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Changes in geography, supply, sectors - EY - Global

Trading placesChanges in geography, supply, sectors

2020 vision: regional patterns of trade

Rapid-growth markets will become an even more dominant force in global trade over the coming decade.

By 2020:

  • World trade in goods will total around US$35t, two and a half times its value in 2010. At the same time, world trade in services will double to around US$6t.
  • China’s exports to Europe, at over US$1t, will be almost twice as large as US exports to Europe.
  • Intra-regional European trade will be worth over US$7t, still significantly higher than intra-regional Asian trade of US$5t, despite rapid-growth in Asia.
  • Europe’s exports to Africa and the Middle East will be around 50% larger than its exports to the US.

Europe will be the most important market for Sub-Saharan Africa’s exports, accounting for a quarter of all its trade, although still at a relatively small value of US$108b. By 2020, the total flow of services trade from Europe to Asia Pacific (excluding Japan) will be larger than to North America.

Changes in geography

  • Rapid-growth markets will become an even more dominant force in global trade over the coming decade, with the Asia-Pacific region set to experience the fastest growth in global trade to 2020. Nearly half our Asia-based respondents to our survey expect to export more than 60% of their output in five years’ time, compared with fewer than a fifth of companies in the Americas.
  • Trade will also be increasingly focused around Asia, the Middle East and Africa, suggesting that the key geographical location for companies will change. Indeed, Europe’s exports to Africa and the Middle East by 2020 are forecast to be almost twice as large as Europe’s exports to the US. Companies will need to gain footholds in rapid growth markets at an early stage, while they still have the opportunities to establish a significant market presence and gain market share.
  • Other rapid-growth economies outside of Asia are set to expand rapidly, but those countries with a heavy reliance on commodities within Latin America, Sub-Saharan Africa and Middle East North Africa (MENA) will experience a slight decline in their share of global trade over this decade.
  •  China’s dominance in low-end manufactured goods will increasingly come under pressure from lower-cost countries such as Bangladesh, Vietnam and parts of Africa. There is a risk China could lose its competitive edge more quickly if wages rise faster than productivity.

Changes in final destination

  • Strong income growth in rapid-growth  markets means that final demand — as opposed to production-location decisions — will increasingly drive trade patterns between these  markets. The fastest-growing trade route will be between India and China, with Indian exports of goods to China growing at an average annual rate of almost 22% through to 2020, while flows in the opposite direction expand by 18.5% per year. We expect China and India alone to account for almost one-fifth of global trade flows by 2020.
  • Even as Asia becomes more competitive, a growing share of the region’s exports will be destined for other Asian countries. The growth of intra-regional trade among Asia’s new economic superpowers will lead to a renewed concentration of global demand, which will be an important consideration for exporters when making strategic plans for the coming decade.
  • A tremendous amount of trade across borders reflects trade within and between companies, rather than flows to final consumers. Over one-third of the companies in our survey exported finished goods across borders within their own organization and the majority also produced goods for companies in other countries as part of the global supply chain.
  • As economies in sub-Saharan Africa and the Middle East and North Africa (MENA) region develop and open up to trade, we will see increased inflows of intermediate goods that will be assembled and re-exported. Richer economies in the region, particularly the oil-exporting economies of the Middle East, will also represent increasingly important sources of final demand for manufactured products.

Changes in supply

  • Lower trade barriers along with advances in global transportation and communications technology make it increasingly viable for different stages of production to take place in separate locations. This allows companies to seek out the lowest-cost provider for components, regardless of location.
  • Survey respondents indicated that they were comfortable using suppliers from multiple markets rather than focusing on one region for their suppliers. They are also indicated that relationships and trust are the most important factor enabling success in international trade.
  • While companies will increasingly seek single suppliers to service multiple markets worldwide, there are also challenges to such specialization, including those highlighted by the recent supply disruption associated with the Tohoku earthquake. Setting up local production to serve final consumers in  rapid-growth markets will also be an important step, particularly as demand grows in markets with high trade barriers, such as Africa.

Changes in sectors

  • The machinery and transport equipment sector — which includes consumer electric products such as computers, televisions and washing machines, as well as industrial goods - will make the largest contribution to trade over the next ten years. This reflects both the strong growth in demand for consumption and investment goods expected from the rapid-growth markets and the potential to fragment the supply chain as companies increasingly produce components in different locations.

There is enormous potential for Western companies to benefit from growth in banking, insurance and other financial services. By 2020, the total flow of services from Europe to Asia Pacific (excluding Japan) will be larger than to North America. One of the major drivers of this expansion will be the growth of trade in financial services.

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