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Bloomberg Economics and Bloomberg BusinessWeek took a dive into trade and investment data and identified five nations that are coming out as winners of these new geopolitical fault lines. To find out which countries these are and what's happening there. Works may have a cousin in Zurich and Sean Donnan in Washington. Take us through the results of these data and their implications. I'm your host Scarlett Foo today on the Big Take. Which countries are benefiting from the reshuffling
of global supply chains. Guys, it's so great to have you on. Thank you, Thanks so much for having us. So let's get started. Bloomberg identified five countries emerging as important links in the global economy. These are not economic powerhouses, they're not even budding powerhouses. Instead, you call them connectors. What do you mean by that?
So, I think one of the things we think about when you think about the global economy is often the relationship between the largest economies. Right if when we talk about globalization, when we talk about how people are getting along in the global economy, we often think of the US in China, or the US and EU, or the EU and China, And the reality is actually that increasingly we're starting to see these smaller economies that are kind
of setting themselves up. As you could call them pit stops, you could call them extra links in the supply chain. We tend to call them connectors because that's where we are seeing an increasing amount of globalization take place. It's no longer in many cases a bilateral relationship between big economies.
As a result of all sorts of things, from tariffs to geopolitics, we're seeing a lot of trade, a lot of investment, take a diversion on the way between big economies through these connector economies.
I like the way you describe that. If you think of global trade like an aeroplane flight. Political and economic tensions have resulted in there no longer being any direct flights between the US and China, or the US and Russia or other countries. You now need to change planes somewhere first. These are kind of four stopovers. Is that one way of thinking about this, Neva.
Yeah, it's when we're thinking about it, I would say that there is still quite a lot of direct flights between the US and China in terms of trade of goods. When we've looked at the numbers, it is clear that on the products that have been targeted by the trade war since twenty nineteen, there has been a big drop in Chinese exports to the US and US imports from China, but they still get a lot of goods directly from China.
So the US is still important a lot those connectors, those hubs in between the big makers, the big producers, and the big bayers are taking an increasing role in the global supply chain. So we are seeing some lengthening of the global supply chains with an extra stop in some cases.
Another way of thinking about it, if you're talking about flights, is that those direct flights have just gotten more expensive, so more people are taking indirect lights through hubs. So you know, if we're talking about places like Vietnam and Mexico and you're thinking about the US kind of domestic airline network, they're kind of the Atlantas and Chicago's of the world.
When you talk about countries like Mexico, like Vietnam, how did they become so critical in the current global economy. Is it because they are a clear member of Team China or Team USA or Team Europe? Or is that too simplistic.
I think it depends on the individual economies. A lot of it has to do with free trade relationship and free trade agreements. For example, Mexico, it being part of what used to be called NAFTA, has made a huge difference in its economic relationship with the United States and Canada. It is a key part of a North American supply chain, but one of the things we've seen in recent years, for example, is a lot of Chinese companies start to invest in Mexico, where they are producing for the US market.
They still want to ex bort to the US, they're just doing it from factories in Mexico. It's the same thing with Vietnam. Vietnam for years has been building its trade relationship. Since the nineteen nineties, it's been building its economic relationships with both the US and China. I don't think you'd put them in either Team China or Team USA. Both teams are trying to make sure they have a good relationship with Vietnam.
And I think some of those relationships actually predated the tensions and building of tensions in geopolitics globally. I think if you think of Mexico or Vietnam, these are countries that have started Mexico in particular, emerging as very important manufacturing hubs. One Vietnam because it was very close to China, the factory of the world, and the other one because it was very close to the US, which is the market of the world. In addition, you have polland of course,
which benefits from the two aspects. It's very close to Germany a very large manufacturers and it's also part of the EU Single Market, so a very large consumer market. I think those are the sort of benefits from those economies, and now they are I think in a more polarized
global world, those advantages are becoming even more important. And I think, as you said, Sean, they are neither Team China or tiam Us, and in a way they are trying to stay as neutral as possible because that's in their own advantage to a large extent, it's also in the advantage of the US and China themselves as it sort of smoothed the relationship and the shocks between them.
