Global trade unbundled - Standard Chartered Bank

l Global Research l

Special Report

Global trade unbundled

All rights reserved. Standard Chartered Bank 2014

Special Report

Table of Contents

Madhur Jha +44 20 7885 6530

Summary

3

Key messages

5

Part 1: Long-term trends in trade

7

[email protected] Macroeconomic Research Standard Chartered Bank

Samantha Amerasinghe +44 20 7885 6625 [email protected] Macroeconomic Research Standard Chartered Bank

Chidu Narayanan +852 3983 8568

Is trade slowing on a structural basis?

13

The end of the commodity boom

16

Rising trade protectionism

16

A trade finance collapse?

19

[email protected] Macroeconomic Research Standard Chartered Toronto Representative Office

The end of the globalisation and offshoring dividend

21

Achilleas Chrysostomou +44 20 7885 6437

27

[email protected] Global Research Standard Chartered Bank

Part 2: The special role of China The rise of the mega-trader

27

Part 3: Made in the world

31

Trade in services may be the future of trade

38

Part 5: World trade routes dissected

41

North-North and North-South trade

41

US trade to China is growing fastest

42

EU trade is shifting towards EMs slowly

43

The rise of South-South trade

44

China’s rise as a mega-trader

45

China’s trade with South partners is growing

46

ASEAN export growth has slowed since the crisis

47

ASEAN’s share of trade with the US and Japan is falling

48

India – Rapid growth from a low base

49

Indian exports to the US are a falling share of total

50

9 April 2014

John Calverley +1 905 534 0763

32

Part 4: Conclusion: Looking ahead

References

[email protected] Regional Research Standard Chartered Bank (HK) Limited

51

2

Special Report

Summary  Expanding supply chains and increased openness drove rapid trade growth in past decades  But trade has been weak since the 2008-09 crisis; there is talk of a structural slowdown  We believe the outlook is improving and trade will soon grow faster than GDP again  China could cement its position as a mega-trader as South-South trade continues to lead

Global trade patterns have changed dramatically in the last two decades. Emerging markets (EMs) now account for 42% of world exports, up from 19% in 1990, or 52% excluding intra-EU trade. Asia has firmly established itself as the centre of the ‘made in the world’ vertical global supply chain, with China emerging as a mega-trader. Trade is increasingly ‘unbundled’, with countries no longer trading in goods so much as in ‘tasks’, such as design or assembly. Goods are ‘made in the world’, with components and partial assemblies frequently traded several times across borders before the final product reaches consumers. Services trade is expanding faster than goods trade, driven by improving communications. Services cannot always easily be measured at the border and some estimates put them at 40% of total trade now. Historically, trade growth has averaged about 1.4 times GDP growth. But since the 2008 peak, world exports have risen only 5%, while nominal GDP is up by more than 10%. Some fear that this slowdown is structural. We, however, believe trade growth will pick up and this ratio will be restored. Growth in developed countries is accelerating, while manufacturing, still the driver of goods trade, is coming out of the doldrums. Constraints such as lower trade finance availability and rising protectionism are fading. Numerous bilateral trade pacts have been agreed in recent years and new multilateral trade pacts are in the works. The next leg-up in trade is likely to be fuelled by a further unbundling of the supply chain, by continuing growth and opening in emerging countries, and by increasing horizontal trade in both intermediate and finished goods. Figure 1: Emerging markets are driving world trade % share of exports going to EMs – 1990 vs. 2012 70 1990

60

2012

50 40 30 20 10 0 HK

UG

AE

PK

KR

BR

SG

TR

GR

AU

TH

JP

US

ID

MY

GH

NG

UK

CA

Source: WTO, Standard Chartered Research

9 April 2014

3

Special Report

9 April 2014

Figure 2: Emerging markets lead trade growth, but trade has slowed everywhere since 2008

16%

India

14%

12% MENA

Indonesia 10%

Korea

SSA Russia

Thailand

8% 2008-2012

Brazil

China

Malaysia LatAm Singapore

6%

US

CEE

4% EU 2%

Japan

0%

Germany

-2%

Export growth rates. Size of bubbles represents the value of exports in 2012; EU excludes intra-EU trade

-4% 0%

5%

10%

15% 2000-2007

Source: WTO, Standard Chartered Research

20%

25%

30%

4

Special Report

Key messages Emerging markets now account for around half of global trade  

 

EMs’ share of world exports excluding intra-EU trade is now 52.3%, up from 27% in 1990. Including intra-EU trade, it is 42%, up from 19% in 1990. Most countries have seen a big rise in the share of their trade with EMs. From 1990-2012 the share of US trade with EMs rose to 46% from 25%, Brazil’s to 57% from 25% and Korea’s to 60% from 16%. The share of South-South trade has grown (+16ppt) at the expense of NorthNorth trade (-20ppt). Asia-Pacific (here including Japan but excluding Australia/NZ) is at the heart of trade, contributing a third of the increase in world trade since the 1990s. China now accounts for 11.5% of global exports, up from 1.6% in 1990.

Goods are increasingly ‘made in the world’, with global supply chains   

The import content of exports has risen to 40% of total exports currently from 20% of total exports in the 1990s and is forecast to reach 60% in 2030. Trade is in ‘tasks’ (e.g., assembly or design) rather than in ‘products’. Export statistics are increasingly unrelated to underlying value-added.

Services trade is growing fast and is more important than it looks 



Trade in services has grown at an average 9.0% since 1990, higher than the 8.0% for goods trade. But calculated on a value-added basis, it is nearly double the 20% share suggested by conventional trade statistics. The EU remains the leading exporter of services, but the US, India, China and



Japan are important players as well. India, Vietnam and Korea are targeting services exports to boost growth.



The slowdown in trade growth since 2008 is mostly temporary   

The average ratio of world trade to GDP growth (volumes) since the 1960s has been 1.4. It has been lower since 2007, but is rising once again. The ratio was highest in the 1990s − a golden decade for trade fuelled by the creation of the WTO and liberalisation in China and India. Protectionism rose during the financial crisis, but has since stabilised.

Trade is set to accelerate, but patterns will change     



9 April 2014

Faster GDP growth in Europe and the US will boost world trade, after a weak performance in 2012-13. Recent monthly statistics support this view. We believe the trade-GDP growth ratio can return to the 1.3-1.5 range. Recent agreed bilateral trade deals as well as several hoped-for big multilateral trade agreements such as TPP and TTIP should bolster trade. With commodity prices more stable, the fastest-growing trade routes of AsiaMENA, Asia-Latam and Asia- Africa will grow more slowly. Trade will benefit from improvements in technology – especially further declines in communication costs. But some technologies such as robotics and 3D printing could reduce the advantage of low-wage countries. China is a true mega-trader − a position last held by colonial Britain, with trade significant not only as a share of world trade (11.5%) but also of its own GDP (47%). China will likely become a champion of free trade.

5

Special Report

9 April 2014

Figure 3: China has emerged as a mega-trader Exports, major trade corridors,1990 and 2012

EU

US China MENA

India

Asia ex CI

Latam Sub-Saharan Africa

USD tn

0.0

0.6

1990 2012 Source: IMF DOTS, Standard Chartered Research

6

Special Report

Part 1: Long-term trends in trade The rise of emerging markets Global trade has increased more than four-fold in value terms since the 1990s, touching USD 18tn in 2012 or about 25% of global GDP. The expansion in trade shows three important trends: the rise of EM economies as important trading partners; the growing importance of regional trade, particularly in Asia; and the expansion of global supply chains, usually with China playing a key role. Exports by EMs account for 52% of total world exports (excluding intraEU-trade)

The majority of trade continues to be between developed markets, 58% if we include intra-EU trade, but this has fallen from 81% in 1990. Excluding intra-EU trade (a large part of which is in the euro), developed-market (DM) exports were overtaken by EM exports in 2011 and now stand at 48%, down from 73% in 1990 (Figure 4). As well as the role of supply chains, the rise in EM trade also reflects higher commodity prices and the expanding share of emerging markets in the global economy, as highlighted in our Special Report, 6 November 2013, ‘The super-cycle lives: EM growth is key’. Two factors in particular have helped drive globalisation over the last few decades: (1) trade liberalisation, particularly the Uruguay Round and China’s accession to the WTO in 2001; and (2) technology improvements leading to easier, faster and cheaper communication and lower transport costs.

World trade has traditionally grown 1.4 times faster than global GDP in real terms

World trade (in volume) has historically grown faster than world real GDP, with an average ratio since 1960 of 1.4 (Figure 5). This partly reflects the expanding supply chains already mentioned. It is also due to increasing “horizontal trade”, particularly between developed countries, as similar products are traded across borders, sometimes as part of supply chains but often final products, based on brand and consumer preference. In the 1980s the EU accounted for almost half of global trade growth. This reflected the pulling down of trade barriers within Europe, encouraging both vertical and horizontal trade integration. It shows what can be achieved by comprehensive trade liberalisation; this was before the single market (i.e., harmonised regulations) or the single currency had been established. Over the last decade, the EU is still the largest source of trade growth, but accounts for only around a quarter of the total increase. Excluding intra-European trade, Asia is the largest contributor to trade.

Figure 4: EM share of world exports is rising

Figure 5: World trade has historically grown faster than GDP (1950-2012, volumes, % y/y)

% 80

9

DM excl IntraEU

70

Export growth

8 GDP growth

7

60

6 5

50

4

40

3 2

30

EM

1

20

0 1960

1970

1980

Source: IMF DOTS, Standard Chartered Research

9 April 2014

1990

2000

2010

1950-60

1960-70

1970-80

1980-90

1990-00

2000-07

2008-12

Source: WTO, Standard Chartered Research

7

Special Report

1990s: The golden age of trade growth as trade liberalisation accelerated

The 1990s were a golden age of trade expansion, with the volume of trade growing twice as quickly as real GDP. This partly reflects trade liberalisation, as the Uruguay Round concluded in 1994 was the most comprehensive to date. There was also the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991, which led to the opening up of Central and Eastern Europe. At the same time, there was an intensification of market-oriented reforms in several other developing countries, along the lines of the ‘Washington Consensus’ recommendations. A key factor was the pursuit of export-oriented policies by developing countries, as it became increasingly obvious that the import substitution policies of the post-war period (1950-70s) had failed. Trade growth was boosted by the rise of China, which at that time was focused on export-led growth. China’s export boom lifted its share in global exports to 11.5% in 2012 from only 1.6% in 1990. The ratio of trade-to-GDP growth (both in real terms) eased to 1.4 (in line with long-term averages) during 2000-07, but has slowed to only 0.7 since 2008. In Part 2 of this report, we explore the reasons for this slowdown and consider the outlook for trade.

The rise and rise of Asia China contributed over half of the rise in South-South trade

The rising importance of emerging markets in world trade has been associated with the growth in South-South trade corridors (trade between developing markets). The shares both of South-South and of North-South trade (trade between developed and developing countries) have expanded over the last twenty years at the expense of North-North trade, which has steadily dropped to 36% in 2012 from 56% in 1990 (Figure 6). This decline has almost completely been matched by the rise in SouthSouth trade, which increased to 24% from 8% over this interval. China contributed over half (8.7ppt) of this 16ppt increase in South-South trade. The share of NorthSouth trade has risen modestly (+ 5ppts) since 1990. Asia (excluding Japan) has contributed nearly 40ppts of the increase in world trade since the start of the new millennium, with other EMs also raising their contributions. The developed world, in particular Japan, has been a smaller driver of world trade growth over the last decade (Figure 7). The numbers in Figure 7 exclude trade between EU members.

Figure 6: Share of inter-regional world exports

Figure 7: Contribution to world trade growth

1990-2011 (% of world trade)

ppt, 2000-12, EU excluding intra- EU trade

100%

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

90% North-North

80% 70% 60% 50%

North-South

40% 30% 20%

South-South

10% 0% 1990

1995

2000

2005

Source: WTO, Standard Chartered Research

9 April 2014

2008

2009

2010

2011

Unspecified destinations

1980-90 2000-12

Asia*

N. EU (ex Japan America Intra EU)

CIS

Latam

SSA

CEE

MENA

Note: * Asia excludes Japan. Source: WTO, Standard Chartered Research

8

Special Report

As well as the factors mentioned earlier, the rising share of South-South trade in world exports reflects trade liberalisation in EM countries. There have been a large number of preferential trade agreements (PTAs) negotiated between developing economies; these account for the majority of new PTAs concluded since 1990. Emerging markets understand the benefits of an export-led strategy

Most emerging markets recognise the benefits of an export-led strategy. As well as providing foreign currency to pay for essential capital goods, it helps improve the productivity of domestic firms by exposing them to international competition and international best practice. It also allows firms to benefit from greater economies of scale that would not be possible by just relying on small domestic markets. Finally, in most cases it provides encouragement for foreign investors to use the country as an export platform, which brings in capital and know-how and helps train the work force. It can also stimulate new infrastructure spending. Asia is often characterised as following a ‘flying geese strategy’, where the production of manufactured goods continuously moves from the more advanced countries to the less advanced ones as labour costs rise. Elements of this approach are visible elsewhere in the world too, particularly in Europe. A key issue for trade and development in the long run is the extent to which India and eventually Africa will join the formation.

