Ernst & Young Singapore

Balance of trade to shift permanently to the east

Press release   •   Dec 01, 2011 09:46 +08

The total value of international trade is set to increase from 30% to 37% of world GDP by 2020

  • Asia-Pacific to experience fastest growth in global trade to 2020
  • China and India to account for almost one-fifth of global trade flows by 2020
  • China’s exports to Europe at over $1trn almost twice as large as US exports to Europe
  • One of the major drivers of Asian trade expansion will be the growth of trade in financial services

Global trade has long been dominated by so called advanced economies is now shifting permanently eastwards according to Ernst & Young’s forecast Trading places: The emergence of new patterns of international trade prepared in conjunction with Oxford Economics.

Asia-Pacific will experience the fastest growth in global trade to 2020 and intraregional trade there will lead to a renewed concentration of global demand.

Although global trade collapsed during the financial crisis, it has since bounced back strongly, led by trade amongst emerging markets. Global trade was dominated by the advanced nations at the start of the 1990s but their share has declined markedly and this trend is set to continue its momentum through to 2020.

Gerard Dalbosco, Managing Partner, Markets, Asia-Pacific at Ernst & Young comments: “While the advanced economies continues to battle through the financial crisis the rapid-growth markets are going from strength to strength and are an increasingly significant part of the global economy.

They will become an even more dominant force in global trade and as a result businesses are going to have to adjust their strategies to reflect the increasingly regional pattern of world trade that is developing and will intensify over the next decade.”

Global trade across Asia to 2020
Ernst & Young estimates that the continuing shift toward global outsourcing of production, as well as the growth of regional supply chains to serve the rapid expansion of demand from rapid-growth markets, will compress the share of the advanced economies in global trade from a little over 60% in 2010 to around 55% by 2020.

Asia will continue to be the most dynamic region in terms of trade, with the fastest growth of exports in goods occurring within the region itself. India and China will drive the continued rise of the emerging markets and together these economies will account for almost one-fifth of global trade flows by 2020.

India and China also represent the fastest growing source of demand for exports from other countries. The projections show that two of the most rapidly growing trade routes will be US exports to China and India, which we see growing at an average annual rate of almost 16%. So while the US share of world exports fell significantly over the past decade, our forecasts imply that this trend will be reversed over the next ten years as the US capitalizes on its strength in exporting to Asia. Europe’s exports to China will rise by $370b over the next ten years. China’s exports to Europe at over $1t will be almost twice as large as US exports to Europe.

Regional patterns of trade
The Asia-Pacific region will experience the fastest growth in global trade to 2020. Indeed, nearly half of Asia-based respondents to our survey expect to export more than 60% of their output in five years’ time, compared with less than a fifth of companies in the Americas.

“The fastest growth of merchandise exports will occur within Asia itself. More specifically, it will be China and India that lead this expansion. Our bilateral trade forecasts show the fastest-growing trade route lie between these two economies, with Indian exports to China growing at an average annual rate of almost 22%, while flows in the opposite direction expand at an average annual rate of 18.5%. We expect China and India alone to account for just under one-fifth of global trade flows by 2020,” explains Dalbosco.

A trade cluster within Asia has been created, and China has already become the most important export destination for most Asian economies. The increasing importance of regional supply chains is a trend that will help to reinforce the importance of both China and India within the overall pattern of global trade.

Even as Asia becomes more competitive, a growing share of the region’s exports will be destined for other Asian countries. The growth of intra-regional trade among Asia’s new economic superpowers will lead to a renewed concentration of global demand, which will be an important consideration for exporters when making strategic plans for the coming decade.

China in the center stage
Although wages are rising rapidly in coastal China, the abundance of cheap labor in the rest of the country will continue to make China an attractive destination for labor-intensive industries. However, China’s dominance in low-end manufactured goods will increasingly come under pressure from lower-cost countries such as Bangladesh, Vietnam and parts of Africa, as China moves up the value chain and its labor costs rise.

India and China will drive the continued rise of the emerging markets and, together, these economies will become more important to global trade than the US and Eurozone. For example, measured at current market exchange rates, the global GDP share of the emerging markets is set to increase from around 34% in 2010 to 48% by 2020. China’s share alone is forecast to surge from 9% to nearly 20% over this period. These gains will be at the expense of the advanced economies.

Strong investment by China may help facilitate strong growth in Africa – enabling the continent to capitalize on its plentiful and expanding labor force, abundant natural resources, and a more stable political outlook in some countries.

China’s share of global trade in machinery and transport equipment is projected to rise from 18% to 24% over the same period. This reflects China’s rapid growth of exports in this sector, which is forecast to average 14% per annum over the next 10 years. By contrast Europe accounted for 35% of world exports of machinery and transport equipment in 2010. Even though this share is projected to fall to 32% by 2020, Europe’s head start is large enough that it will make the largest absolute contribution.

China will account for almost half of the expansion in global exports of ICT equipment, pushing its share of global trade up to 42%. Although further expanding an already large market share will be more difficult, much of this new trade will reflect the evolution of the regional supply chain within Asia, with electrical components shipped between China and other parts in the region. The Rest of Asia region accounts for a further 21% underscoring the growing importance of Asia as a technology trade hub.

The US has been proactive in building economic relationships and trade links with China. These efforts will begin to pay dividends in the coming years as demand expands and we see this trade route growing at an average annual rate of almost 16%.

Regional flow of services
Trade in services is also likely to witness rapid growth with Asia once again leading the way. By 2020, the total flow of services from Europe to Asia-Pacific (excluding Japan) will be larger than to North America.

Dalbosco explains: “One of the major drivers of this expansion will be the growth in banking, insurance and other financial services as the Asian economies mature and middle class develops. Demand for more sophisticated financial services is already growing rapidly with rising wealth levels and the region growing in importance as the financial center.”

It is not just financial services where growth is expected to be rapid in Asia. Tourism is also likely to be an increasingly important sector as the number of international tourists travelling from China is forecast to double from 32m in 2010 to 59m by 2020. The increase in associated spending will be even more significant, rising from $52b in 2010 to $222b in 2020.

It is intra-regional trade of services in Europe that will witness the largest increase over the period. The US and Europe will continue to dominate services, with China and India only gaining a significant market share within the rest of Asia.

The “machinery and transport equipment” sector (which includes consumer electrical products, such as computers, televisions and washing machines, as well as industrial machinery) will make the largest contribution to trade growth over the next ten years, followed by other manufactures such as textiles, lumber and rubber. In total these dominant sectors will account for close to 54% of merchandise trade by 2020. This reflects both the strong growth in demand for consumption and investment goods expected from emerging markets and the potential to fragment the supply chain as companies increasingly produce components in different locations. China’s share of global trade in this sector is projected to rise from 18% to 24%.

Risks and uncertainties
With the global supply changing so rapidly and demand uncertain, there are a number of alternative scenarios and risks that could threaten, or boost, global trade growth. Dalbosco concludes: “Perhaps the most dramatic would be a currency realignment scenario, implying a rebalancing of domestic demand between the US and Asia-Pacific region. This would have significant impacts on projected patterns of trade. Alternatively, even a partial acceleration of trade liberalization could drive a larger-than-expected rise in global trade flows.”

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