Look Forward | Episode 11: China Inc. heads to the Global South in the age of tariffs

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[00:00:05]

Andy Critchlow

Hello. My name is Andy Critchlow. I'm Head of News at S&P Global Commodity Insights, and welcome to the Look Forward Podcast from S&P Global. In today's rapidly shifting markets, success depends on anticipating what's next. The professionals who excel are those who can spot emerging trends before they fully materialize. The Look Forward Podcast delivers exactly that, insights to help you prepare for tomorrow's opportunities and challenges.

We bring you expert perspectives on macroeconomic trends, capital markets, energy transition, and global trade with a sharp focus on what these developments mean for the decisions that will shape your tomorrow. This podcast connects you with S&P Global's Look Forward Council, bringing cutting-edge research on long-term trends and transformative market shifts. Together, we're committed to providing the forward-looking intelligence you need to navigate uncertainty with confidence.

Welcome to this episode of the Look Forward Podcast where we delve into the dynamic landscape of China's global trade and investment strategy. I'm Andy Critchlow, Head of News at S&P Global Commodity Insights, and today, I have the privilege of speaking with Charles Chang, the Greater China Country Lead at S&P Global Ratings. We'll be discussing the insights from the recent report titled China Inc. Heads to the Global South in the Age of Tariffs.

As China's trade relations shift significantly due to increasing tariffs and geopolitical tensions, the report highlights how Chinese firms are pivoting towards the Global South with exports to these regions surpassing those to the U.S. and Western Europe combined. Join us as we explore the implications of this trend, the growth strategies of Chinese firms, and the future of global commerce.

[00:02:10]

Andy Critchlow

Charles, welcome. Thank you for joining us from Hong Kong. This is a big market shift that we're seeing, and the report indicates that, by the end of the year, China's exports will be 50% more to the Global South than the U.S. and Western Europe combined. It's quite a startling statistic really. What are the key factors driving this shift in export markets for Chinese companies?

[00:02:42]

Charles Chang

The key shift really started to happen in about 2018 when the tariffs started to come on Chinese goods, and at that point, there was a very clear shift towards exporting to countries where those tariffs are not applicable.

The U.S. tariffs, in many ways, motivated Chinese firms to look for other markets, and that has continued on into the second Trump administration. In the last 5 years or so, we've seen that trend really accelerate. The pace of that growth is more or less at 3x of what it was in the previous 5-year period. This is something I think that will be a longer-term trend.

The bottom line is Chinese companies are looking for markets, and they're becoming more global, more competitive, and that, along with some of the pressures from tariffs and some of the obstacles in the developed markets, are motivating them to go to what people call the Global South, which is essentially a collective term for emerging markets.

[00:03:56]

Andy Critchlow

The volumes and the significance of this is quite staggering really. One of the figures that really caught my eye in the report were the trade volumes now between China and this group of nations and regions in what we would define as the Global South, it represents something like 20% of GDP in these countries.

[00:04:17]

Charles Chang

Yes. They've become quite significant. Among China's top trading partners, the average is about 20% in terms of the volume of trade compared to the size of each country's GDP. I use that figure as a way to get a feel for how important those trade flows are to those countries, and clearly, in the era that we live now where geopolitical tensions tend to surface and there's a rivalry between the U.S. and China, countries may feel like they're pulled one way or another.

The bottom line is those trade relations are one of the key considerations for the countries that are caught in the middle. Those numbers are, as you say, quite significant, and that goes a long way in explaining how many countries are behaving in between these two superpowers.

[00:05:20]

Andy Critchlow

We have this investment trend and Chinese firms increasingly investing in the Global South, foreign direct investment into Southeast Asia, I think, quadrupling over the last decade as an example. Can you elaborate a little bit more on the sectors that are attracting the most investment and the strategic motivations behind some of these decisions?

[00:05:43]

Charles Chang

This is an interesting shift that has become more apparent, particularly in the last few years since the COVID restrictions came down. One of the concerns that observers had when it comes to Chinese investments in the past had been that a lot of it is focused on resources, focused on getting minerals, getting upstream oil and gas assets and so forth, but that's changing because what we're seeing are Chinese companies looking for production centers in the Global South markets.

Their aim now for many companies is to localize production because they have realized, for particular industries, that localized production offers them advantages with respect to alignment with local policies, alignment with local governments.

Also, what we're seeing are Chinese companies that are finding that lower-cost production bases may also be something that's beneficial to their supply chains. There are also pressures from the U.S. as well as some European clients on the manufacturing side where they're looking for diversification out of China in terms of production basis, so Chinese producers are also being asked by their customers to look for other production centers.