The global supply chain is centred on Asia

Asia’s growing role in South-South trade has been fuelled by rising trade within Asian economies. Asia’s intra-regional trade accounts for nearly half of all of Asia’s trade with emerging markets. Much of this relates to the expanding supply chains, though especially as trade is liberalised, Asia is likely to see increasing horizontal trade, as is seen most notably in the European Union. This will include both intermediate goods and final products. The extent to which this happens will be another key factor in the development of trade in coming years.

Figure 8: Countries are exporting more to EMs % share of exports to EMs – 1990 vs. 2012 80

DM countries to EMs overall

EM countries to EMs overall

70 60

1990

50 40

2012

30 20 10 0 HK KR SG GR AU JP US UK CA KE UG AE EG PK BR TR IN

ZA TH RU SA ID MY GH VN NG CN DE PH BD MX

Source: UNCTAD, Standard Chartered Research

9 April 2014

9

Special Report

Korea, Greece and Nigeria have seen dramatic increases in trade with emerging markets

Most countries have seen a profound shift in the proportion of their exports going to emerging markets rather than developed markets (Figure 8). Some of the most dramatic shifts include Korea, up to 60% from 16% since 1990, Brazil to 57% from 25% and Thailand and Indonesia, also both up about 30ppt over the same period. Among developed countries, Greece stands out with an increase to 52% from 17%, while the US has increased to 46% from 24%. African countries have also reoriented, with Nigeria’s share up to 35% from 8% and Uganda’s up to 66% from 10%. India’s share has increased to 54% from 34%, while China’s share, perhaps reflecting its role in final assembly, has increased only to 32% from 16%. Countries with the smallest shifts towards emerging markets include Canada and Mexico, where the North American Free Trade Agreement (NAFTA) led to a big increase in regional trade; and the UK, where trade with Europe expanded rapidly. Bangladesh and Vietnam saw a decline in their share of exports going to emerging markets, reflecting their penetration of US and European markets for clothing, footwear and electronics.

Fastest-growing trade routes over the last decade have involved Asia

It is hardly surprising that the fastest-growing trade corridors over the last two decades predominantly reflect South-South trade: MENA-Asia, Latam-Asia and Africa-Asia. Trade growth in these corridors accelerated in the 2000-07 period and recovered briskly following the Global Financial Crisis (GFC) (Figure 9). Within these, MENA-India and Latam-China are two routes showing especially rapid growth. MENA-India recorded trade of USD 135bn in 2012, up from USD 2bn in 2004 while Latam-China increased to USD 100bn in 2012 from USD 2bn in 2000. For more on trade corridors see Part 5 of this report, which provides detailed charts on the growth and scale of trade between major regions and countries.

The changing dynamics of exports As emerging markets move up the value chain, they are producing higher valueadded products that can increasingly compete with those produced in developed markets. They are also able to consume more of such products due to rising income levels and become a key source of new demand for exports from these countries. Increased exports contributed to higher GDP growth between 1980 and 2011, while rising incomes supported expanded imports. Figure 10 showcases this parallel development of trade and output in developing countries. The share of developing economies in GDP at current exchange rates rose to 39% in 2011 from 24% in 1980.

Figure 9: Fastest-growing EM trade corridors

Figure 10: Shares of EM and DM in world GDP and trade

Value of exports, USD

Current prices, %

500bn

MENA-Asia

100bn Africa-Asia 10bn

1bn 250mn 1980

Latam-Asia

% share of world trade

% share of world GDP

1980 1985

1990

1995

Source: WTO, Standard Chartered Research

9 April 2014

50 45 40 35 30 25 20 15 10 5 0

2000

2005

2010

2011

China

1980

2011

Other EM

1980

2011 US

1980

2011 EU

Source: UN Statistical Yearbook, WTO Secretariat

10

Special Report

Rising exports contribute to GDP via the process of specialisation, but they also force export companies to compete globally, which improves efficiency. The boom in Asia’s exports has been linked to a dramatic expansion in vertical global supply chains evident from the rise in the exports of intermediate goods as a proportion of total goods (Figure 11). According to a European Central Bank report (ECB 2012), vertical supply integration is estimated to account for close to a third of total trade growth and has steadily increased since the mid-1990s. Manufacturing goods dominate world trade

World goods trade has increasingly become geared towards manufacturing products (Figure 12). These exports were hardest hit by the GFC as manufacturers drew down inventories at the expense of new output and exports. However, manufacturing exports still stood at 65% of total trade in 2011. On the other hand, fuel and mining products have gained share since the 1990s, rising to 22% in 2011 from 14% in 1990. Much of the increase in this share has been the result of rising primary commodity prices that have tended to inflate the value of fuels and mining products.

Emerging markets are moving up the value chain

According to the ECB report, vertical specialisation in high-tech products increased substantially over the last two decades, especially in East Asia. Since the mid-1990s, low- and middle-income countries have expanded their market share in intermediate product categories such as chemicals or medium- to high-tech manufacturing such as machinery and transport equipment, with an increase in export share to c.31% in 2010 from below 10% in 1995. Several major questions emerge from the above discussion: Has the global crisis altered the trade dynamics of the last few decades? Is the great trade boom resulting from globalisation coming to an end? Is world trade likely to play a smaller role in the growth of emerging markets as trade protectionism rises? Will there be further trade liberalisation? Will factors such as transport and communication continue to be as supportive of trade growth as in the past? Is services trade going to grow rapidly? And with China growing more slowly and maturing as an economy, how will this impact trade?

Figure 11: Exports of intermediate goods are on the rise

Figure 12: Product shares in world merchandise exports

% of total exports

% Korea

60% 55%

China

100% 90%

Agricultural products Fuels and mining products

80%

50%

70%

45%

60%

40%

50%

35%

40%

Manufactures

30%

30%

20%

25%

10%

20%

nes

0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: WTO, Standard Chartered Research

9 April 2014

1900 1925 1938 1955 1963 1970 1980 1990 2000 2011 Note: nes- not elsewhere specified. Source: WTO, Standard Chartered Research

11

Source: IMF DOTS, Standard Chartered Research

Special Report

9 April 2014

Figure 13: Export growth rate 1990-2012 (CAGR)

12

Special Report

Is trade slowing on a structural basis? Trade collapsed in 2009 and has recovered only weakly World trade fell nearly 38% from peak to trough during the crisis

The GFC was accompanied by the sharpest collapse in world trade in the post WWII period. World merchandise exports fell nearly 38% from peak to trough, much more than the roughly 5.0% drop in global output. Massive fiscal and monetary stimulus aided a V-shaped recovery in trade in 2009, but trade growth has been weak in the post-GFC period, with world exports only 5% above the 2008 peak even five years into the recovery (Figure 14). Figure 15 documents how regional exports have fared in the pre- mid- and post-GFC periods. China led the surge in exports during the 2000-08 period, with exports rising nearly 700% from 2000. The peak-to-trough drop in exports was broadly similar across most regions, though Africa and MENA saw the largest declines, reflecting the fall in commodity prices.

EM trade is 14% higher than its 2007 peak, while DM trade is 5% below

The recovery since then has differed sharply across countries and regions. Emerging markets led by Asia have not only recaptured pre-GFC peaks, but are also about 14% higher than those peaks. MENA is the exception. Stable to weaker commodity prices have tempered the export recovery for MENA and Sub-Saharan Africa (SSA), after the brutal fall during the crisis. For emerging markets overall, there was an initial bounce in 2009-10 and since then they have posted a merchandise export growth rate of 12%, much higher than their advanced counterparts at 5.3%. Still, overall world trade is only about 5% higher than the pre-GFC peak, whereas GDP is now higher by more than 10%, driven by strong growth in emerging markets and especially China. Unsurprisingly, the trade weakness reflects anaemic trade growth in the advanced economies, which have not recovered pre-GFC export levels (still about 5% lower than pre-crisis peaks). While US exports are above pre-GFC levels, Japan and Europe have seen a substantial weakening in export growth, partly related to the recession in the euro area. But another reason why GDP has grown so much more than trade since the pre-GFC peak is that the value of trade in China’s GDP has fallen significantly since then, to 25% most recently from 35% in 2007, a point to which we return below (Figure 16).

Figure 14: Asia has led the recovery in world trade Index, goods exports to world in USD value, Q2-2008=100 160 Asia 140 EMs 120 Global 100 DMs EU

80 60 40 2008 Q2

2009 Q2

2010 Q2

2011 Q2

2012 Q2

2013 Q2

Source: IMF DOTS, Standard Chartered Research

9 April 2014

13

Special Report

Much of the recent slowdown in trade has cyclical origins

Trade was already slowing in the 2000-07 period after the surge in the 1990s. Our view is that there is a long-term gradual downtrend for trade growth compared with the 1990s, especially relative to GDP growth, but that much of the recent extreme weakness has cyclical origins, including the European recession and sluggish industrial production (IP). We will make our case in the pages following. Meanwhile the GFC seems to have hastened the global shift in power from the DM to the EM world. Emerging countries now account for 52% of world trade compared with around 46% in the pre-GFC period and an even lower 34% at the start of the new millennium (excluding intra-EU trade).

The GFC is quickening the shift in power from DMs to EMs

Moreover, South-South trade or intra-EM trade has continued to gain ground, with the share of intra-EM goods exports rising to 41% in Q3-2013 from around 35% in Q2-2008 as a proportion of total EM goods exports. Developing Asia remains the dominant trade partner and the share of trade with the South has risen further to 37% in 2013 from 33% in 2008 (19% in 2000). Asia also now gets the bulk of its imports (52%) from emerging markets, which in part underlines the importance of Asia in global supply chains. Within Asia, countries such as Vietnam, the Philippines and even Bangladesh have raised their share of global trade, but China remains the ‘mega-trader’ in the international economy, a position last held by colonial Britain.

Figure 15: Merchandise exports to the world by region Index based on USD value, Q1-2000=100 and % change Pre-GFC peak Index

GFC trough Index

Q3-2013 Index

% fall peak to trough

% gain peak to now

World

285

179

300

37.2

5.3

Advanced

238

154

226

35.3

-5.0

US

193

138

218

28.5

13.0

Japan

179

104

157

41.9

-12.3

Germany

288

185

244

35.8

-15.3

EU

271

172

235

36.5

-13.3

Emerging

471

259

540

45.0

14.6

Developing Asia

490

308

657

37.1

34.1

China

789

475

1087

39.8

37.8

India

536

359

757

33.0

41.2

Indonesia

269

178

302

33.8

12.3

Korea

293

194

352

33.8

20.1

Latam

307

183

359

40.4

16.9

MENA

534

240

525

55.1

-1.7

SSA

470

209

503

55.5

7.0

CEE

554

344

575

37.9

3.8

Source: IMF DOTS, Standard Chartered Research

9 April 2014

14

Special Report

Growing concerns about the slow trade recovery World trade stagnated between 2012 and 2013

In 2012-13 concerns began to mount over the weak pace of trade growth. Having bounced up in 2009-11, world merchandise exports in value terms have been close to flat since then (Figure 14). Export growth has been weaker globally in the recovery period, even for the global trade engine, developing Asia. There is rising concern that this very weak performance will continue and will dent the global output recovery. Countries that are deleveraging domestically (such as in peripheral Europe and Japan) are relying heavily on external trade to supply the growth boost needed to ease the hardships associated with domestic cutbacks. The fear is now that this growth boost might not be forthcoming. Moreover, economists have long viewed the trend for trade growth to outpace GDP growth as a positive sign for economic growth and development. There is overwhelming evidence that the specialisation and differentiation it allows both increases economic growth and enhances consumer choice. By forcing companies to compete in larger markets, productivity growth is driven higher, while the range of consumer goods can be larger as producers still reap economies of scale. So if trade growth is so weak, perhaps world growth and development is slowing too.

