and trade, nor the economic practice of countries in the era of globalization. After more than a decade of China's accession to the WTO, China has been deeply involved in globalization and achieved a win-win situation with the global market. However, when the world enters a new era of anti-free trade prevalence, high tariff barriers, and rising investment barriers, free trade and global division of labor are threatened. At this time, the global “win-win” situation begins to be broken, and protectionism with “let a country great again” as the core begins to prevail. In the new context, the “win-win” component of the global economy is decreasing, while the “zero-sum game” feature is strengthening.
In the ten years since the global financial crisis, the development of developed countries and emerging market countries has not been narrowed but has increased. The capital surplus environment formed by the “expanding policies” of the world’s major central banks has contributed to the global recovery from the financial crisis; but when the US and European economies recovered and began to return to monetary normalization, the emerging market countries that were lifted by liquidity began to bear the cost of tightening policies. The aforementioned “fragile five countries” and “new fragile five countries” are physically vulnerable in emerging market countries.
Although China's economic physique and comprehensive strength are very different from those of the above-mentioned “fragile” countries, there are still internal and external risks that need to be vigilant. In any case, excessive debt (especially external debt), worrying balance sheets, lack of sufficient industrial support in the domestic economy, insufficient support for the economy in the domestic market, incomplete social security, environmental degradation in business development, and insufficient confidence of the middle class in the domestic market... All these factors will weaken investors' confidence in the domestic market. Once there is a major change in the economic environment, it may induce greater risks. Smaller emerging market economies may become “fragile” countries; larger emerging market countries may end up failing to “middle- income trap”.
Final Analysis Conclusion：
Globalization has brought about a win-win situation in the world, while counter-globalization has intensified the trend of “zero-sum games”.