There is both for the product makers as well as for the manufacturing -- servicing companies to look for places to produce that are outside of China, and this is a trend that has been going on for the last few years and accelerated by these trade tensions.

What that means is that for Chinese companies basically looking to expand production, whether it is electronics or cement, they are having to invest in not just manufacturing capacity. They can't just go into these countries and build a plant.

In many cases, they have to help build the infrastructure, and they have to help develop the labor force in order for them to be skilled enough to produce some of the more sophisticated products that are just beyond labor value added. That means that a whole host of investments are accompanying Chinese companies' entry into these markets.

This brings us back to the time when this was happening in East Asia when what was called the four tigers, Hong Kong, Taiwan, Singapore, Korea, were developing -- following similar paths, which is manufacturing capacity being developed locally, and that transfers skills and know-how to the local economy which eventually becomes internalized in those countries.

This is a development path that is well-known to policymakers, particularly in Southeast Asia. They have an incentive to use and leverage some of these inflows to help them on the development path, and this is not just -- obviously, not just in Southeast Asia. Southeast Asia is the most significant one, but this is also happening in Latin America as well as Africa.

[00:09:20]

Andy Critchlow

You said something really interesting there around the offshoring of manufacturing by Chinese companies to more low-cost, advantageous locations in the Global South. That is a behavior that really -- we would normally associate really with western companies in more mature markets, more developed economies where they're looking for cost advantages from offshoring some manufacturing, and we've seen that as a global trend for the last 20 years.

Is this then a sign as much as a strategic pivot within China and within China corporations as it is a sign that China internally is developing and, actually, it's starting to -- because of the scale of the Chinese economy, the scale of growth that it's starting to feel some of the pressures that we would normally associate with economies in the west, be it the U.S. or Western Europe? What I mean by that is dealing with rising costs, rising cost of labor, rising cost of production, rising cost of energy, these corporations, if they are to maintain their profit margins and their growth, they need to look elsewhere.

[00:10:30]

Charles Chang

Yes, I think it's all of that. There are a number of important factors that are happening, namely three. The first one is the fact that China is a more mature economy and its growth is slowing down. We're not seeing the same kind of pace of growth that we've seen in China as we have seen in decades past. Many Chinese companies who are seeking growth are finding that they need to look in other markets and that overseas markets are becoming more attractive from that perspective.

The second factor is the fact that Chinese companies are becoming more competitive. The misperception, I think, often when it comes to China is that they compete purely on low cost and low prices. That is no longer the case. I think in the auto sector, in consumer goods sectors, what you'll find that the industry is telling us as well as other observers is that these Chinese competitors are competitive on a global basis, and it's not just on price. It's on capabilities as well as quality. That global competitiveness is the second factor that is driving Chinese companies to seek other markets because they can. They're able to compete in other markets.

Lastly, the trade tensions between U.S. and China and the erection of tariffs against Chinese goods basically directionally are pushing Chinese companies to look elsewhere where those tariffs are not in their way. That leads them to Global South markets, which historically have been more neutral when it comes to these kind of tensions and are looking for economic development which aligns well with Chinese companies' objectives. These three forces are driving these companies to look in those markets, and this trend is something that is likely to continue for a very long time, probably in the next 5 years or over a decade.

[00:12:42]

Andy Critchlow

That point that you made around the perception of Chinese manufacturing Chinese products in the market and how that is changing, I think that it's a really important point. I think you're really seeing that in areas such as automotive, especially the EV space where maybe 3, 4 years ago, Chinese manufacturers, probably on a technology footing, quality footing, maybe weren't necessarily where some of the other global manufacturers were.

I drive a Tesla, but I had a seat in a BYD the other day, and I have to say, touch, feel, everything, it seemed to me equal, if not better, in many respects. When you look at the -- you compare the cost, I think it's a great example really of the point that you've just actually made there, and I think a lot of consumers are starting to realize that.

You're seeing it as well in other spaces. I think that -- in the AI space, in deep search, how they stole the jump on everyone at the beginning of this year and created a big stir with the launch of that particular technology and how that was disruptive in the AI space, and we're seeing that more and more.

Let's come back to the report. Trade relationships. With the Global South accounting for 44% of China's exports now, how do you see these trade relationships evolving in the context of some of the economic challenges that you've mentioned, obviously, China's economy, it can't sustain these high levels of growth that we saw at the beginning of the journey, if we think back to 2001 when China joined WTO, and also the ongoing trade tensions with the United States?