Trade should pick up as the euro area recovers following its own crisis

Some of these fears are likely misplaced. It is only natural for trade growth from developing Asia to slow as it becomes a bigger share of the global economy. At the same time, the euro area, which has the highest share of global trade (if counted as one entity) has been mired in a recession that has had knock-on effects on other regions’ trade growth as well. With the euro area finally emerging from recession this year (we expect it to grow by 1.3% in 2014), this should support a recovery in global trade as well. Accelerating growth in the US should have the same effect. But, concerns linger that there are more fundamental factors that will arrest growth in world trade. These include: 

The end of the commodity boom



Rising trade protectionism



A drag from trade finance losses



The end of the globalisation and offshoring dividend



The economic slowdown in China

Figure 16: China’s export/GDP ratio has fallen

Figure 17: Korea’s trade/GDP ratio has risen

% share of exports to GDP

% share of imports to GDP

50

50

45

45

40

40

35

35

30

2007

30

2007

25

25

2012

20

20

15

15

10

10

5

5

0

2012

0 KR

MENA

EU

CN

Source: IMF DOTS, Standard Chartered Research

9 April 2014

ID

IN

JP

US

KR

EU

MENA

IN

CN

ID

JP

US

Source: IMF DOTS, Standard Chartered Research

15

Special Report

The end of the commodity boom Exports of fuels and minerals increased as a share of global exports from 14% in 1990 to 22% in 2011. Over half (52%) relates to fuel exports. This partly reflects greater demand from emerging markets, whose economic growth is commodity-intensive as they build factories, cities and infrastructure, but was mainly due to rising commodity prices that magnified commodity export values. This demand-led rise in commodity prices has spurred a supply response that is expected to help moderate oil-price gains over the next few years, or even allow them to fall back. More oil demand will offset some of the increase in supply, but the commodity price boom might be over

Worries about a 1980s-style oil supply glut might be overdone as demand from commodity-deficient emerging markets is expected to push up volumes traded, while political uncertainty in the Middle East is holding back supply. The IEA estimates that global energy demand will grow by 33% by 2035 (compared with 2011). Emerging markets will account for 90% of this increase in net energy demand, with India replacing China as the primary demand driver after 2025. This increase in demand will offset some of the rise in availability and will likely keep price declines in check over the coming period (Figure 18). More limited commodity price gains would then mean some moderation in the share of commodities in total value of exports, but rising volumes should keep the ratio above its long-term average of around 15% of total exports (Figure 19).

Rising trade protectionism The rise in trade over the last few decades is attributable to a concerted effort to bolster international economic co-operation. The creation of the General Agreement on Tariffs and Trade (GATT) and other multilateral agencies like the IMF and World Bank that advocate trade liberalisation lowered barriers to trade, especially in terms of tariffs. Average tariffs fell to 3% in 2010 from 10% in 1980 for developed countries. The decline was even bigger for developing countries, which saw a 20ppt drop in average tariff rates (Figure 20). Trade protectionism rose after the crisis, but is easing now

The crisis and the need to support domestic growth appear to have increased the willingness of authorities to use trade measures to protect domestic economies, threatening a slower recovery in world trade. th

According to the 14 Global Trade Alert (GTA) report published in September 2013, countries have taken 2134 new measures since 2008 that almost certainly discriminate against foreign commercial interests (CEPR 2013a). Out of these, 1,814 Figure 18: Commodity price appreciation to slow

Figure 19: Higher prices have boosted the share of fuels

USD/bbl

% of total global trade

160

30 Forecast

140

25

120

80

15

60

10

Brent oil

40

5

20 0 Mar-95

0 Mar-98

Mar-01

Mar-04

Mar-07

Source: IMF DOTS, Standard Chartered Research

9 April 2014

Fuels and mineral products

20

100

Mar-10

Mar-13

1963

1970

1980

1990

2000

2011

Source: UN Statistical Yearbook, Standard Chartered Research

16

Special Report

measures are still in place. In addition, there are another 235 measures still in force that could hamper foreign commercial interests. While some of these measures are now being slowly unwound, the concern is that protectionism could remain a drag on global trade growth (Figures 21, 22). There has been limited progress on global trade talks, but bilateral agreements have proliferated

The lack of progress on the Doha round of talks, launched in 2001, has also been a point of concern. Some economists have blamed the proliferation of bilateral and free-trade agreements for the lack of progress on global trade agreements. They also argue that these bilateral agreements reduce international trade efficiency by ‘diverting’ trade to preferred but less efficient destinations. According to the World Trade Organisation (WTO), the number of Preferential Trade Agreements (PTA) and Bilateral Investment Treaties (BIT) more than tripled between 1990 and 2010. Approximately 300 PTAs are currently in operation and many more under negotiation. Around half of these PTAs are bilateral and almost two-thirds are between developed and developing countries (World Trade Report 2013).

Figure 20: Trends in average Most Favoured Nations applied rates % 40 35 Developing countries

30 25 20

High income nonOECDs (19)

15

High income OECDs (11)

10 5 0 1981

1985

1989

1993

1997

2001

2005

2009

Source: WTO, Standard Chartered Research

Figure 21: Trade protectionism has fallen back

Figure 22: China has faced most trade discrimination

Number of ‘beggar-thy-neighbour’ measures implemented 1,000

700

500

800 700

G20

600

400

No. of trading partners imposing discriminatory measures

500

300 200

No. of discriminatory measures implemented on target since Nov 2008

900

600

400 300

Non-G20

200

100

100

0

0 2009

2010

Source: GTA, Standard Chartered Research

9 April 2014

2011

2012

2013

CN

EU

US

DE

FR

IT

UK

KR

JP

ES

Source: GTA, Standard Chartered Research

17

Special Report

Bilateral agreements could facilitate wider global agreements on trade

There is little argument that a global trade agreement would be preferable to the ‘spaghetti-bowl’ of FTAs in existence today; such an agreement would benefit many more economies and reduce the risk of trade protectionism. The conclusion of the WTO ‘Bali package’ in December 2013 under the Doha round of talks could yet prove to be a shot in the arm for global trade talks. The Bali package assists trade facilitation by simplifying customs procedures and reducing the red tape around trade. The WTO calculates the benefit of reducing trade costs by between 10-15% under the Bali package to be between USD 400bn and USD 1tn. The Bali package is expected to be adopted by 31 July 2014. Recent academic work suggests that PTAs are not necessarily inefficient, as they can facilitate wider trade agreements by establishing standards and procedures and lowering domestic political opposition to wider global deals.

Figure 23: Key multilateral trade agreements Trade agreement Under Negotiation

Trans Pacific Strategic Economic Partnership (TPP)

Currently under negotiation between 9 countries: US, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam. The US entered into negotiations for the TPP in March 2008; The US reaffirmed its commitment to the TPP in November 2009 and since then, 19 rounds of ‘behind-closed-door’ negotiations have taken place. The schedule for negotiation has recently accelerated in order to bring the agreement to a close.

Transatlantic Trade and Investment Partnership (TTIP)

Currently under negotiation between the EU and US. The negotiations aim at removing trade barriers in a wide range of economic sectors. Negotiations were launched in 2011 in large part due to the continuing economic crisis and the stalling of the multilateral trade negotiations in the WTO – the so-called Doha Development Agenda. Independent research shows that TTIP could boost: the EU’s economy by €120bn, the US economy by €90bn and the ROW by €100bn.

Regional Comprehensive Economic Partnership (RCEP)

A Free Trade Agreement scheme of the 10 ASEAN member states and its 6 FTA partners (Australia, China, India, Japan, Korea and New Zealand), formally launched during the 2012 ASEAN summit. Expected to be concluded by 2015, it hopes to build on efforts made in the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership in East Asia (CEPEA) initiatives.

Existing Agreements North American Free Trade Agreement (NAFTA)

An agreement signed by Canada, Mexico and the United States creating a tri-lateral, rulesbased trade bloc in North America. The agreement came into force on 1 January 1994.

South Asian Free Trade Agreement (SAFTA)

An agreement reached in 2004 at the 12th SAARC summit, which came into force on 1 January 2006. The 7 South Asian nations signed a framework agreement on SAFTA to reduce customs duties of all traded goods to zero by 2016.

ASEAN Free Trade Area (AFTA)

A trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries. The AFTA agreement was signed in 1992 and now comprises 10 countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia). The primary goals of AFTA are the elimination of tariffs and non-tariff barriers within ASEAN. The next step is the ASEAN Economic community (AEC) due to start at the end of 2015. The aim is to transform ASEAN into a region with free movement of goods, services, investment and skilled labour and freer flow of capital.

Gulf Co-operation Council (GCC)

A political and economic union of Arab states, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The unified economic agreement between the GCC countries was signed in November 1981. A GCC common market was launched on 1 January 2008 potentially removing all barriers to cross-country investment and services trade. A customs union was declared in 2003 but practical implementation has lagged.

Southern Common Market (MERCOSUR)

An economic and political agreement among Argentina, Brazil, Paraguay, Uruguay and Venezuela, with Bolivia becoming an acceding member on 7 December 2012. MERCOSUR was established in 1991. The Southern Common Market promotes free trade, fixing of a common external tariff and adopting a common trade policy, and the coordination of macroeconomic and sector policies to ensure free competition between member states.

Source: WTO, Standard Chartered Research

9 April 2014

18

Special Report

There has recently been progress on trade agreements that cover large parts of the global economy. The Trans-pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) together would cover 60% of the global economy once in force. According to Petri and Plummer (2012), the TPP could result in a boost to Asia-Pacific trade, with potential trade gains of nearly USD 2tn per year once full integration is achieved. In addition, agreements like the Regional Comprehensive Economic Partnership (RCEP) in Asia may provide a further fillip to South-South trade (see Figure 23 for more details). Agreements on multilateral trade deals are complicated by the need to harmonise the regulatory environment

The concern is that these trade agreements may be difficult to complete, as they are no longer about simply reducing tariffs on certain products or commodities. With tariffs already very low, these agreements are focused on harmonising the regulatory environment around trade across regions and tackling twenty-first century concerns such as intellectual property rights and financial services oversight. This would require individual economies to be willing to give up sovereignty over how these markets are regulated domestically, which might be hard to get approved in national parliaments. However, it is not unprecedented. The creation of the single market in Europe has shown how harmonisation of different rules and regulations can lead to higher trade, even though the process can be very slow at times. If they can be completed, optimists argue that the TPP and TTIP could serve as templates for future wider agreements, or that other countries could simply join them when they are ready. Some argue, however, that the country groupings involved in the TPP and TTIP on the one hand and the China-backed RCEP on the other, reflect geopolitical rivalry more than anything. While there is probably something to this, common regional interests might facilitate these agreements.

A trade finance collapse? Many believe that the more-pronounced collapse in trade in 2009 than in world output resulted from a sharp and significant drying up of bank-intermediated trade finance availability during the GFC. While trade finance has picked up, there are also concerns that the withdrawal of some European banks from EM finance has had an impact. Trade finance is certainly important; the BIS estimates that around a third of all trade is supported by some form of bank-intermediated trade finance. Trade finance is especially important for the Asia-Pacific region, which accounts for about Figure 24: Trade finance fell after the GFC Volume of MT700 (letters of credit), mn 4.8

4.7

4.6

4.5

4.4

4.3 2008

2009

2010

2011

2012

Source: SWIFT, Standard Chartered Research

9 April 2014

19

Special Report

half of the estimated USD 6.5-8.0tn (in 2011) global trade finance flows. The fear is that this situation will persist; tighter banking regulations or more expensive trade credit may lead to an extended period of low trade finance (and trade) growth. If so, this could prove to be a very important constraint on a global trade recovery over the medium term. ADB calculated a trade finance gap of USD 1.6tn in 2013

Data on global trade finance is notoriously hard to collect, with the BIS-IMF abandoning their attempt to do so in 2004. However, IMF-led surveys since the crisis and SWIFT data have shown a significant decline in bank-intermediated trade finance since the GFC (Figure 24). Based on a survey conducted in 2013, the ADB calculated a massive ‘trade finance gap’ of USD 1.6tn, with a gap of USD 0.4tn in Developing Asia, the region with the highest demand for trade finance.

BIS suggests that the impact of trade finance was secondary to falling demand

A recent report by a study group set up by the BIS (2014), however, suggests that this estimate overstates the gap. The report suggests that scarcity of trade finance was an economically significant but not primary determinant of falling trade, accounting for no more than one-fifth of the drop in exports seen during the GFC. Surveys conducted by IMF-BAFT as well as other academic work suggest that around 60-80% of the drop in trade was driven by falling demand. With demand now picking up as the global economy recovers and the crisis in Europe abates, both trade finance and trade should pick up as well.

Availability of global trade finance is improving

In addition, the BIS study group’s calculations show that the withdrawal of crisisaffected banks (especially European banks) has been increasingly offset by greater trade finance availability from international and regional banks (Figure 25). The IIF Emerging Markets Bank Lending Conditions Survey also shows the improving availability of global trade finance after a sharp deterioration during the European crisis (Figure 26), a pattern replicated in Asia as well. There is a further worry that even if trade credit availability improves, it might be at a higher cost for firms as banking regulation is tightened, lowering the demand for this sort of finance. The BIS report suggests that while loan prices did go up, this has not been a major factor for the reduction in trade availability. In fact, increased competition from domestic and global banks in order to garner market share has kept pricing relatively tight. The risk is that the evolving regulatory regime (Basel III and new national rules) and the normalisation of monetary and bank funding conditions could lead to a re-pricing (upwards) of these loans.