And I'm so glad you brought up Poland. So right now we have Vietnam, Mexico, Poland. There's also Indonesia and Morocco. Maybe like you crunch the numbers, you took a look at the combined economic output and input of these countries, what do they look like?
So they are about four percent of global GDP together, So that's probably the size of Germany. It's for tradio on USD in twenty twenty two, so it's not a very large economic block, but it's starting to make some size but at the same time they have clearly punched above their weights when it comes to investment. And if you look at the number of green field investments so very quickly, green field investment is those foreign direct investment
projects into a new project, a new factory. So it's really the sort of trend of production in the future. So that's a very good indicator where feelings like the
big factories of the future. Basically, in twenty twenty two, I think those countries got almost ten percent of green field investment together, so four percent of GDP, ten percent of green field investment, and they're also probably represented about twelve percent of the world exports of goods, so you can see that these are very foreign investment trade oriented economies.
So in terms of what these countries have in common, you mentioned proximity, you mentioned manufacturing hub. You also mentioned this ability to draw investment from foreign companies that are looking to expand their footprint, maybe diversify their supply chain. Is there anything else that we should think about in terms of what these countries share in common.
Yeah, Look, trade deals are a big part of the story, and I think in the case of Morocco, for example, it has a trade agreement with the United States, and as a result of that trade agreement, companies that invest there are able to take advantage of the benefits of the Inflation Reduction Act and all the subsidies and incentives that are in that when it comes to things like
electric vehicle production and so on. So Morocco sits at the top of Africa, has free trade relationships with the US, also with the EU, and that means that it becomes the kind of like Mexico, a hub for investment, a hub for production, and it really is looking forward and they really are trying very hard to position themselves in
terms of this kind of electrification. This is the other context for all of this is we have this enormous transition happening in the global economy from fossil fuels to green energy, and a lot of these countries are finding a way to take advantage of that.
There's been many studies actually looking at what are the drivers that can explain how a country can raise its stakes in the global value chains, and there are lots of things. Proximity trade deeds. Language can help as well, having a common language with one of the big importers or exporters. The quality of infrastructure and institutional quality generally HELPSODOT cheaper labor cousts, of course, and that probably sort of thing you think about when you think about Mexico
versus the US, or Vietnam versus China. So there are lots of drivers of potential success in global value chains that have clearly benefited those five economies.
After the break, which countries in Asia and Africa are benefiting from tensions between China and the West. We've talked a little bit broadly about these countries, but I want to take a deeper dive into Vietnam because Vietnam's positioning is really interesting. It's role as connector, it's always in there, but it's been super charged since Donald Trump, the former president, launched his trade war against China. Can you talk a little bit about how Vietnam's role has evolved.
Vietnam's economic rebirth really started happening in the nineteen nineties when it normalized relations with the United States. Remember, they had been for decades after the Vietnam War, had been kind of frozen out. The US and Vietnam did not have diplomatic relations. And what we saw when that happened in the early nineteen nineties is very quickly an initial surgeon investment and people looking at producing in Vietnam. It's a big economy in its own right, or a big
population center in its own right. But what we saw during the Trump administration was another acceleration in that as we had the Trump administration put these tariffs on goods from China, and so a lot of people started shifting production and that is happening to this day. It's still playing out. One of the places that our reporters visited as part of this project is, you know, literally these rice fields in northern Vietnam that are being turned into
factories for fox Con that will make MacBooks. You know, there's other companies that will make AirPods, all of your eye devices. We think of them often as coming from China. A growing number of them are going to come from other countries like Vietnam. So Vietnam is very much focused around the kind of tech supply chain consumer tech supply chain.
One of the important things to point out, and I think this is really where the connector label comes in, is that a lot of these factories are being run by the same suppliers who have factories in China. Now like fox Con and that in fact, in some cases these are Chinese suppliers who are setting up in Vietnam, so China doesn't get taken out of the equation just because production shifts to Vietnam.
