BoardMatters Quarterly, April 2012
The shifting tide of international trade
Questions for the audit committee to consider
- Which emerging market(s) will be the most important to the company in the short, mid and long term, and how does the company’s investment plan prioritize these markets? Has management shared this plan with the board?
- Has the company considered investment opportunities in less familiar territories where it may be possible to establish an early foothold?
- Has the company adequately analyzed the costs — both explicit and hidden — of any planned investments in rapid-growth markets?
- Is the company well placed to capitalize on the growth of regional trade hubs?
- How much of an effect would unexpected trade policy changes or potential currency realignments have on the company?
Understanding the new patterns of global trade can help companies be more competitive and better prepared for possible shifts or unexpected changes in trade policy or trends in the future.
World trade recovered strongly from the global financial crisis, but it’s not necessarily a return to business as usual. New patterns have emerged, and the balance of international trade is clearly shifting.
While we’ve seen a surge of investment from West to East, this flow of capital is not the only force behind the opening up of the global economy. Focusing on West to East misses the growing East to West dimension — and the far greater increase of trade East to East.
The traditional sources of raw materials and low-cost workers are growing into wealthy markets in their own right, with highly skilled workforces.
India and China will drive the continued rise of the emerging markets and, together, these economies will become more important to global trade than the Eurozone and US. Companies in rapid-growth markets are now challenging the Fortune and Forbes lists.
Share of world GDP in PPP terms2
Companies, their boards and audit committees recognize these developments and are thinking about where to invest — sometimes in emerging markets where there may be increased risk, but also greater opportunities. Understanding the new patterns of global trade will help companies be more competitive and better prepared for possible shifts or unexpected changes in trade policy or trends in the future.
The next decade of trade
By 2020, world trade in goods will total around US$35 trillion, two-and-a-half times its value in 2010. At the same time, world trade in services will double to around US$6 trillion. Other patterns expected during the next decade include:
- China’s exports to Europe, valued at over US$1 trillion, will be twice as much as US exports to Europe.
- Intra-regional European trade will be worth over US$7 trillion, still significantly higher than intra-regional Asian trade of US$5 trillion, 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$108 billion.
- The total flow of services trade from Europe to Asia-Pacific (excluding Japan) will be larger than to North America.
Working with Oxford Economics, we issued a report that examines several expected changes in patterns of international trade.3
Our analysis included a survey of hundreds of senior global executives across 17 different markets. We identified several changes in the scale and direction of trade that will have a profound effect on the competitive environment for all companies.
Companies and boards seeking to channel investments into the most prosperous market should note that Asia is increasingly seen as the region that will dominate world trade by 2020. Nearly half of the Asia-based survey respondents expect to export more than 60% of their output in the next five years, compared with less than one-fifth of companies in the Americas.
Europe's exports to Africa and the Middle East are forecasted to be around 50% more than its exports to the US. Companies will need to gain footholds in rapid-growth markets at an early stage, while they still have the opportunity to establish a significant market presence and gain market share.
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. Additionally, there is a risk that China could lose its competitive edge more quickly if wages there rise faster than productivity.
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 nearly 22% by 2020. Flows in the opposite direction are expected to grow by 18.5% per year. China and India alone will account for almost one-fifth of global trade by the end of this decade.
The forecast shows that two of the most rapidly growing trade routes will be US exports to China and India, which are expected to grow at an average annual rate of almost 16%. So, while the US share of world exports fell significantly over the past decade, this trend will be reversed over the next 10 years as the US capitalizes on its strength in exporting to Asia.
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.
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.
Lower trade barriers along with advances in global transportation and communications technology make it increasingly possible 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, and many are comfortable using suppliers from multiple markets rather than focusing on one region for their suppliers.
While companies will increasingly seek single suppliers to service multiple markets worldwide, there also are challenges to such specialization, including those highlighted by the recent supply disruption associated with the 2011 Tohoku earthquake in Japan. Setting up local production to serve final consumers in rapid-growth markets also will be an important step, particularly as demand grows in markets where trade barriers may stay high, such as Africa.
The machinery and transport equipment sector, which includes consumer electric products as well as industrial goods, will make the largest contribution to trade over the next 10 years due to increased demand in rapid-growth markets.
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.
Alternative scenarios and uncertainties
With the global supply chain changing so rapidly and uncertain demand for products, there are a number of alternative scenarios and risks that could result in global trade patterns in 2020 that differ significantly from this forecast. These variables include currency realignment or rapid trade liberalization.
Companies, their boards and audit committees will need to think about possible risks as they adjust their strategies to address the many changes to international trade expected in the next decade.
For detailed information and data on these trends, please visit www.ey.com/tradingplaces.
2 Trading place: the emergence of new patterns of international trade, EY, November 2011. www.ey.com/GL/en/Issues/Business-environment/Trading-places--New-patterns-of-international-trade, p.10.