Figure 25: Trade finance has recovered since the GFC

Figure 26: Global supply of trade finance has improved

USD bn

50=neutral, above 50=improving

1,000

Trade finance

900 Trade (RHS)

5,000 4,500

800 700

4,000

600

3,500

70 65 Global TF demand

60 Global TF supply

55 500 400

3,000

300 2,500 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 Source: BIS, Standard Chartered Research

9 April 2014

50 45 40 2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

Source: IIF EM Bank Lending Conditions Survey, Standard Chartered Research

20

Special Report

Measures are being taken to address concerns about regulatory changes and their impact on trade finance

So far there is little evidence of any decline in trade finance on the back of regulatory changes. However, market participants have argued against several recommendations proposed by the Basel Committee as potentially restricting their ability to support trade finance in particular countries. The Committee has already addressed and alleviated some of these concerns (such as lowering the outflow rate for calculating the liquidity coverage ratio and the credit conversion factor for the leverage ratio for trade finance compared with initial recommendations). This lowers the potential for severe disruptions in trade finance availability.

Global trade fall reflected a sharp drop in global IP, not trade finance

There is little doubt that trade finance plays an important role in facilitating trade; however, we argue that the sharper drop in trade in 2009 (as compared to world output) was not so much a result of trade finance drying up, as a reflection of the dominance of industrial products in total trade. Global trade mimics the global IP cycle more closely than it mimics global GDP, as services trade is still not well captured by the trade data (Figure 27). Inventory swings mean that IP tends to be more volatile than GDP; IP also grows at a higher rate than GDP during periods of recovery. A new trade model proposed by Dennis Novy and Alan Taylor argues that the sharper collapse in trade (relative to industrial output) reflected a rise in uncertainty. This increased uncertainty coupled with the greater cost of foreign inputs saw firms cut back foreign orders more sharply than domestic orders as part of the inventoryadjustment process. Global uncertainty is now fading and both business and consumer sentiment are beginning to improve, which should support a recovery in trade over the coming years.

The end of the globalisation and offshoring dividend The world might have already picked the low-hanging fruit of greater openness in large EMs

Continuing with our assessment of whether there is a structural slowdown in trade, it is increasingly argued that the world economy has already picked the low-hanging fruit of greater globalisation and low cost offshoring. The arguments are as follows:

Figure 27: World trade reacts to industrial production more than GDP Volume index 2000=100 180

Exports

170 160 150

GDP

140 130 Industrial production

120 110 100 90 80 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Bloomberg, IMF, Standard Chartered Research

9 April 2014

21

Special Report



There was a unique set of factors that boosted world trade in the last two decades. The integration and opening up of previously Communist blocs in the CIS region, Central and Eastern Europe as well as China (through WTO membership) is unlikely to be repeated, implying slower global trade growth as well. 

Most of the gains from lower transportation improvements may have already occurred.



The low-cost advantage of EM countries such as China, which together with innovation in transport and communication spawned the global vertical supply chain, is now eroding as EM wage growth picks up. This, together with some competitiveness improvements in the West is resulting in reshoring or onshoring of production back to DMs.

and

communication

There seems to be some merit in the argument that a large part of the integration of previously closed economies has already taken place. Countries that remain closed to rest of the world are much smaller in size than countries like China were and so are likely to have a lower impact on world trade. This might suggest that trade growth is unlikely to be quite as rapid as was seen in the pre-crisis period. However, there are numerous populous low-income countries following China in development, including Vietnam, Bangladesh and India, as well as countries in Africa such as Nigeria, Ghana, Uganda and Ethiopia, where trade could grow very rapidly in the coming decades if they are able to sustain fast economic growth. Countries become more open as they become bigger

Moreover, this misses the point that there can be greater trade between already open economies. It is not a given that as a country becomes bigger it will necessarily become more inward looking. In fact, large exporters such as Germany and Korea have become more open as they have become bigger, although in each case there was a brief period of declining openness (Figures 28, 30 and 31). Only Egypt in our sample of countries became less open during 1990-2012. Even large countries such as the US and Japan, which are considered relatively closed economies, have become more open over time as their economies have become bigger. A similar pattern is likely to be seen for China and other large EM countries that are currently witnessing a decline in openness as measured by the ratio of trade to GDP.

Figure 29: Composition of Great Britain’s trade

Figure 28: Trade openness has risen over time Exports plus imports as % of GDP

%

120

KO DE

100 80

UK

60

CH

40

JP US

20 0 1980

Nonmanufactures

Manufactures 1910

1985

1990

1995

Source: UNCTAD, Standard Chartered Research

9 April 2014

100 90 80 70 60 50 40 30 20 10 0

2000

2005

2010

1990

1910

Imports

1990 Exports

Source: Baldwin and Martin (1999), Standard Chartered Research

22

Special Report

Trade is not what it used to be We also believe that the concerns noted above underestimate some fundamental changes in the nature of world trade, as they still look at trade in a very traditional framework. Under the traditional framework, countries exported differentiated goods to one another based largely on comparative advantage. This was certainly true of the first globalisation or ‘unbundling’ phase in the pre-WWI era, where Great Britain imported largely commodities from the rest of the world while exporting manufactured goods to other countries (Figure 29). Unbundling referred to the separation of production from consumption as goods were produced in one region but consumed in another. The rise of the vertical supply chain has been the hallmark of the ‘second unbundling’ phase

This was also true in the post WWII ‘second unbundling’ phase, with the set-up of vertical supply chains based on low-cost production units. Unbundling referred to the breakup of production itself into various phases situated in different locations. Yet the world trade framework is different now.

Figure 30: Trade openness versus share of world nominal GDP – 2012 % of GDP 12

CN

% share of nominal GDP

10 JP 8 6

DE

4 BR

AU

2

ID PK

0 0

20

40

UK

RU IN

CA

ZA EG GR PH BD

NG 60

KR

SA

MX

TR

KE

TW

GH 80

100

120

TH

140

MY

VN

160

180

Trade openness 2012 Source: IMF DOTS, WEO, Standard Chartered Research; Note: US (31.5, 22.4), HK and SG were excluded

Figure 31: Almost every country has become more open since 1990 Exports plus imports as % GDP, 1990 and 2012 160 MY

Trade openness 1990

140 120 100

TW TH

SA

80

EG

60

ID PK AU

40 20

BR

US

JP

NG

PH

GR ZA CN TR

UK CA

DE

VN

KR

MX KE GH

IN BD

0 0

20

40

60

80 100 Trade openness 2012

120

140

160

180

Source: IMF DOTS, WEO, Standard Chartered Research; Note: HK and SG were excluded

9 April 2014

23

Special Report

The difference between the traditional supply chain model and today’s more complex supply chains lies in the fact that trade is now not so much in goods but in tasks, a reflection of growing specialisation that allows the same product to be both imported and exported by the same country. For example, while the iPad is said to be manufactured in China, China actually only makes a portion of the final product, importing the rest from other countries like Korea and Taiwan. This difference is highlighted by the rise in the import content of exports, now estimated to be around 40%, compared to only 20% in the 1990s according to the WTO (WTO 2012). Data from the OECD confirms this trend (Figure 32). The WTO expects it to rise to 60% by the 2030s, suggesting that specialisation and globalisation will continue, albeit at a slower pace. Rapid advances in communication and technology are lowering barriers to unbundling tasks further, allowing for integration of newer, low-cost, more distant geographies in the global supply chain. EM wages are still very low despite strong gains

But now there is growing evidence that countries such as China are experiencing increases in wages and salaries that are eroding this low-cost advantage. It is difficult to get comprehensive data on wage levels for developing countries, but as Figure 33 shows, despite strong growth, EM wages remain well below those in the West. In our view, this suggests that wages have not risen enough to signify the end of the global supply chain or a slowdown in world trade; reshoring is likely to be only a modest trend, as we discuss below.

Horizontal versus vertical supply chains The effect of wage convergence may be to change the nature of trade between converging countries, rather than trade itself (see Baldwin 2012). So instead of vertical supply chains, where developing economies produce only low value-added goods, the nature of trade might shift to one of horizontal supply chain integration, where economies trade parts and components of similar products with each other to give buyers more variety and efficiency. This would be in addition to the horizontal trade that is seen when countries at comparable levels of development trade similar final consumption goods. This is not a new phenomenon; horizontal supply chains have been around for several decades now. The most famous example of this is the exports of parts and components of automobile exports from one developed country to another such as Figure 32: Import content of exports

Figure 33: Wages are still low in absolute terms in EMs

% of total exports

USD (2011)

60

2005

IN PH MX CN MY AR BR RU PL ZA TU KO ES IT UK DE US JP CA FR AU

50 40 30 2012 20 10 0 HU

IE

KO

IL

MX CH DE

Source: OECD, Standard Chartered Research

9 April 2014

TU

UK

IN

ID

JP

ZA

Average wage per month (2011)

0

1,000

2,000

3,000

4,000

5,000

Source: ILO, IMF, PwC Analysis, Standard Chartered Research

24

Special Report

from the US to Canada or France to Germany and vice versa. The argument is that while there might be a limited comparative advantage in engaging in trade of similar products between countries at similar levels of development, it is still advantageous to undertake this trade, as it provides economies-of-scale efficiencies for producers as well as greater variety of choice for consumers. Horizontal supply chains will become more important for EMs

In our view, we might have already begun to see horizontal supply chains becoming more important in emerging markets. The rise of South-South trade is a very clear indication that trade between nations does not have to be based on low labour costs, but could reflect mutual trade gains from greater specialisation and efficiency. We expect this trade only to grow over the coming years, as mentioned in the previous section.

Offshoring, reshoring and ‘flying geese’ At the same time, vertical global supply integration likely has further to go, while claims that developed world producers will look to bring back or onshore production seem over-stated. It is very hard to find reliable data that would help disentangle the impact of re-shoring/onshoring on world trade from that of the steep crisis-led decline in global demand. However, according to a survey conducted by the Boston Consulting Group (2013), around half of 200 US companies with sales of over USD 1bn is considering the possibility of bringing production back to the US. Still, a much smaller percentage (20%) of these companies is actually looking to bring back production over the next two years. Moreover, even if some companies bring back factories from overseas, their suppliers may still be in cheaper wage countries. The ‘flying geese’ pattern of trade has led to inclusion of more countries in the global supply chain

What is evident is that the rise in labour costs in China and other countries has led to the inclusion of more countries in the global supply chain. Anecdotal evidence, as well as rising trade, shows that countries such as Vietnam, Bangladesh, the Philippines and several others are now being viewed as alternative offshoring destinations by companies no longer finding China and other East Asian companies profitable. As already noted, this is known as the ‘flying geese’ pattern of trade, where industrialisation in one country and resulting wage increases trigger further offshoring to other economies. Not only does this process help low-income countries to develop, it also lowers the costs for consumers and thus improves global welfare.

Figure 34: China− How do you plan to respond to labour shortages? % of respondents, from Standard Chartered’s surveys 2014 Invest more in capital equipment

2013 2012

Move capacity inland

Move capacity out of China

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Source: Standard Chartered Research

9 April 2014

25

Special Report

In an annual survey that Standard Chartered conducted recently (On the Ground, 17 March, ‘China - 375 clients talk wages in the PRD’), we found that while moving capacity out of China is now being considered, only 13% of respondents said they would leave the country to save costs. There has been an increase in the proportion looking to move inland from the Pearl River Delta since 2012, but the majority said that they would invest more in capital equipment within China itself (Figure 34). For those looking to move out, Cambodia seemed to be the favourite destination, with Bangladesh and Vietnam also popular choices.

The world continues to shrink The ‘third phase of unbundling’ may reduce the need for reliance on cheaper offshore centres

There is also talk of the ‘third phase of unbundling’ or the third industrial revolution, which would further break down the process of consumption and production to a micro – household or individual – level. This would be possible with the onset of new technologies such as 3D printing, robotics, and further digitisation of the process of manufacturing. 3D printing and advances in robotics that now allow robots to work alongside human beings, previously thought to be too dangerous or costly, are being closely watched. They could reduce the need to rely on cheaper offshore centres and lead to a breakdown of supply chains. However, these innovations are likely to take many years before becoming cheap and effective enough to be widespread. There are other innovations, however, that continue to reduce the costs of communication and transport, lowering the barriers to including more geographically diverse locations in the global supply chain. Smart phones and the spread of broadband, allowing video conferencing, are important. In future, technologies such as telepresence, which allows one to feel and give the appearance of being present in a meeting in a different location, may lower trade barriers and allow workshops farther afield. It is also encouraging that emerging markets are taking greater interest in pushing ahead with innovations through higher R&D spending (Figure 35), which will not only assist domestic production, but also make these economies attractive locations for the production of higher value-added goods.

