In the shadow of the Eurozone debt crisis, suppliers and buyers are facing anemic investment and commodity markets in both Europe and the US. However, emerging markets such as Brazil and India continue to develop rapidly. Repeatedly posting positive growth, these emerging markets have become the new stars in global trade. If these relatively untapped markets represent expanding opportunities for businesses, then how lucrative are these markets, and what are the risks?
Surging consumer demand in emerging markets
The term 'emerging market' refers to a country in the process of transforming its national economic structure into a modern, market-based economy. Currently over ten countries can be classified as emerging markets. The largest among them are China, India, Indonesia, Brazil, and Russia. Other important emerging-market economies include Mexico, Turkey, Argentina, Pakistan and Bangladesh.
Rising demand will continue to fuel future growth in these markets. China's consumption potential, for example, is unquestionable due to the sheer size of its consumer base. The country's gross domestic product (GDP) has risen impressively over the last ten years, representing a doubling of GDP during that decade. In addition, according to figures from China's National Bureau of Statistics of China, the Consumer Confidence Index between January and May of 2012 stood at over 100. In the first five months of this year, accumulated retail spending increased by 14.5% compared with the same period last year, reaching RMB$8,163 billion.
With a population of 1.2 billion, India is not far behind. In 2011 alone, its imports were valued at approximately US$370 billion, a year-on-year increase of 22%. This makes India a potential gold mine for companies seeking to expand their global presence. Numerous businesses which are seeking to solidify their long-term strategic growth have identified India as a key location for increasing global market share.
Brazil is another emerging economy with big potential. Two world-class events, the 2014 World Cup and 2016 Olympic Games, have stimulated a substantial increase in Brazil's domestic construction demand and created employment, investment and tourism opportunities.
In other emerging markets, thanks to steady development, foreign imports are now much in demand to satisfy a thriving domestic appetite.
Attractive though these new markets may be, new market entrants face many risks. Like a beautiful rose, avoiding the not-so-obvious thorns is as important as reaping the rewards of investing in these economies.
Different language requirements are a given, but every country's culture, business practices, lifestyle choices and consumption patterns vary significantly. Reaching consensus and agreement can be very time-consuming and frustrating.
In addition, entering an entirely new market involves high expenditure on channel exploration, set-up of physical entities such as warehouses, shops and offices, and on marketing. When searching for new business opportunities, businesses should carefully consider and evaluate the human, physical, and financial resources required over the long term.
Most of the challenges mentioned above can be dealt with in due course. Time alone, however, cannot remedy the challenges posed by high tax rates and, more importantly, opaque tax systems. Data from the World Trade Organization (WTO) indicate that India's import tariffs currently average 12.5%, with agricultural and alcohol tariffs sometimes reaching 100% and 150% respectively. Apart from tariffs, importers are further hindered by a variety of value-added or general sales taxes, central sales taxes, and a wide range of local taxes. These complex tax regimes are common in newly developed countries, India's case being just one example out of many. A complicated and ambiguous tax system significantly increases exporters' costs and impedes the development of stable and healthy bilateral trade.
Another critical obstacle is the large volume of anti-dumping regulations. Anti-dumping laws were originally intended to ensure "fair trade" on all sides. However, in many cases the use of these laws has evolved into a market-protection strategy, and those who are ultimately affected are innocent suppliers and buyers. Although Mr. Pascal Lamy, Director-General of the WTO, recently noted that "there was a significant decline in initiations of new (anti-dumping) investigations, from 213 in 2008 down to 153, in 2011", numerous related complaints between developing and developed countries can still easily be found by logging on to the WTO website. And there are no guarantees that the number of complaints will not increase again.
Lastly, formidable barriers to trade exist in the form of technical and/or regulatory barriers which are usually found in European countries and the US. However, in recent years several emerging markets in South Asia and the Middle East have also introduced various technical barriers to trade. These regulations often come into effect at very short notice or even without any notice at all, and change from time to time, causing considerable inconvenience as well as serious losses to both the buyers and sellers.
Rapidly rising demand in emerging economies has caught the attention of global traders. But before moving forward, research must be conducted into the target market's local demand, price levels, sales channels, quality standards, and relevant laws and regulations. Without adequate analysis and preparation, even the best organizations can experience setbacks and incur unforeseen losses.
Unfortunately, anti-dumping regulations, trade barriers and the variety of other obstacles cannot be entirely avoided. To succeed, suppliers can finesse these by establishing comprehensive early-warning and rapid-response mechanisms in order to prevent any trade frictions that might arise. A sound strategy will help weather these storms.
The best outcome for all parties is simply for trade barriers to be reduced by accelerating bilateral trade negotiations towards mutually acceptable agreements.