[00:14:28]

Charles Chang

China seems to have decidedly taken up the strategy of pursuing other markets since the imposition of tariffs in the first Trump administration, and this playbook seems to have come back at a much faster pace and broader scale in the second Trump administration.

What we're seeing is the Chinese government very actively reaching out to Global South governments, whether it's in Latin America or Southeast Asia, to, first, support the global trading system and, two, to cut tariffs instead of raising tariffs. Recently, you might have noticed that China cut all tariffs on all African countries down to 0. We're not seeing this from the U.S. and Europe, and there may be an intention to show the contrast between what China is doing in terms of trade versus some of the other developed markets.

At the end of the day, what a lot of these countries are looking for are commercial development, they're looking for economic development, they're looking for infrastructure to be built in their country, and the Chinese are apparently willing to trade, willing to build ports and roads and rail, and they're offering that in their outreach to these countries.

When you look at -- whether it is the Brazilian President or the Southeast Asian Prime Minister visiting China or President Xi visiting those countries, these are often the agreements that are signed on the back of those meetings, usually 20 or so meetings -- 20 or so agreements signed on collaboration on trade, on manufacturing, on development, on infrastructure, on technology advancement.

Across all of these areas, China seems to be pushing forward and reaching out to many of these markets, and what that has an effect on is the trade relations between Chinese companies and these countries, so it paves a way for these countries to operate -- for these companies to operate in those countries. We've seen that most evidently in Southeast Asia.

As I mentioned before, some of these countries' trade volumes are very high with China. China's trade with Southeast Asia, for example, is as big as 1/4 of the entire region's GDP, so these are very, very big numbers. Of course, if you have that kind of economic significance, on other spheres, you may find those countries to put those considerations in the mix.

This is going to be, I think, a core strategy for Chinese companies as well as the Chinese government for what we're calling the age of tariffs. This is their counter to these tariffs that are coming up in developed markets, and they will continue to pursue this strategy, I think, for as long as this is the kind of world that we're looking at.

[00:17:50]

Andy Critchlow

Paradoxically then from the perspective of the U.S., the age of tariffs has actually arguably given China more leverage in some of these emerging markets and frontier markets and what we would term the Global South, which is incredibly interesting, but it's not just there. I think here in the U.K. where I'm based, here in London where we're recording today, there's definitely been a shift in the tone of the British government towards China. That is actually quite counter to its relationship with the U.S.

The British government is, I think, far keener to reestablish better relations with China, certainly on the trading and economic front, which, I guess, is part of the same trend would you say as well that it doesn't -- it's not just limited to some of these -- to the Global South? It's more developed economies as well that this sort of dynamic is working with?

[00:18:56]

Charles Chang

Yes, it certainly can be. I think Europe has taken a slightly different approach versus the U.S. Europe, for example, on the tariff front are looking at imposing countervailing duties. What that means is that the aim for those tariffs are to level the playing field. However you define that, however you calculate that, that's the aim, whereas U.S. tariffs seems to be looking at a broader objective of strategic competition versus China.

For example, the so-called small-yard, high-fence trade sanctions as well as other tariffs that just simply aims to block out Chinese goods and to slow the development of Chinese technology and Chinese industries, those are different objectives. I think the Chinese firms are able and willing to deal with countervailing duties. They can essentially work with those types of parameters because you can calculate those. That, you can build into your cost. You can localize production to manage that.

Companies are there to make a profit, so where they can make a profit on the same playing field, they might very well be very willing to do so, whether it's in the Global South or in Europe. I think for Europe and for the U.K., when those parameters are set, when those rules are developed, you will find Chinese companies looking to work with them rather than just canceling out or dropping the whole market.

In all the discussions we've had so far with Chinese companies, if you ask them, do they want to trade with the U.S. or with Southeast Asia or the Global South, they will say both. They're willing and happy to trade where they can make a profit and where they can operate.

From their perspective, they're going to look for markets where they can develop their operations and make a profit. If European rules allows them to do that, then I'm pretty sure that they're going to be looking into it and pursue it. Actually, many of those companies have decided to continue to develop their plans in Europe as we speak even as these tariffs are coming online.

[00:21:40]

Andy Critchlow

That pursuit of profit, do you think that that has made Chinese companies more adventurous? These markets in the Global South, they can be complex markets to navigate from a regulatory perspective. For a lot of Western European, U.S. companies, that may be more challenging. Do you think that one of the competitive advantages that China has in this space is just prepared to take more risks?

[00:22:06]

Charles Chang

I think the way to think about it is probably this. For a very long time, observers of China or of Asia, whether it is in Asia or outside Asia, have been asking the question of when we're going to see Chinese multinationals. We're not used to seeing Chinese multinationals. We're used to seeing U.S. and European multinationals. That is a function of the stage of development of those countries as well as those companies.