Figure 35: Patent applications at the top five offices A new world order is emerging (000s) 350

1,200

300

1,000

250

US

200

800

Japan

600

150 100

Korea

50

India

400 200 China (RHS)

0

0 1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Source: WIPO, Standard Chartered Research

9 April 2014

26

Special Report

Part 2: The special role of China The rise of the mega-trader China’s share of world trade has risen to 11.5% in 2012 from 7.5% in 2007

A recent paper from the Peterson Institute suggested that China is the only genuine mega-trader to have emerged since the time of the British Empire (Subramanian and Kessler 2013). The authors define a mega-trader as a country with a significant share of trade both domestically (relative to its own GDP) and globally (relative to world trade). While other Asian economies such as Singapore and Korea enjoy very high trade/GDP ratios they do not have a significant share on a global scale. The significance of China on the world trade map is evident from its dominance in terms of the world’s largest ports, a good proxy of world trade (Figure 36). China’s rise to the second biggest economy has been partly driven by its booming exports. China has grown to be the biggest contributor to world trade, accounting for over 11.5% of total world trade, second only to the EU. While world trade has slowed following the GFC, the emerging markets have shown resilient growth. China’s share of world trade has risen to 11.5% in 2012 from 7.5% in 2007 even as developed markets’ trade has fallen by 10ppt and even as China’s share of trade in its own GDP has gone down. More than half of China’s burgeoning trade is with Asia, accounting for 52% of China’s exports and 56% of its imports (Figure 37). In addition, China is also already the biggest trade partner for almost all the Asian countries (Figure 38).

China is the biggest trade partner for almost all Asian countries

Figure 36: Top 10 world container ports 1990 versus 2012 Rank – 1990

Port, country

Volume (mn TEUs)

Rank – 2012 Port, country

Volume (mn TEUs)

1

Singapore

5.22

1

Shanghai, China

32.53

2

Hong Kong, China

5.10

2

Singapore

31.65

3

Rotterdam, Netherlands

3.67

3

Hong Kong, China

23.10

4

Kaohsiung, Taiwan

3.49

4

Shenzhen, China

22.94

5

Kobe, Japan

2.59

5

Busan, South Korea

17.04

6

Los Angeles, US

2.58

6

Ningbo-Zhoushan, China

16.83

7

Busan, South Korea

2.35

7

Guangzhou Harbour, China

14.74

8

Hamburg, Germany

1.97

8

Qingdao, China

14.50

9

New York, New Jersey, US

1.87

9

Jebel Ali Dubai, UAE

13.30

10

Keelung, Taiwan

1.83

10

Tianjin, China

12.30

Source: World Shipping Council Containerisation International Yearbook (2004-2012), Standard Chartered Research

Figure 37: Over half of China’s exports go to Asia

Figure 38: China: Asia’s biggest trade partner

USD million, 3mma

% of total 45%

200,000

40% 150,000

RoW

35%

EU

30%

US

25%

100,000

Other Asian

50,000

0 Jan-00

Hong Kong Jan-02

Jan-04

Jan-06

Source: CEIC, Standard Chartered Research

9 April 2014

CN

20%

Jan-08

Jan-10

Jan-12

US

15% 10% 5% 0% AU

BG

HK

IN

ID

JP

MY

PH

SG

KO

Source: CEIC, Standard Chartered Research

27

Special Report

China’s exports to emerging Asia suffered a mild setback during the GFC, but did not experience as significant a reduction as did trade with the developed markets. The contribution of net exports to China’s growth has fallen significantly since 2008 and growth has been powered increasingly by investment and domestic consumption (Figure 38). This, together with a sharp reduction in China’s current account surplus and slowing GDP growth over the last few years, has raised concerns about China’s ability to continue to drive global trade higher.

Is China’s trade growth slowing? China’s exports fell as a share of GDP to 25% in 2012

China’s trade is beginning to slow. This is only natural given the rising dominance of China in global trade and output. But the process seems to have intensified since the GFC. There has been no contribution of net trade to overall growth since 2010. This reflects a greater slowdown in China’s exports than imports. China’s exports fell as a share of GDP to 25% in 2012 from around 35% in 2007, while imports fell by a smaller 5ppt to 22% of GDP. This is more dramatic than for other major countries.

China’s export growth has been dragged lower by a sharp decline in exports to DMs

China’s export slowdown has been quite broad-based, with even export growth to Asia easing to just 12% annualised since 2010 from around 20% annualised during the 2000-07 period. Exports to other EM partners such as Latin America and Africa have also slowed, but are still growing at double-digit levels. China’s export growth has been dragged lower by a sharp decline in exports to the developed world, with exports growing at an average 6% to Japan (from 12% in 2000-07), 7% to North America (from 21%) and a mere 3% to Europe (from 26%). China’s exports to countries such as Italy and France have fallen as these countries have battled recessions. As export growth has slowed, and given China’s role in the global supply chain, import growth has also weakened over the last few years. Big drops in import demand are seen from Latam (averaging 9% annual growth during 2010-13 compared with 32% pre-GFC) but import growth has also slowed from Asia due to supply chain inter-linkages (7% now compared with 20% pre-GFC). Meanwhile China’s GDP growth has powered ahead, boosted by high investment in infrastructure, housing and industrial capacity, all of which have a lower import content than does export activity (Figure 39). There are several reasons why we remain constructive on China’s position as the leader of world trade.

Figure 39: Net exports contribute a small amount to growth (%)

Figure 40: Hi-tech is one-third of China’s exports

15

100%

13

GDP growth

% of total exports 90%

11

80%

9

70%

7

Investment

5

Garments Machinery

60% 50%

3

Consumption

1 -1

Net exports

-3 -5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: CEIC, Standard Chartered Research

9 April 2014

Electric & Electronics

40% 30% 20%

Hi-tech Products

10% 0% Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Source: CEIC, Standard Chartered Research

28

Special Report

China’s trade has been growing at more than a 10% rate since the GFC and stands to gain from recovery in DM growth

First, China stands to gain considerably from the ongoing recovery in the developed world. China’s trade has been growing at a rate of more than 10% since the GFC, despite muted demand from the developed world. The DM growth outlook is picking up now so China should benefit overall. The United States was, until recently, China’s biggest export destination. 45% of China’s exports to the United States are machinery and electrical equipment, which amounted to USD 169bn in 2013, bigger than the total exports of several EM countries. These exports will grow as US consumption increases and demand for technology rises. As a result, we expect China’s trade surplus to rise in the near-term, led by stronger exports over 2014. Second, China remains a leading force in world trade, having consolidated its position as key player in global supply chains. As we argued above, while China’s low-cost advantage is eroding, the pace of movement of manufacturing to lower cost countries or to reshoring/onshoring by developed countries is likely to be slow.

China is moving up the value-chain, increasing its share of medium-to high-technology products

China is moving up the value-chain, increasing its share of medium- to hightechnology exports. Almost a third of China’s overall exports are hi-tech products, particularly mechanical and electronics products (Figure 40). While many of these exports are still only assembled in China, they require semi-skilled labourers as well as technology infrastructure. We believe it is unlikely that there will be significant migration of these processes out of China for lack of suitable replacement centres, with both the infrastructure and the scale to accommodate these exports. Locations such as Vietnam, Bangladesh and Sri Lanka certainly provide cheaper options than China for low-end exports such as clothes and toys, particularly as Chinese wages continue to rise. However, it will likely prove hard for migration of semi-skilled, value-added activities, such as the assembly of tech products, to these economies in the absence of significant investment in infrastructure and an increase in the availability of skilled labour. Additionally, reverse migration to Taiwan or back to the United States is unlikely, as the cost of labour in China is significantly cheaper than in developed markets.

Countries tend to be exporters in industries where they have large domestic markets

Countries tend to be exporters in industries where they have large domestic markets (Krugman 1981). Even if China pursues policies that support greater domestic consumption over time, it could still be a strong exporter in those sectors where there is large domestic demand on account of improving efficiency. Figure 41: China dominates demand and supply of several key commodities % of world demand or supply 60 50 40 30 20 Demand 10

Supply

0 Oil

Natural gas

Coal

Aluminium

Copper

Lead

Nickel

Zinc

Source: Standard Chartered Research

9 April 2014

29

Special Report

Finally, we believe that concerns about China’s trade dynamics focus too much on export performance. China’s growing weight in the global economy has already made it the marginal buyer of a host of commodities. China has the largest share of demand for most major commodities except oil, where it is second to the US; and natural gas, where it is the fourth-largest buyer (Figure 41). The focus on more balanced growth and structural reforms domestically will, over time, allow for lower savings and higher consumption. It will also lower the emphasis on infrastructure spending, as is already happening. Some of this shift towards consumption will filter into greater imports from the rest of the world, strengthening global trade growth and South-South trade in particular. We expect China’s trade to double in size by 2020

We expect China’s trade to continue growing at a steady rate, doubling in size by 2020 (see The Renminbi’s 2020 Odyssey published on 3 November 2013; Figure 43). It is likely to increase its share of world trade significantly as it will be a key driver of growth in both emerging and developed markets. China’s trade growth is unlikely to rebound to the double-digit level seen over the last couple of decades. However, it is important to remember that the sheer size of China’s trade will mean that even 7% GDP growth, faster than the growth in developed world trade, would make China the single biggest contributor to world trade in absolute terms. This further reinforces China’s status as a world leader in trade and reiterates the central role that it will likely play in the continued growth of global trade.

China could become a champion of free trade

As the world’s mega-trader, China will have an increasing interest in promoting and maintaining free trade. And to satisfy consumer demand, to successfully move up the value chain and to keep trade partners happy, China will likely want to open up further to imports over time. Moreover, it will remain heavily dependent on imports of th raw materials (unlike the US). Hence, like Britain in the 19 century and the US after 1945, China could, over time, become a champion for liberalising world trade.

Figure 42: China’s exports slower, but still high

Figure 43: We expect China’s trade to double by 2020

Average growth in exports of goods and services, %

China total trade and projections (USD bn)

20

12,000

18

2

6,000 7.4 4,000

Germany

India World

US Japan

4

7.6

2,000

UK

10 8

8,000

Korea

China

12

6

Our forecast

10,000

16 14

Actuals

0 1995-2002

2003-2008

Source: CEIC, Standard Chartered Research

9 April 2014

2009-2013

2014F-2018F

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Standard Chartered Research

30

Special Report

Part 3: Made in the world Conventional bilateral trade measures tend to under/overestimate trade balances

The growing complexity of global supply chains and the trade in tasks rather than products make the conventional measures of valuing trade increasingly outdated. Goods are no longer ‘made in China’ or ‘made in the US’, but ‘made in the world’. As a result, conventional bilateral trade statistics that measure gross imports and exports often under- or over-estimate the underlying bilateral trade balances between economies (though the overall trade balance for a country remains unchanged). This is best represented with the help of the now famous iPad example. Authors of the study called Capturing Value in Global Networks: Apple’s iPad and iPhone (2011), estimated that Chinese labour only received about USD 10 in direct wages for a unit costing USD 275 (Figure 44). However, with its ‘Made in China’ tag, the entire USD 275 is attributed as an export by China to the US.

Hi-tech value added in China amounts to more than one-sixth of exports

This is true of many other products which are assembled in China, but fabricated primarily in Taiwan or Korea, often using designs from elsewhere and parts from Japan and Europe. The net value added to these products in China is, however, still significant in absolute terms because of the sheer scale of operations. We can calculate the net export of hi-tech products, as classified by customs. About one-third of China’s exports are hi-tech products, while about one-sixth of imports are classified as hi-tech. Assuming that all hi-tech products imported are exported after an incremental value-add, net exports would comprise about one-sixth of exports. In fact, at least some of the hi-tech goods imported will stay in China, so we can conclude that hi-tech value-added in China amounts to somewhat more than onesixth of exports.

TiVA is now the preferred measure of global trade flows

The UN, World Trade Organization and other multilateral agencies are increasingly trying to find ways to better capture this change in trade dynamics. As trade is now more a reflection of global value chains, trade in value-added (TiVA) is now being preferred as a measure of global trade flows. This captures the value-added by each country in the production of goods and services that are consumed worldwide. The use of TiVA is still challenging and quite technical, which is why it is used along with the conventional measure of trade. However, there are several advantages of using this measure of trade. These include:

Figure 44: Distribution of value for the iPad

Figure 45: Trade statistics underestimate services

% of total

Services exports as % of total exports

Cost of inputs: China labour, 2

Cost of inputs: non-China labour, 5 Cost of inputs: materials, 31

Unidentified profits, 5 S. Korea profits, 7

Apple profits, 30

22.0 21.5 21.0 20.5 20.0

Retail & distrib, 15

Japan profits, 1

19.5 19.0 Taiwan profits, 2

Non-Apple US profits, 2

Source: ‘Capturing Value in Global Networks: Apple’s iPad and iPhone (2011)’, Standard Chartered Research

9 April 2014

22.5

18.5 18.0 2005

2006

2007

2008

2009

2010

2011

2012

Source: World Bank, Standard Chartered Research

31

Special Report



Better measurement of exports and imports, less double counting and a better sense of actual trade chains for products. For example, if the US imports a product from China that has also been partly produced in Taiwan, conventional trade will only show trade relations between China and the US and



ignore Taiwan as a trade partner of the US. Better formulation of regional/bilateral trade policy. For example, a study by



the Swedish National Board of Trade on the European shoe industry revealed that some shoes ‘made in Asia’ and targeted by anti-dumping laws by the European Commission actually contained 50-80% of EU value-added. So the laws were hurting domestic production as well. Better formulation of global policy on global imbalances. Value-added trade data reveals a better representation of the actual bilateral deficits and surpluses of countries, which can then help formulate policies to resolve these imbalances.