So Mava, can you talk us through some of the numbers. When you look at export numbers, important was what do they reveal in terms of Vietnam's role.
Vietnam is one of the smallest of those five connectors. That's actually think the only smallest one would be moreco So it's quite a small economy in terms of size, but it's been growing extremely rapidly and their trade numbers have been on the rise for quite a few years already.
What we did for the analysis is that we looked at how much of the global trade they had in all the different products in twenty seventeen, and then we compared how much they got like how much they had increase their market shares in different products by twenty twenty two, and Khalif Vietnam was one where we had seen near
sixty over performance in exports. That means their trade has been growing much faster than that of the rest of the world, and in the meantime they had been receiving, and that has been the case for the last ten years. A lot more confid investments. So what we're seeing in Vietnam is that a lot of investments arrived in the early twenty tens and is now at maturity. So it's really boostings are export numbers and supporting the manufacturing capacity.
Vietnam's experts to the United States have almost tripled in the last five years. Their imports from China have almost doubled in the last five years.
Let's talk about another Asian country, not so much a neighbor, but in the same region in Southeast Asia, and this would be Indonesia, which of course has a large population and a lot of natural resources, and I think that's a critical component here. Sean, you mentioned earlier about the greenification of the global economy. What role does Indonesia play in that greenification.
Indonesia has a lot of the things that the world needs to make electric vehicles. We're talking about things like nickel. What they've done is they've positioned themselves studiously as a kind of neutral party. If you remember, going back in history, Indonesia was a founding member of the Non Aligned movement during the Cold War, which refused to take sides. So we see the really interesting kind of corporate marriages taking
place in places like Indonesia. Earlier this year, Ford signed a deal with a Chinese cobalt producer in Brazil's Valet, which is an enormous miner, to develop and process nickel via a mine in Indonesia, and that was very much something that was broken by the Indonesian government. They're trying very hard to make themselves a kind of essential stop or an essential source for the electric vehicle supply chain, for the green energy supply chain.
To be clear, they're not actively choosing between the US or China, are they. They're kind of actively courting both countries absolutely.
I mean President Joko Widodo, who's really behind this, was in the US earlier this year and his message was very clearly, we want more US investment in Indonesia, and at the same time they are getting lots of Chinese investment there. And the US is not the only Western
or G seven economy that they're courting. They want investment from everywhere, and if anything, their complaint is that, you know, on the US or on the Western side, some investors have been slowed to come to Indonesia and aren't quite balancing out the investment that they're seeing from China. MA.
But you mentioned earlier Morocco being the smallest of the five connector countries that Bloomberg has identified, yet when it comes to the car industry and the ev industry, it's playing an increasingly important role. Can you tell us a little bit about the basics of Morocco's economy and how therefore that puts it in a very advantageous position given the current state of the fragmented global economy.
It's really the car industry and the shift to the electric vehicles mean that actually car manufacturers from Europe in particular honor so some of the German ones have to make big investments, they have to renew their equipment stock, and that's a very good opportunity for those countries that can benefit from these new investments. The benefits the manufacturers are looking for, those lower labor costs in some cases.
In the case of Morocco, you have also a better access to some of the natural resources, so that makes them a very good destination for new investments. And that's what we're seeing currently in Morocco and Sean. The Free trade agreements that you mentioned earlier. This really comes into play when it comes to Morocco, and it's something that maybe was not planned but has worked out pretty well.
Absolutely, so, the US and Morocco have quietly had a free trade agreement in place for many years. It didn't quite matter as much as it does today in the past. And the reason it matters today is because we're talking about billions of dollars in investment that is going into Morocco in battery plants and other kind of parts of
the electric vehicle supply chain. And one of the big reasons for that is that free trade agreement and the fact that that free trade agreement makes things that are produced in Morocco eligible for the tax rebates and the other incentives that you have under the Inflation Reduction Act, which is a big part of the Biden administration's effort to encourage the development of the green economy.