At a certain point, companies, when they are globally competitive enough, when their markets are mature and advanced enough, they will be seeking growth on a global basis, and this seems to be happening now. The moment seems to be, now, Chinese companies, industry leaders, in particular, are becoming multinationals. They're stepping out of their countries, just like the American and the European companies are. To a certain extent, this is a natural progression of the advancement and development of these companies.

Now, as you say, in a lot of these markets, the operating environment may be involving more regulatory risk, there may be less infrastructure, there may be more legal risk and what have you. This is just a function of those markets. In considering those, if they believe that they can manage it and continue to make a profit while operating in those countries, they will do so, and we're seeing that they are entering more of these markets, not just as places of production for re-export which is a misperception that's often put out on Chinese companies.

They are increasingly looking at these markets as end markets, producing there and selling there, and we're seeing this in a number of industries. Auto is one of them. White goods. Electronics is another one. There will be others. Cement, interestingly, is also…

[00:24:16]

Andy Critchlow

Which we focused on the podcast actually in our last episode. Cement is this -- how significant it is actually for global growth and for picking up these trends, so that's interesting that you point that out.

[00:24:29]

Charles Chang

The interesting finding from the report is how many industries were seeing Chinese companies go overseas. Now, obviously, if Global South markets and developed markets are equally welcoming and equally easy to enter, surely, they will look at all of them, but the issue with the Asia tariffs is that for some of the advanced economies and developed markets, there are now roadblocks in the way.

As a first port of call, they tend to go to Southeast Asia where they're more familiar and it's closer and where they have more production capacity to begin with. Then there's Latin America and Africa. Many have looked into developed markets as well, but they're just simply finding it harder to operate in the midst of these tensions. The age of Chinese multinationals is coming along with the age of tariffs, and the two are reinforcing each other.

[00:25:38]

Andy Critchlow

I've been a financial journalist for 25 years, and whenever I'm asked what was the most important pivotal moment in my career as a reporter, I always come back to China joining WTO in 2001. I think it changed the world. In many respects, this has -- that has been the canvas upon which commerce economies have been painted on over the last 25 years. What we're talking about today in terms of future projections, is this on a scale of that, or is it more just an evolution of that great shift in China opening up to the world?

[00:26:18]

Charles Chang

I think it probably would be on the scale of that. I think if you compare Chinese firms heading to the Global South versus China's entry to the WTO, the question is, "How long it would take for the phenomenon we're talking about now to reach the scale of China entering the WTO?"

China entering the WTO is about China joining the global trading system and becoming globalized in the process, which China is, and the phenomenon we're talking about is Chinese companies going out to the world and essentially claiming and developing markets around the globe. It's about China not just coming into the system but actually becoming an integral and important part of the system with global players that are on par with the traditional western, European as well as American, global companies.

I think in, say, a matter of 20 years or so, we may very well see a world where the center of gravity have shifted to South-South trade, trade between China and the Global South, which is -- we're already there, but also in terms of Chinese multinationals becoming key global players in more markets.

This is where I think there's an important implication of this, which is that as tariffs go up to protect various companies, what they may find is that when they step out of their domestic markets beyond those protections that they may not be able to compete against some of these Chinese competitors who have been competing globally without that protection.

To some extent, it stunts the ability of the protected multinationals to really hone their ability to compete and to advance their technologies to compete. This will take a little bit of time to play out, but you're finding this already rising as a concern, for example, among U.S. auto players who are talking about how Chinese EV carmakers are very competitive on a product basis and not just on a price basis. We should see that theme continue to play out.

[00:28:59]

Andy Critchlow

Charles, thank you very much. Fascinating conversation. Fascinating report as well. For the benefit of our listeners, where can they obtain a copy of this report if they want to delve a bit deeper themselves?

[00:29:15]

Charles Chang

This report is available on S&P Global's website. If you just simply google, "China Inc. heads to Global South S&P," it will show up as the top hit on your Google search, and you can see the online article. You can also download a copy from there.

[00:29:34]

Andy Critchlow

Thank you. Likewise, if you would like to download episodes of the Look Forward Podcast, go to Spotify, search for Look Forward Podcast S&P Global, also on the Apple [ Podcast Store ] and YouTube, and you can also listen to us directly from the S&P Global website. Charles, thank you very much for joining us from Hong Kong. Have a great evening now as it will be. A great conversation. To all our listeners, please look out for the next show. Thank you.