China’s apparent large bilateral trade surplus with the US looks very different in value-added terms. This does not alter the overall current account balance for each country, which reflects the difference between domestic investment and savings. Better formulation of measures to deal with crisis situations, such as the



trade collapse in 2009, if the actual global value chain is fully recognised. These measures would address both the labour and output impact of such crises. Greater awareness that services are tradable. Finally and possibly most importantly, conventional trade estimates greatly underestimate the contribution of services to total trade, leading to the notion that services are not tradable. This is simply not true.

Trade in services may be the future of trade Commercial services trade accounted for less than 20% of total trade in 2012

According to the World Development Indicators, services accounted for 70% of world GDP in 2010, up from 57% in 1990. Yet, trade in goods and services as reported by conventional methods predominantly reflects goods trade. Commercial services trade only accounted for less than 20% of total trade in 2012 (Figure 46). Of this, transport (followed by travel) is the biggest individual category, but it has been losing share to ‘other commercial services’, which now form 53% of all services exports (Figure 46). Other commercial services include: financial, insurance, construction, communication, computer and information, royalties and license fees, personal, cultural and recreational, and other business services.

Figure 46: Other services overtake travel and transport

Figure 47: EU, then Asia are biggest in services %

% of services 60

Other services

60

50

50

40

40

30

Travel Transport

30

Asia

20

20

10 10

0

North Am Africa 2005

0 Jan-00

Jan-05

Source: World Bank, Standard Chartered Research

9 April 2014

EU 27

Jan-10

2010

Transport

2005

2010 Travel

2005

2010 Other

Source: World Bank, Standard Chartered Research

32

The expanding global production chain

Source: WTO, Standard Chartered Research

Special Report

9 April 2014

Figure 48: Made in the World

33

Special Report

Trade in services is more difficult to define and to measure than trade in goods. Goods arrive at the borders and are generally measured and taxed. But services can come over a wire or be embodied in people moving about. The WTO has identified four ‘modes of supply’ for services (Figure 49). WTO has identified four ‘modes of supply’ for services

The first, cross-border movement via telecoms or postal services, is straightforward conceptually, but may not be easy for statisticians to capture if it is not subject to reporting and/or tax. The second, consumption abroad, was traditionally mainly tourism and business-related travel, but now study abroad and so-called medical tourism are growing rapidly. The third, commercial presence, is controversial. If an international chain of hotels sells a room for a night, much of that service is produced locally (land, construction, house-keeping) but part may qualify as international services, including booking systems, staff training, branding etc. The fourth, the temporary movement of people on projects or contracts, should also be considered services. On a regional basis, the biggest exporter of services (by the conventional measurement method) is the EU, with over a 50% share (Figure 50). On an individual country basis, however, the US dominates commercial-services exports, though the top five exporters vary widely depending upon the category of commercial services being considered. For the largest category of ‘other commercial services’, the US, India, China and Japan are the biggest exporters.

DMs have the advantage in education with the US, UK and Australia benefiting

In education, developed countries have the advantage. According to the US Institute of International Education there were 819,644 foreign students studying in the US in the 2012-13 school year, with 283,222 Americans studying abroad (data applies to the prior year; ICEF Monitor 2013). Education is even more important for Australia’s smaller economy, with 515,853 foreign student visas in the latest year. Service export earnings from education totalled AUD 14.6bn, placing education fourth behind iron, coal and gold in Australia’s export product rankings, ahead of natural gas and tourism (Connelly and Olsen, 2012).

EMs have the advantage in medical tourism, with Mexico and Thailand being the leaders in this field

Medical tourism favours emerging countries because costs can be so much lower compared to developed countries. Americans without insurance or with large copayments often travel for treatment. Some companies and their insurance providers are also reportedly looking at overseas options for treatments. Meanwhile consumers in free-but-rationed systems in Europe or Canada can avoid long waiting times for routine operations. Mexico and Thailand are two of the leaders in the field and Brazil, Costa Rica, India, Malaysia and the Philippines are also seeing strong growth. KPMG reported in 2011 that 3mn patients globally were going abroad for treatment, with a total value of USD 78.5bn, and that annual growth is in the 20-30% range (KPMG 2011).

Figure 49: Examples of the four modes of supply (from the perspective of an importing country) Mode 1: Cross-border Mode 2: Consumption abroad Mode 3: Commercial presence Mode 4: Movement of natural persons

A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, e-books, music or film downloads, tele-medical advice, distance training or architectural drawings. Nationals of A have moved abroad as tourists, students or patients to consume services. The service is provided within A by a locally established affiliate, subsidiary or representative office of a foreign-owned and controlled company (Bank, hotel group, construction company etc.) A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g., hospital, construction company).

Source: WTO, Standard Chartered Research

9 April 2014

34

Special Report

Travellers from EMs will account for 51% of total international tourism by 2023

Meanwhile international tourism is growing rapidly and is increasingly led by travellers from emerging countries, especially China. According to a study by Oxford Economics, travellers from the emerging world will account for 51% of traffic by 2023, up from 41% in 2013 (Oxford 2014). The definition of emerging here is non-OECD members and since the OECD includes among others Mexico, Poland and Turkey, the data somewhat understates the role of emerging markets. The Oxford study forecasts travel to grow by 5.4% annually over the next decade, with outbound traffic from Asia-Pacific, Middle East and Africa growing the fastest. South-South journeys accounted for 40% of global air traffic in the last five years. Outbound travel from China, only 1% of the world total in 2005, is set to overtake that from the US in 2014.

Calculating the real value-added Services account for double the conventional estimate of less than 20% of total exports

The biggest problem with the conventional method of calculating services is that it might mask those sectors of the economy where value-added originates. It is estimated that for the developed economies, for example, a large share of the valueadded in goods exports originates in the services sector (in line with the sectoral composition of the economy). This becomes apparent when one uses the TiVA measurement to look at services exports. The share of services exports to total exports jumps for most countries, and on average it is estimated that services exports now account for nearly double the conventional estimate of less than 20% of total exports (Figure 56). This is important, as there is a growing school of thought that trade in services will become a more dominant driver of trade in the future. Earlier notions of services largely being domestic have been proven untrue by the success of IT service exports for countries such as India (Figure 54). Continued innovation in the field of computer technology and internet services is increasing the likelihood of promoting growth through services trade.

Figure 50: Leading exporters and importers in world trade in commercial services, excluding intra-EU trade 2012 Rank

Exporters

Value (USD bn)

Share

Rank

Importers

Value (USD bn)

Share

1

Extra-EU(27) exports

823

24.6

1

Extra-EU(27) imports

639

20

2

US

614

18.3

2

US

406

12.7

3

China

190

5.7

3

China

281

8.8

4

India

148

4.4

4

Japan

174

5.4

5

Japan

140

4.2

5

India

125

3.9

6

Singapore

133

4

6

Singapore

117

3.7

7

Hong Kong

126

3.8

7

Canada

105

3.3

8

Korea, Rep

109

3.3

8

Korea, Rep

105

3.3

9

Switzerland

88

2.6

9

Russia

102

3.2

10

Canada

78

2.3

10

Brazil

78

2.4

Note: Export share of UK (6.4%), Germany (5.9%) and France (4.8%) and import share for Germany (6.9%), UK (4.3%) and France (4.2%). Source: WTO, Standard Chartered Research

9 April 2014

35

Special Report

Services trade could yet prove to be a game-changer for many EMs

Services trade could yet prove to be a game-changer for many developing countries that are basing their growth story on the export of services (World Bank 2012). In addition to India, the Philippines is now the third largest player in the Business Process Outsourcing (BPO) market. African and MENA countries are increasingly pulling their weight as well, with Morocco, Kenya, South Africa and Tunisia all supplying services to Europe. According to Subramanian and Kessler, this ‘dematerialisation of trade’ will lead to trade in services eclipsing trade in goods as services become increasingly embodied in trade and better captured by trade data.

Growing emphasis on services in FTAs Both DMs and EMs are trying to push through higher services exports to boost trade

The only global agreement on trade in services, the General Agreement on Trade in Services (GATS), was concluded in 1995. While there has been some attempt to further liberalise services trade under the GATS umbrella, little progress has been made so far. On the other hand, many of the new bilateral and multilateral trade agreements (including the TTIP agreement) aim at lowering barriers to trade in services. It is not just developed countries, but also developing countries that are trying to push through higher services exports to boost trade.

Note: EUR-27 share of 43.2%. Source: WTO, Standard Chartered Research

9 April 2014

Egypt

Japan

India

Switzerland

Canada

Ukraine

Egypt

Turkey

Taipei, Chinese

Canada

India

Russia

Norway

Hong Kong

China

Singapore

Korea, Rep of

Japan

US

Extra-EU 27 exports

0

Malaysia

5

Thailand

10

Turkey

15

Macao, China

20

Hong Kong, China

16 14 12 10 8 6 4 2 0 Australia

Share, 2010

25

China

Share, 2010

Extra-EU-27 exports

Figure 52: Leading exporters of travel services

US

Figure 51: Leading exporters of transportation services

Singapore

The Indian government estimates that the recently agreed though not yet signed FTA on services and investments between India and ASEAN countries (December 2013) could increase trade with ASEAN economies, to USD 100bn in 2015 and USD 200bn in 2020 from USD 80bn in 2012. This is part of a broader plan being drawn up by the Indian government to better capture services sector data, and leverage its position as a services-based economy through the expansion of FTAs to ASEAN markets and the EU.

Note EU-27 share of 35.4%. Source: WTO, Standard Chartered Research

36

Special Report

The focus on services trade is not limited to India. Vietnam is bolstering efforts to reduce poverty and join the WTO through the development of its relatively weaker services sector, particularly services trade. Aided by a USD 2.55mn injection from the United Nations Development Programme (UNDP), the Vietnamese government has launched a three-year project in 2013 to liberalise the services sector. TISA could be the most important driver of services trade

Perhaps the most important driver of services trade might be the Trade in Services Agreement (TISA) currently being negotiated by 22 different participants or 50 countries, representing 70% of the world’s trade in services. Countries currently involved in the negotiations include the largest services exporter in the world (the US), the EU (27 economies), Korea, Japan, Mexico, Turkey, Hong Kong, Australia and Canada, among others. The focus of the negotiations is on harmonising regulations, opening up markets and providing better cross-border data. The agreement is still in early stages of negotiation, however, having been launched only in 2013. At the same time, it is criticised as not being comprehensive enough, as the big emerging markets such as India, China, Brazil and Russia are not part of the negotiation process. However, there have already been four rounds of negotiations with participants, suggesting that there is progress towards agreement.

Even the most pessimistic WTO estimates show the share of services trade rising by 2035

In the World Trade report 2013, the WTO offers a scenario analysis of the possible evolution of trade over the next two decades. Its estimates show that in all scenarios, even pessimistic ones (which include protectionism and a major slowdown in world trade), the share of services trade in overall trade would rise by 2035, although manufacturing would remain the dominant sector of trade.

Figure 53: Leading exporters of financial services Share, 2009

Figure 54: Leading exporters of computer and information services (share, 2009)

30

25

25

20

20

15

15

Note : EU -27 share of 54.7%. Source: WTO, Standard Chartered Research

9 April 2014

Malaysia

Singapore

Philippines

Norway

Canada

China

Israel

US

Extra EU 27

Norway

Korea

Canada

India

Japan

Singapore

Hong Kong

0 Switzerland

0 US

5

Extra EU 27

5

India

10

10

Note: EU-27 share of 58.5%. Source: WTO, Standard Chartered Research

37

Special Report

Part 4: Conclusion: Looking ahead We believe that much of the recent weakness in world trade growth is temporary, a reflection of weak underlying demand in developed markets – especially for manufacturing (durable) goods, which comprise the bulk of international trade. The effect of the expansion of global production chains is to magnify the impact upstream on trade. We also believe that the worst of the GFC is now behind us and global economic growth is set to improve from this year onwards, picking up steam over the next few years. Trade is unlikely to grow as rapidly as it did in the 1990s or 2000s (following the opening up and integration of large EMs and ex-communist countries into global trade), but we think that concerns about the lack of trade finance and a sudden end to supply-chain expansion are overdone. In addition, while there was a rise in trade protection immediately following the GFC, there seems to be no acceleration in protectionist measures, with more FTAs being negotiated to support trade over the coming years.

The ratio of trade growth/GDP can regain its long-term average The ratio of trade growth/GDP edged back up to 1.1 over 2010-12

The ratio of the growth trade volume to real GDP growth since the 1960s has been close to 1.4. While it plummeted during the GFC, this ratio edged back up to 1.1 over 2010-12, still below the historical average on account of the euro-area debt crisis and recession during this time. With the euro area now emerging from recession, we expect the ratio of trade growth to GDP growth to return to its historical averages. The GFC does not seem to have altered the big transformations taking place since the turn of the century: South-South trade and services trade are likely to continue to gain importance over the coming years. In an environment of improving growth and diminishing trade barriers, the WTO estimates that global trade could quadruple from 2011 levels by 2035. This would amount to a geometric mean annual rate of about 5.9%. In our long-term forecasts we project long-term real GDP growth of 3.8% from 2013-30, so this would give a ratio of 1.55. But this is the WTO’s ‘high’ scenario, intended to provide an upper boundary for trade projections. As such, it could be optimistic.