Not to mention the fact that Morocco is home to the world's largest reserves of phosphate, which is a key ingredient in rechargeable cells used in evs. I struggle to keep track of all the different ingredients in these ev vehicles because there's so many different components and you have to go all over the world to get them.
One of the things that we are seeing today in the world of electric vehicles and particularly in terms of batteries, is a huge amount of innovation, which means that some of the key ingredients for today's batteries may not be the key ingredients for the next generation of batteries. That is a potential vulnerability for some of these connector economies.
Coming up a closer look at the fruits of foreign investment for Poland and Mexico. Let's focus in on what's happening in Poland because there are several countries here where we talk about their wealth of natural resources, whether it's Morocco, whether it's Indonesia. In Poland, are there natural resources to speak of here? Or is Poland critical because of its geographic position positioned in eastern Europe between the West and Russia, but also a low cost center.
The fact is is that since the end of the Cold War, Poland has positioned itself as a manufacturing hub within Europe and has become a really important part of the production process for German and other European automakers. And now that we have this transition happening in the auto industry. It is again trying to take advantage of that. And again, you know, like other countries, it's trying to make sure that it's not just producing parts, but that it's actually
taking full advantage. And so there's even an effort underway to produce their own national vehicle with help from Ainese company, it should be said, and move up the value chain. We have seen in the last five years the value of China's exports to Poland double. We also in that same period have seen Poland's exports to other EU countries go up by fifty six percent. In other words, it's again that connector relationship. We're seeing significant growth in trade coming in and trade going out.
Let's cross the Atlantic and go over to Mexico, which is the US's southern neighbors. So geography is certainly a benefit for Mexico. Also the fact that it's got such a close trade relationship with the US for decades now through NAFTA and then the successor to NAFTA. But also it is a source of natural resources as well, with the oil of the industry very well developed in Mexico. Tell us a little bit about how the relationship between
Mexico and the US has changed. Just over the past couple of years.
Since the Trump administration started putting in tariffs. We saw a similar phenomenon in Meca that we saw in Vietnam, and that is that companies in the US who were reliant on parts coming from China and it's often a case of parts rather than finished goods, shifted production to Mexico. And what we've seen happened since is the Chinese suppliers that used to benefit from that relationship move their investment
and invest heavily in Mexico. Tesla is building a gigafactory in Mexico, and alongside it, we're seeing Chinese companies that hope to supply that company build their own factories. We also are seeing Chinese workers move to Mexico to train Mexican workers and Chinese managers there. We think of the US Mexico relationship, which goes back and forth and is often difficult, whether it's because of the drug trade or because of what is happening with immigration in the southern border.
But the fact is is that there are other players in that relationship that make Mexico much more of a connector economy rather than simply a kind of outpost of the United States and corporate America.
With all these Chinese companies setting up shop in Mexico in the official numbers, does that count as a Mexican company or a Chinese company? Does it even matter?
This is where you know, how we count these things gets very complicated. So you know, there are ownership structures a lot of the countries around the world, and we see this in Mexico as well. You know, set up joint ventures with local partners, and so you know it's a part Chinese, part Mexican company. In many cases there
are some full subsidiaries in Mexico of Chinese companies. But when those goods hit the border, those imports from Mexico, whether they are produced by a Chinese company, a European company, or an American company, they all count as imports from Mexico. And that's where sometimes the data can be misleading. And sometimes, you know, when we're thinking about globalization and what is happening, we focus on that headline data and we miss what is happening below.
And that's why we are very grateful to institutions like the OECD who try to actually join the dots between those different exports and imports and see exactly where the value added is coming from. And when you think in terms of the impact of the economies of becoming connectors, it means they don't capture the full value of those new exports because they have to import more to be able to construct them, assemble them in some cases, and then export them. It's not just re export. There is
some assembling or some transformation going on. So it's still quite a big benefit for those economies in terms of activity, of jobs, of taxis connection and things like that.
So looking ahead, how secure are we in thinking of these countries as connector countries that are so essential or are they more vulnerable than we realize because as technology changes, they're not in a position to keep taking advantage of their position in the global economy.
