Before we begin, let me just say that the world has been watching with horror at the events unfolding in Minneapolis. The killing of Alex Pretti and Renee Good by federal agents was terrifying to watch, and I never thought I’d see anything like it happen in a developed country, let alone the United States.
But amazingly, far from being cowed into submission, the people have organized, especially in Minneapolis, with volunteers and everyday citizens taking to the streets to document the activities of ICE agents, blowing whistles to warn their fellow residents of approaching danger, and helping to support each other by delivering groceries and supplies to residents afraid to be outside during this time.
It’s been inspiring to see, especially now, knowing what could happen to them. I don’t know how this ends, but I think this week is when many Americans really started to see their government in a very different light.
Which kind of dovetails into what this article is actually about, which is how increasing American aggression is reshaping how the world sees it, and how it’s starting to change the world economy.
This month included the World Economic Forum in Davos, Switzerland, a gathering of world leaders that included the US president threatening to invade Greenland, despite Greenland being an ally. And when the rest of NATO objected, President Trump threatened Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland with tariffs in retaliation.
Europe’s reaction to those threats was initially disbelief, shock, and indignation. Feelings that Canadians have gotten to know quite intimately over the last year.
But now, Europeans are joining us in boycotting US products, avoiding US travel, and even threatening to skip the World Cup. They’re also realizing something that we figured out a year ago: Even if you sign a trade deal, like both Canada and the EU did, there’s nothing stopping the US from reneging on the deal and imposing tariffs on you anyway. There’s literally no point in negotiating.
So now the world is waking up to the fact that decoupling their economies from the US is now not just a matter of economic diversification, but a matter of national security. Dependence on the US might make your economy grow in the short term, but eventually, that dependence can and will be used against you.
So as Canada’s Prime Minister Mark Carney so eloquently argued in Davos, the solution isn’t to cozy up to the US and hope for the best (we tried that, it doesn’t work), but rather, band together and trade with each other.
Let’s Make a Deal
This economic diversification has already started, and has only accelerated since the events of Davos.
First, there was the announcement of a new trade deal between Canada and China, in which Canada would allow a limited number of Chinese EV’s to be imported in exchange for China opening up trade on Canadian canola products.
Prime Minister Mark Carney recently unveiled a big shift in Canada’s trade policy. He visited Beijing to firm up a “strategic partnership” with China that included a dramatic change to tariffs on electric vehicles (EVs), as the federal government seeks to diversify trade options. The shift in strategy was prompted by an increasingly fraught relationship with the Trump administration.
Then a surprise announcement that Canada and South Korea would cooperate on bringing South Korean auto manufacturing into Canada.
Canada, facing U.S. tariffs that threaten its auto industry, announced on Thursday an agreement with South Korea to explore bringing Korean automotive manufacturing to the country.
Canada Signs Auto Deal With South Korea, Moving Further From the U.S., NY Times
The UK appears to be following Canada’s lead, with their PM Keir Starmer travelling to Beijing to start trade talks of their own.
The leaders of Britain and China on Thursday called for a “strategic partnership” to deepen ties between their nations at a time of growing global turbulence as they sought to thaw relations after years of chill. Neither Prime Minister Keir Starmer nor President Xi Jinping publicly mentioned Donald Trump, but the U.S. president’s challenge to the global order was clearly on their minds.
British PM Starmer says ‘really good progress’ made in China talks on trade, travel issues, CBC
And then there’s the EU. Almost immediately after coming back from Davos, the EU signed a free trade agreement with MERCOSUR, a South American trading bloc consisting of Argentina, Brazil, Paraguay, and Uruguay.
The European Union and the Mercosur bloc of South American countries formally signed a long-sought landmark free trade agreement on Saturday, capping more than a quarter-century of torturous negotiations to strengthen commercial ties in the face of rising protectionism and trade tensions around the world.\
European Union, South America’s Mercosur bloc sign landmark free-trade agreement, CBC
And then there’s the massive free trade deal that got announced between the EU and India, known as the “Mother of All Deals”
On Tuesday, the president of the European Commission Ursula von der Leyen, president of the European Council António Costa and India’s prime minister, Narendra Modi, announced the “mother of all deals”, which promises to bring together about 2 billion consumers and a quarter of the world’s GDP.
The post-US world is already taking shape – look at the massive EU-India trade deal, The Guardian
You get the idea. The world is eager to get back to business, and if that means working around the US, then so be it.
An Emerging Opportunity
So why am I telling you all this?
Because it could mean something very interesting for emerging markets.
I’ve owned Emerging Market ETFs in the past, and the reason I got rid of them was that I wanted to simplify my portfolio to include only large-cap developed countries.
But now, as the world turns to making deals with each other, guess which countries keep popping up in the news?
I’ll give you a hint: The 5 biggest countries in the Vanguard FTSE Emerging Market ETF (VWO) are:
- China
- Taiwan
- South Korea
- India
- Brazil
All those trade deals I mentioned above include someone from this list.
And interestingly, if we overlay VWO’s performance on top of the US index, VTI, we can see that YTD, VWO is outperforming VTI by quite a bit.
Now, this is once again, a speculative investment decision on my part, which is a fancy way of saying I’m making a guess. An educated guess, but a guess nonetheless. So I’m going to keep my guess limited to 5% of my portfolio, just in case I get it totally wrong.
But come on! Look at that list of countries. China, Taiwan, South Korea, India, Brazil. If you’re any other developed country besides the US, and you want to make a free trade deal with someone, you’re going to be doing it with one of these countries.
What do you think? Do you think emerging markets is poised from some alpha? Or are you still all in on the USA? Let’s hear it in the comments below!
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