Figure 55: Top 10 exporters of commercial services

Figure 56: Services are larger in value-added terms

% share

Services exports as % of total exports, TiVA basis 70%

25

60% 20

50% 40%

15

30% 20%

10

10% 5

0%

Extra- EU US

CN

IN

JP

Source: World Bank, Standard Chartered Research

9 April 2014

SG

HK

KO

SZ

CA

HK UK EU27 US IN FR TU LU DE JP AU BR ZA SG CA PH RU RO KO MX CN ID

-10%

0

Source: WTO, Standard Chartered Research

38

Special Report

The WTO’s ‘low’ case, which combines a weak GDP performance with increasing protectionism, projects export volume growth of just under 2%. This rate is slower than GDP growth in this scenario, implying a ratio of trade/GDP growth of less than 1. These projections underline the importance of keeping trade corridors open, avoiding protectionism and making further progress in trade liberalisation. Overall, our view is that the outcome will most likely be nearer the top of the WTO’s range than the bottom, and probably close to the long-term average of 1.4. We are optimistic that China and other emerging markets will find their way forward from the difficulties they are facing currently, through new reforms which, among other things, will expand trade. Meanwhile progress on international trade liberalisation is likely in our view, partly because the world has become so globalised already and partly because the new communications technology will encourage it.

South-South trade to rise strongly WTO sees South-South trade more than doubling from current levels

The WTO’s high scenario sees South-South trade ballooning to around 43% of total world trade, more than doubling from current levels. China would augment its position as the mega-trader of this century, raising its share from a tenth to about a quarter of total trade. India’s share would rise as well, albeit more modestly to about 5% of total trade. These increases would come primarily at the expense of lower North-North trade, with the US (-6ppt) and EU (-4ppt) both losing out.

The South’s share of global GDP and trade will likely continue to rise sharply

Similar results are seen in another ADB study, which looks at the prospects for South-South trade growth to 2030 (Anderson and Strutt, 2011). It shows the EM share of global exports increasing to 55% in 2030 (under their core assumptions) from 33% in 2004, while high income countries’ share drops to 44.8% in 2030 from 67% in 2004. Hence, the South’s share of global GDP and trade will likely continue to rise sharply over the next two decades, and according to ADB’s projections are likely to overtake North-North trade by 2030. Asia remains the centre of inter-regional trade. Asia’s bilateral trade with all regions (with the exception of North America) increased as a share of world trade between 1990 and 2011. We expect Asia to maintain its importance in world trade over the coming years, with the fastest-growing trade routes likely to remain centred on Asia. As we noted earlier, the fastest-growing trade routes over the last decade have been Asia-MENA, Asia-Latam and Asia-Africa. Looking ahead, more stable commodity prices are likely to dampen commodity export growth for these corridors. However, rising commodity export volumes and the growth of other mutually beneficial trade that allows catch-up with the West are likely to ensure that these remain fairly fastgrowing trade routes over the coming years, if slower than in the past. The ASEAN Economic Community that aims to lower barriers to freer flow of investment and trade within the region could form the basis for the next leg-up for Asia-led trade. Beyond that, fast growth in the Indian sub-continent and in Africa should boost trade growth, especially if they become more open to trade and regional trade expands. Also, as suggested earlier, an expansion of horizontal trade in China and other emerging countries is expected in coming years − horizontal trade among producers as well as to final consumers.

9 April 2014

39

Special Report

Figure 57: Exports by product 2012

Source: IMF DOTS, Standard Chartered Bank

Figure 58: Imports by product 2012

Source: IMF DOTS, Standard Chartered Bank

9 April 2014

40

Special Report

Part 5: World trade routes dissected North-North and North-South trade   

   

North-North trade overall has stagnated since 2008; trade with Europe is still down. North-South trade has recovered from the GFC, though exports to MENA have been sluggish. Exports from North America (US and Canada) to Latam overtook exports to the euro Area in 1992 and have surged ahead (Figure 59). This reflects the role of NAFTA in promoting trade with Mexico. Excluding exports to Mexico, US and Canadian exports to Latam in 2012 were USD 190bn, slightly less than exports to developing Asia and to the euro area. EU exports to developing Asia surpassed exports to the US and Canada in 2008 (Figure 60) Japan’s exports to developing Asia have risen very rapidly since 2000 (Figure 61). Approximately half of UK trade is with the EU (Figure 62).

Figure 59: North American exports by region

Figure 60: EU exports by region

USD bn, US and Canada

USD bn

450

Latam

400

300 250

350 300 Euro Area

150

150

Developing Asia

100

100

MENA

50

SSA

200

0 1990

1993

1996

1999

2002

2005

2008

2011

MENA 3,000 2,500 North America 2,000 Latam 1,500 SSA

0 1993

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

Figure 61: Japan’s exports by region

Figure 62: UK’s exports by region

USD bn

USD bn Developing Asia

250

200

200 North America

100

EU Latam

50 0 1990

1993

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2005

2008

2011

MENA SSA

2005

2008

2011

300

250

150

1,000 500

Source: IMF DOTS, Standard Chartered Research

300

3,500

50 0 1990

4,000

EU (RHS)

200

250

4,500

Developing Asia

EU

150 100

Developing Asia

North America 50 0 1990

MENA 1993

1996

1999

2002

2005

2008

SSA Latam 2011

Source: IMF DOTS, Standard Chartered Research

41

Special Report

US trade to China is growing fastest 

US trade has recovered relatively well from the GFC crisis Exports to China have grown faster than to Mexico and Canada, especially since 2000 (Figure 63). Imports from China comprise by far the fastest-growing corridor (Figure 64). US exports to Latam have risen since the GFC while they have fallen to the EU (Figure 65). The share of imports from developing Asia (Figure 66) rose above imports from Latam and the EU in the early 2000s (China accounts for 9.8ppt of this share).

   

Figure 63: Growth in US exports to key partners

Figure 64: Growth in US imports from key partners

Index 1980=100

Index 1980=100

5,000

China

China

50,000

Mexico Canada

5,000

Mexico

UK

500

Japan

500

50 1980

1984

1988

1992

1996

2000

2004

2008

Germany Canada Japan

50

2012

1980

1984

1988

1992

1996

2000

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 65: US export shares by region

Figure 66: US import shares by region

% share of total US exports

% share of total US imports

35

30

30 Latam

25

2004

2008

2012

Developing Asia

25 Latam

20

20 EU

15

Developing Asia

10

10 MENA

5

SSA

0 1980

1984

1988

1992

1996

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2000

2004

EU

15

2008

2012

MENA

5

SSA 0 1980

1984

1988

1992

1996

2000

2004

2008

2012

Source: IMF DOTS, Standard Chartered Research

42

Special Report

EU trade is shifting towards EMs slowly The EU’s exports and imports with China and Russia have been growing faster than to the US and intra-EU trade (Figures 67 and 68). Exports to China are up 35 times since 1990, while imports are up 105 times. The growth in EU imports from Japan slowed from the 1990s, likely reflecting increased final assembly of goods in China (Figure 68). The share of intra-EU exports in total EU exports has been in the 65-68% range since 1990, falling back to the low end recently (Figure 69). The share of EU countries exports going to developing Asia is increasing but only to around 5% (Figure 70). Excluding intra-EU trade it would be 14%.

     

The share of EU imports from developing Asia has risen far faster, from 2% to 9% (Figure 70). But it has been weak since 2008.

Figure 67: Growth in EU exports to key partners

Figure 68: Growth in EU imports from key partners

Index 1980=100

Index 1980=100 50,000

5,000 2,000

China

China

Russia

1,000

5,000

Russia

Japan

500

EU

EU Japan

500

US

US

100 50 1980

50 1984

1988

1992

1996

2000

2004

2008

1980

2012

1984

1988

1992

1996

2000

2004

2008

Source: IMF DOTS, Standard Chartered Research; Note: Russia (Index 1992=100)

Source: IMF DOTS, Standard Chartered Research; Note: Russia (Index 1992=100)

Figure 69: EU export shares by region

Figure 70: EU import shares by region

% share of total EU exports

2012

% share of total EU imports

12%

70%

10%

14%

70%

12%

EU (RHS)

65% 8%

MENA EU (RHS)

65%

10% 8%

6%

Developing Asia

MENA

4%

60%

Developing Asia

6% 55%

Latam

2%

60%

Latam

4%

55%

2% SSA

0% 1980

1984

1988

1992

1996

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2000

2004

2008

50% 2012

SSA

0% 1980

1984

1988

1992

1996

2000

50% 2004

2008

2012

Source: IMF DOTS, Standard Chartered Research

43

Special Report

The rise of South-South trade     

The three fastest-growing trade corridors are all South-South and include Asia. They are Asia-MENA, Asia-SSA and Asia-Latam (Figure 71). For Latam, developing Asia is its fastest-growing export market by far. SSA-developing Asia has been the fastest growing regional trade corridor for SSA since 1990, with Latam second (Figure 72). Developing Asia has been the fastest-growing trade corridor for MENA since 2004, with SSA second (Figure 73). For MENA, Latam is its second-fastest growing source of imports; imports from developing Asia are growing fastest (Figure 74).

Figure 71: Growth in Latam exports by region

Figure 72: Growth in SSA exports by region

Index 1990=100

Index 1990=100

6,000 4,000

Developing Asia

13,000 5,000

2,000 1,000

Developing Asia

SSA

Latam

MENA DM

500

Euro Area

100

MENA

1,000

DM

500

Euro Area

100

50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 73: Growth in MENA exports by region

Figure 74: Growth in MENA imports by region

Index 1990=100

Index 1990=100

5,000 2,500 1,000 500 250

Developing Asia SSA Advanced Economies Latam Euro Area

5,000

Developing Asia

2,500 Latam 1,000

SSA Euro Area

500 250

100

Advanced Economies

100 25

50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: IMF DOTS, Standard Chartered Research

9 April 2014

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: IMF DOTS, Standard Chartered Research

44

Special Report

China’s rise as a mega-trader 

Note that our log scale showing the expansion of trade goes much higher than for other countries! For example China’s exports and imports with Latam have risen more than 200 times since 1990, the fastest growing corridor (Figure 75 and 76). China’s top export destination is the US; it overtook Japan in 1997 (Figure 77). Total exports to the EU (not shown here) were USD 335.6bn in 2012 (just less than to the US at USD 352.5bn. Exports to the euro area were USD 243.8bn. China’s top supplier is Japan, but Korea is fast catching up (Figure 78).

   

Figure 75: China exports by region

Figure 76: China imports by region

Index 1990=100

Index 1990=100

22,000 10,000 5,000

Latam Developing Asia

2,000

45,000

SSA MENA Latam

15,000 10,000 5,000

Euro Area MENA

Euro Area

Developing Asia

DM

DM

1,000

500

500

100 50 1990

SSA 1993

1996

1999

2002

2005

2008

50 1990

2011

1993

1996

1999

2002

2005

2008

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 77: China’s exports to key partners

Figure 78: China’s imports from key partners

USD bn, Top 5 export destinations

USD bn, Top 5 import origins

2011

250

400 US

350

200

300 250

Japan Korea

150

Taiwan US

200 150

Japan

100

Korea Germany India

50 0 1990

1993

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2005

2008

2011

100

Germany 50 0 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

45

Special Report

China’s trade with South partners is growing The share of China’s trade with Japan, both exports and imports, has declined sharply since the early to mid-1990s (Figures 79 and 80). China’s largest South-South export destination is India, though India receives only just over 2% of exports (Figures 81 and 82). China’s trade with bilateral South-South partners is growing rapidly.

  

Figure 79: China’s share of exports with key partners

Figure 80: China’s share of imports from key partners

% share of total China exports

% share of total China imports

25

25

20

20 US

15

15

10

10

Japan Korea Taiwan US Germany

Japan 5 0 1990

Korea Germany India 1993

1996

1999

2002

2005

2008

2011

5 0 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 81: China’s exports to key South-South partners

Figure 82: China’s exports to key South-South partners

(USD bn), Top 5 export destinations

% share of total China exports 3.5

60 50

India

40

Russia Taiwan

3.0

Russia India

2.5 Taiwan

2.0

30

Malaysia

1.5 20

Indonesia

10 0 1990

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2005

2008

Indonesia

0.5

Malaysia 1993

1.0

2011

0.0 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

46

Special Report

ASEAN export growth has slowed since the crisis     

ASEAN exports have resumed growth since the GFC, but at a slower pace (Figure 83). The fastest-growing export destination is Latam, followed by Africa (Figure 83). The fastest-growing individual markets are China, Australia and Korea (Figure 85). Since 2008 exports to Japan have picked up, while exports to the US have stagnated (Figure 85) Import growth has been strongest from China (Figure 86).