So a lot of this is going to depend on the individual economies and how much they rely on certain natural resources, whether it's phosphate in Morocco or nickel in Indonesia. But I think you know, one of the common phenomenons that we see across these economies is a desire to get into the manufacturing game to move up the value chain,
and that kind of bodes well for the future. There's absolutely a vulnerability in terms of innovation and disruption and what changes in the future in terms of our needs
for minerals and so on. But there's also another reality, which is, you know, we looked at these five economies, they were kind of the top of our list, but they're not the only ones trying to be connectors in this new global economy, and so we're going to see more competition to be these connectors in the global economy from other countries and governments work very hard to attract investment from both the US and China, from the European Union,
from Japan, from big companies all over the world. We're also going to see big companies all over the world kind of leverage the power that they have to get more incentives and benefits, and you know, there is a risk that we will see a bit of a race to the bottom in terms of taxation or industrial subsidies to get all of this investment flowing around the world.
The big takeaway going forward about all this is, for a decade or more, people have been writing about the end of globalization, or been talking about deglobalization or slobalization and so on. What we see with these economies is evidence that kind of globalization has been pretty durable and that actually it always finds a way and companies always find a way to get around even barriers like tariffs countries put up and to deal with things like geopolitics.
One of the vulnerabilities for this country is still that so far, I think they have managed to stay new hard to be aligned with either the US or China, and of course for them, if the tensions retchet up, we have more of a decopling between two blocks. If they're forced to choose side, or if investors choose side for them because they go for the safest place, then it's going to be more challenging for some of these economy.
So the country like Poland, for example, at the heart of the European Union is probably quite a safe bet for investors. Country like Vietnam, sitting so close from China geographically angiopolitically when you look at UN votes for example, could be more at risk of a flight to safety from some of the investors looking to go to proper friend shoring.
I like what Sean said about how companies always find a way to get around whatever barriers or restrictions are put up, and in many cases they're using these connector countries to do so, does that actually add to the economic value overall? When you tell it all up, I mean, it makes everything look like there's more trade, there's more investment, even if you're doing it in a more roundabout way.
There's another way of looking at it. There's the kind of consumer end of that, which is when stuff takes more stops on the way to getting to you, the consumer, that inevitably means higher costs for the consumer and higher costs for companies and so on, and it's a less efficient way of producing. And so these connector economies, absolutely we're going to see them adding to global growth. We're
going to see adding to flows of trade. But you know, there's also this kind of negative impact of all that, which is all of this is going to cost us more. It means that that television, that iPhone, those AirPods, that electric vehicle all may end up costing us a little bit more than it would otherwise.
Maybe is that you take tredeo second best. It's quite good that we can have those step hubs in between the main economies. When they stopped imposing very large trade war tariffs or things like that. For example, you look at some very large model of the global economies, you realize that you can split the word into two economic blocks.
As long as you keep a neutral block in between, the global costs are manageable or contain in terms of GDP because these neutral countries play a cushioning role between. You have losses because in a way you have this extra stop that doesn't really add any value, but it's just the sort of second base to importing and exporting
directly between countries. But the costs are contain as soon as you split the word without neutral countries in between, so you really have the word split between two economic blocks.
The global models start to find much higher shocks to the global economy, much higher costs, because then you have a lot of inefficiencies whereby you have too much investment in China relative to demand in Chinese block, and you have to invest a lot in the rest of the world, and you have to invest in things where you're not actually so good doing instead of investing in things where you're a bitter at So you don't exploit your comparative advantage as much as you used to, so he's our
big gross Sean.
Thank you so much for joining us from Washington. Fantastic story.
It's wonderful to be here.
Thank you, Mava. Really appreciate your giving us insight, and thank you for staying up late to speak with us.
Thanks for having me.
Thanks for listening to us here at the Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, Bloombergarplate, or wherever you listen. And of course we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. This episode was produced by Federica Romaniello, with production support from Sam Gobauer. Raphael I'm Silly is our engineer. Original music by Leo Sidron I'm
Scarlett Fou. We'll be back tomorrow with another Big Take