Balance of trade to shift permanently to the east
Asia-Pacific to experience fastest growth in global trade to 2020 - China and India alone to account for almost one-fifth of global trade flows by 2020
- China’s exports to Europe at over US$1trillion almost twice as large as US exports to Europe.
- Europe’s exports to Africa and the Middle East at more than US$900b will be around 50% larger than its exports to the US
London, 28 November 2011 – Global trade which has long been dominated by so called “advanced economies” is now shifting permanently eastwards according to Ernst & Young’s forecast Trading places: The emergence of new patterns of international trade prepared in conjunction with Oxford Economics. Asia-Pacific will experience the fastest growth in global trade to 2020 and intra-regional trade there will lead to a renewed concentration of international demand.
Although global trade was severely restricted during the financial crisis, it has since bounced back strongly, led by trade amongst emerging markets. Global trade was dominated by the advanced nations at the start of the 1990s but their share has declined markedly and this trend is set to continue with ever more speed through to 2020.
Jay Nibbe, Europe, Middle East, India and Africa Markets Leader at Ernst & Young
comments, “While the advanced economies muddle through the financial crisis the rapid-growth markets are going from strength to strength and are an increasingly significant part of the global economy. They will become an even more dominant force in global trade and as a result businesses are going to have to adjust their strategies to reflect the increasingly regional pattern of world trade that is developing and will intensify over the next decade.”
Global trade across Asia to 2020
“We estimate that the continuing shift toward global outsourcing of production-, as well as the growth of regional supply chains to serve the rapid expansion of demand from rapid-growth markets - will compress the share of the advanced economies in global trade from a little over 60% in 2010 to around 55% by 2020” says Adrian Edwards, Global Supply Chain Leader of Ernst & Young.
Asia will continue to be the most dynamic region in terms of trade, with the fastest growth of exports in goods occurring within the region itself. India and China will drive the continued rise of the emerging markets and together these economies will account for almost one-fifth of global trade flows by 2020.
India and China also represent the fastest growing source of demand for exports from other countries. The forecast shows that two of the most rapidly growing trade routes will be US exports to China and India, which Ernst & Young see growing at an average annual rate of almost 16%. So while the US share of world exports fell significantly over the past decade, our forecast implies that this trend will be reversed over the next ten years as the US capitalizes on its strength in exporting to Asia
Europe’s share of global exports will decline, from 38% in 2010 to 34% by 2020. However, the forecast shows that Europe is the developed region that will gain the most in terms of export values from the expansion of demand in China, with exports to China rising by US$370b over the next ten years. China’s predicted exports to Europe at over US$1trillion will be almost twice as large as US exports to Europe.
Rain Newton-Smith, senior economic adviser to Ernst & Young explains, “Despite the fastest growth occurring in Asia in terms of trade volumes our forecast shows that it is intra-regional trade within Europe that is still expected to experience by far the largest rise in dollar volumes over the coming decade. The second largest rise in overall trade volumes is forecast to occur between China and the Rest of Asia, with flows in the opposite direction coming third.”
Regional patterns of trade
New markets for exports are also opening up within MENA and Sub-Saharan Africa as these economies grow in size. Total exports to these regions are forecast to grow more rapidly than exports to the US, Europe, Japan and the rest of the Americas. The forecasts suggest that European exporters will capture around one quarter of the growth in final demand from Sub-Saharan Africa, but exporters from Asia will capture close to half of this growth. Strong investment by other emerging markets and China in particular, may facilitate the strong growth that Africa needs.
Europe’s exports to Africa and the Middle East at more than US$900b 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. But the overall size of the flow from Sub-Saharan Africa to Europe will still be relatively small at US$108b.
In Latin America, plentiful natural resources and strong FDI inflows will enable improvements in productivity to support potential growth. Large populations and the rapid accumulation of wealth, particularly in Brazil, will also support the growth of domestic demand within the region. By 2020 Latin America and the Caribbean’s exports to the US at around US$769b will be slightly larger than Europe’s exports to the US.
Regional flow of services
Trade in services is also likely to witness rapid growth with Asia once again leading the way. By 2020, the total flow of services from Europe to Asia Pacific (excluding Japan) will be larger than to North America.
As Nibbe explains, “One of the major drivers of this expansion will be the growth in banking, insurance and other financial services as the Asian economies mature and middle class develops. Demand for more sophisticated financial services is already growing rapidly with rising wealth levels and the region growing in importance as the financial center.”
It is not just financial services where growth is expected to be rapid in Asia, tourism is also likely to be an increasingly important sector as the number of international tourists travelling from China to international destinations is forecast to double from 32m in 2010 to 59m by 2020. The increase in associated spending will be even more significant, rising from US$52b in 2010 to US$222b in 2020.
It is intra-regional trade of services in Europe that will witness the largest increase over the period. The US and Europe will continue to dominate this market, with China and India only gaining a significant market share within the rest of Asia.
Sectors
The “machinery and transport equipment” sector (which includes consumer electrical products, such as computers, televisions and washing machines, as well as industrial machinery) will make the largest contribution to trade growth over the next ten years, followed by other manufactures such as textiles, lumber and rubber. In total these dominant sectors will account for close to 54% of merchandise trade by 2020. This reflects both the strong growth in demand for consumption and investment goods expected from emerging markets and the potential to fragment the supply chain as companies increasingly produce components in different locations. China’s share of global trade in this sector is projected to rise from 18% to 24%.
Risks and uncertainties
With the global supply changing so rapidly and demand uncertain, there are a number of alternative scenarios and risks that could threaten, or boost, global trade growth for the current 2020 forecast. Newton-Smith concludes, “Perhaps the most dramatic would be a currency realignment scenario, implying a rebalancing of domestic demand between the US and Asia-Pacific region. This would have significant impacts on projected patterns of trade. Alternatively, even a partial acceleration of trade liberalization could drive a larger-than-expected rise in global trade flows.”
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