Figure 83: ASEAN’s exports by region

Figure 84: ASEAN’s imports by region

Index 1990=100

Index 1990=100

3,000

Latam

2,000

Developing Asia

2,000 1,000

SSA

Developing Asia

MENA

1,000

SSA MENA

500 Euro Area

500

Euro Area 200

200

100

100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Latam

50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 85: ASEAN’s exports to key partners

Figure 86: ASEAN’s imports from key partners

Index 1990=100

Index 1990=100

6,000

4,000

China

China

4,000 2,000 1,000 500

Australia Korea Japan

2,000 Korea 1,000 Germany

500

US

US

Japan

200

200

100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: IMF DOTS, Standard Chartered Research

9 April 2014

Source: IMF DOTS, Standard Chartered Research

47

Special Report

ASEAN’s share of trade with the US and Japan is falling    

ASEAN’s exports to China overtook the US and Japan in 2010 (Figure 87). Imports from China blew past the US and China in 2007-08. Imports from Korea will likely pass imports from the US very soon (Figure 88). Imports from China and Korea have grown fastest among ASEAN’s main trading partners (Figure 88). ASEAN’s exports to Brazil are growing fastest, but its share of exports remains well below Taiwan, India and the UAE (Figures 89 and 90).

Figure 87: ASEAN’s share of exports with key partners

Figure 88: ASEAN’s share of imports from key partners

%

%

25%

30%

20%

25% US

20%

Japan

15%

Japan

China

15% 10%

China

10%

Korea

5%

US

Australia 0%

Korea

5%

Australia

0% 1990

1993

1996

1999

2002

2005

2008

2011

1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 89: ASEAN’s exports to key South-South partners

Figure 90: ASEAN’s exports to key South-South partners

USD bn, Top 5 export destinations

% share of total exports

6,000

6% Brazil

5,000

5%

4,000

4%

3,000

India

2,000

UAE Taiwan

1,000

Saudi Arabia

0 1990

1993

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2005

2008

2011

Taiwan India

3% 2% UAE 1%

Brazil Saudi Arabia

0% 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

48

Special Report

India – Rapid growth from a low base  



Like China, India has also seen very rapid growth in trade. India’s fastest-growing trade corridors are all South-South, with Latam the fastest for exports, (Figure 91) and developing Asia and Sub-Saharan Africa about neck-and-neck for import growth (Figure 92). Exports to developed countries have grown more slowly. The UAE overtook the US as India’s top export destination post GFC (Figure 93). Often these goods are re-exported to other countries in the Middle East, Africa and elsewhere.

Figure 91: India inter-regional exports

Figure 92: India inter-regional imports

Index 1990=100

Index 1990=100

25,000

Latam SSA

10,000 5,000

22,000 15,000 5,000

Developing Asia

1000

Euro Area DM

500

1,000 500

MENA 100

100

50 1990

1993

1996

1999

2002

2005

2008

50 1990

2011

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 93: India’s exports to key bilateral partners

Figure 94: India’s imports from key bilateral partners

USD bn, Top 5 export destinations

USD bn, Top 5 import origins 60

45 UAE

40 35

US

30 25

China

20

30

Saudi Arabia US Iraq

Singapore

10

10

5

Saudi Arabia 1993

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

UAE

40

20

15

0 1990

China 50

2005

2008

2011

0 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

49

Special Report

Indian exports to the US are a falling share of total India’s exports to China fell back recently (Figure 95) The US share of total Indian exports has steadily risen since the GFC, while China’s shows a decline (Figure 97). India’s largest source of imports is China, more than double the value of imports from the US (Figure 98).

  

India’s exports to key South-South bilateral partners USD bn, Top 5 export destinations

Figure 95: India’s exports to key South-South bilateral partners (% share of total Indian exports)

45

14

40

UAE

35

10

30

8

25 20 China

15

Saudi Arabia

10

Indonesia

5 0 1990

UAE

12

1996

1999

2002

2005

2008

China

4

Indonesia

Saudi Arabia

2 Brazil

1993

6

0 1990

2011

Brazil 1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

Source: IMF DOTS, Standard Chartered Research

Figure 96: India’s share of exports to key bilateral partners, % share of total Indian exports

Figure 97: India’s share of imports from key bilateral partners, % share of total Indian imports

25

14 China

12

US

20

10 15

8 6

10 UAE 5 0 1990

Saudi Arabia

China Singapore

1996

1999

2002

Source: IMF DOTS, Standard Chartered Research

9 April 2014

2005

US

UAE

Iraq

2 Saudi Arabia

1993

4

2008

2011

0 1990

1993

1996

1999

2002

2005

2008

2011

Source: IMF DOTS, Standard Chartered Research

50

Special Report

References ADB Institute & Pacific Economic Co-operation Council (PECC), (2011) ‘Services st Trade – Approaches for the 21 Century’, The Pacific Economic Co-operation Council, Singapore. Anderson, K. and Strutt, Asian Development Bank (2011), ADB Economics Working Paper Series, “Asia’s Changing Role in World Trade: Prospects for South-South Trade Growth to 2030”, no. 264, July 2011. Baldwin, R. (2012) ‘Global Supply Chains: Why they Emerged, Why they Matter, and Where they are Going’, Fung Global Institute, Working Paper FGI-2012-1, Hong Kong, July 2012. Bank for International Settlements, (2014) CFGS Papers No. 50, ‘Trade finance: developments and issues’, Report submitted by a Study Group established by the Committee on the Global Financial System, January 2014. Boxshall, R., Zimmern, W. & Kupelian, B. (2013) ‘The rising tide of service exports’, Global economy watch – June 2013, PricewaterhouseCoopers LLP.. Centre for Economic Policy Research, (2013a) Global Trade Alert, October 2013 Centre for Economic Policy Research, (2013b) ‘The Future of the World Trading System: Asian Perspectives’, edited by Baldwin, R., Kawai, M. And Wignaraja, G., London. Connelly and Olsen (2012), ‘Education as an export for Australia: More valuable than Gold, but for how long?’ Department for Business Innovation and Skills, (2011) ‘Global Context – How has world trade and investment developed, what’s next?’ Trade and Investment Analytical Papers, London. Euler Hermes Economic Research Department (2013), Economic Outlook no. 1192, Special Report – ‘Trade Routes: What has changed, what will change’, February 2013. European Central Bank, (2012), Quarterly report on the Euro Area, Has the crisis left a lasting mark on global trade?, ECB. Evenett, S. (2013) ‘Protectionism’s Quiet Return: GTA’s Pre-G8 Summit Report’, Centre for Economic Policy Research, London. Fan, Y. ADBI Working Paper Series, ‘Services Policy Reform in the People’s Republic of China: Before and After the Global Financial Crisis’, No. 304, August 2011. Federal Reserve Bank of Dallas, Globalisaton and Monetary Policy Institute 2009 Annual Report.

9 April 2014

51

Special Report

Fergusson, I. (2011) ‘World Trade Organisation Negotiations: The Doha development Agenda’, Congressional Research Service, December 2011. Georgiadis, G. and Grab, J. (2013) ‘Growth, Real Exchange Rates and Trade Protectionism since the Financial Crisis’, Working Paper Series, No. 1618, European Central Bank, November 2013. Hummels, D., Rapoport, D. & Yi, Kei-Mu (1998), ‘Vertical Specialisation and the Changing Nature of World Trade’, Federal Reserve Bank of New York Economic Policy Review. International Monetary Fund (2011), ‘Changing Patterns of Global Trade’, Prepared by the Strategy, Policy and Review Department, June 2011. ICEF Monitor 2013 Open Doors report KPMG (2011), Sharing knowledge on topical issues in the healthcare sector, vol. seven. McKinsey & Company (2011), McKinsey on Supply Chain: Select Publications, Chicago, January 2011. Memedovic, O. and Lapadre, L. (2010), ‘Structural Change in the World Economy: Main Features and Trends’, Working Paper 24/2009, United Nations Industrial Development Organisation (UNIDO), Vienna. National Bureau of Economic Research (2009), ‘International Trade in Services and Intangibles in the Era of Globalisation’, Reinsdorf, M. and Slaughter, M. (editors), University of Chicago Press, May 2009. Novy, D and Taylor, A, ‘Uncertainty and the great trade collapse: New evidence’, Vox, 19 March 2014. OECD (2011), ‘Import content of exports’, in OECD Science, Technology and Industry Scoreboard 2011, OECD Publishing. OECD, ‘Trade in Value-added: Concepts, Methodologies and Challenges’, joint OECD-WTO note. OECD (2013), Interconnected Economies benefiting from Global Value Chains – Synthesis Report, OECD Publishing. Oxford (2014). Shaping the Future of Travel: Macro trends driving industry growth over the next decade, Oxford Economics, commissioned by Amadeus. Petri, P., and Plummer, M. (2012) ‘The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications’, Policy Brief No. PB12-16, Peterson Institute for International Economics, June 2012. Petri, P., Plummer, M. and Zhai, F. (2011) ‘The Trans-Pacific Partnership and AsiaPacific Integration: A Quantitative Assessment’, Economics Series, No. 119, EastWest Centre, October 24, 2011. 9 April 2014

52

Special Report

PricewaterhouseCoopers, (2013), Global wage projections to 2030, September 2013. PricewaterhouseCoopers (2012), Project Blue – Capitalising on the rise and interconnectivity of the emerging markets. PricewaterhouseCoopers (2011), ‘Economic Views: Future of world trade’ – Top 25 sea and air freight routes in 2030, March 2011. Shelburne, Robert, C. (2010) United Nations Economic Commission for Europe, Discussion Paper Series no. 2010.2, ‘The Global Financial Crisis and its Impact on Trade: The World and the European Emerging Economies’, United Nations, September 2010. Sturgeon, T. and Memedovic, O. (2011) ‘Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy’, Working Paper 05/2010, United Nations Industrial Development Organisation (UNIDO), Vienna, 2011. Subramanian, A. and Kessler, M. (2013) ‘The Hyperglobalisation of Trade and its Future’, Working Paper Series 13-6, Peterson Institute for International Economics, July 2013. SWIFT, (2013) ‘Educational Report – Observation on the Evolution of Trade Finance and Introduction to the Bank Payment Obligation’, OPUS Advisory Services International Inc. United Nations Conference on Trade and Development (UNCTAD), (2013) Exploiting the Potential of the Trade in Service for Development, United Nations. United Nations Conference on Trade and Development (UNCTAD), (2013) World Investment Report 2013: Global Value Chains: Investment and Trade for Development, United Nations, New York & Geneva. The World Bank, (2010) ‘International Trade in Services – New Trends and Opportunities for Developing Countries’, Cattaneo et. al. (editors), The International Bank for Reconstruction and Development, Washington D.C. World Bank, (2012) Exporting services: A Developing Country Perspective, World Bank. World Economic Forum, (2012) The Global Enabling Trade Report 2012 – Reducing Supply Chain Barriers, Lawrence, R., Hanouz, M. and Doherty, S. (editors). World Intellectual Property Organisation, (2013) World Intellectual Property Indicators, WIPO Economics & Statistics Series, Geneva. World Trade Organisation, (2013) World Trade Report 2013 – ‘Factors shaping the future of world trade’. World Trade Organisation (2013), The Future of Trade: The Challenges of Convergence, Report of the Panel on Defining the Future of Trade convened by WTO Director-General Pascal Lamy, 24 April 2013. World Trade Organisation, (2013) ‘Trade Profiles 2013’, Geneva. 9 April 2014

53

Special Report

Disclosures Appendix Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Global Disclaimer: Standard Chartered Bank and or its affiliates (“SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or any member of the SCB group of companies or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This material is for the use of intended recipients only and, in any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. Country-Specific Disclosures – If you are receiving this document in any of the countries listed below, please note the following: United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services License for SCB is License No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this document was prepared for wholesale clients only within the meaning of section 761G of the Australian Corporations Act 2001 and the Corporations Regulations. This document is not directed at persons who are “retail clients” as defined in the Australian Corporations Act 2001. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking Regulatory Commission (CBRC), State Administration of Foreign Exchange (SAFE), and People’s Bank of China (PBoC). Germany: In Germany, this document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Hong Kong: This document, except for any portion advising on or facilitating any decision on futures contracts trading, is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Law of Japan (FIEL), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEL or any Specified Deposits, etc. as defined by the Banking Law of Japan. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. Singapore: This document is being distributed in Singapore by SCB Singapore branch, only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact SCB Singapore branch in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO US PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE US SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE US STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE US FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO US PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE US FEDERAL AND STATE LAWS. Standard Chartered Bank (Hong Kong) Limited is exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia in respect of the financial services it provides. Standard Chartered Bank (Hong Kong) Limited is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. © Copyright 2014 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any way without the prior written permission of Standard Chartered Bank. Document approved by

Document is released at

John Calverley Head of Economic Research

22:00 GMT 09 April 2014

9 April 2014

54