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The world trade comeback
Trade growth will once again outpace GDP growth
ING Commercial Banking
Colophon
International Trade research
ING Global Markets Research
Trade Special
April 2015
Authors:
Raoul Leering
Head of International Trade Research
+31 6 13 30 39 44
Filip Bekjarovski
Trainee International Trade Research
ING Commercial Banking
The world trade comeback / April 2015
2
Contents
Executive summary 4
IIntroduction
6
II Trade through the decades: ups and downs
7
III Drivers of the ratio of world trade growth to world GDP growth
11
A) Demand shifts
11
B) Protectionism/ Free trade agreements
13
C) Exchange rate battle
16
D) Offshoring/ Reshoring
16
E) Foreign direct investments
24
F) Trade finance
25
G) Innovations and trade
27
H) Geographical division of trade 27
I) Product division of trade
29
IV Conclusions 31
References
32
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The world trade comeback / April 2015
3
Executive Summary
• The slowdown in the growth of world trade, especially in
relation to GDP growth, has led some commentators to
believe this development marks the end of globalization.
But in fact it is a common feature of economic
downturns. In the period 1980-1982 the ratio of world
trade growth to GDP growth was also around 1, similar to
the ratio since the start of the financial crisis. Having said
this, the current ratio is far below the historical average of
1.7.
• Based on experiences during earlier periods of recovery of
the world economy, the current (cautious) upswing will
push the ratio of trade growth to GDP growth up to 1.2
at the end of 2016. This normal cyclical effect stems from
the fact that demand for durable consumption goods
and investment goods increases disproportionately in
economic upturns and these goods are overrepresented in
global trade.
• On top of this the ratio will be lifted by specific
European factors. The long economic downturn in
the EU has pushed the growth of world trade down
disproportionately, reflecting Europe’s over representation
in trade. On top of this, the relatively large share of
investment in the decline of European demand hurt
world trade more, with investment being relatively
import sensitive. This implies that the current increase
in European growth rates will make world trade
recover disproportionately. ING expects these specific
characteristics of the European economy to drive the
ratio up by 0.1 percentage point to 1.3 before the end of
2016.
• But for the ratio to come close to its long term average of
1.7, more is needed than this cyclical push. Import ratios
around the world have to show structural rises again.
We believe this will happen in the next couple of years
because:
- Implementation of the Bali agreement on lowering
customs procedures will ultimately lift world trade by
4.1% and world GDP by 1.1%. The Bali agreement
will lift the ratio by 0.14 percentage point from
2016 onwards, on the assumption that it will take
five years to implement this agreement and that it’s
done in equal steps so the benefits, in terms of the
upward effect on trade growth and GDP growth, will
be spread out equally over this period. The effect of
this 0.14 per year brings the trade growth to GDP
growth ratio close to 1.5 during the 2016- 2020
implementation period, as long as the world economy
is in a cyclical upturn (otherwise the cyclical influence
on the ratio will start working in the opposite direction
again). Of course any delays in the implementation of
Bali will also delay the upward influence on the ratio.
ING Commercial Banking
- If negotiations on the Transatlantic and Pacific
trade agreements (TTIP and TPP) deliver results that
are acceptable for European, American and Asian
governments and parliaments an upward effect on
world trade in the medium to long term will appear
as well. This will push the ratio up but how much
and when is unclear because it is unknown when
negotiations will be finished and what the outcome
will be.
- Trade will also be stimulated by continuing offshoring
of production to developing economies. Although
reshoring has increased, offshoring will continue
to dominate in the years ahead because there are
many developing countries that have maintained or
improved their attractiveness as production locations,
notwithstanding wage costs rises in some of them.
The relatively low stock of inward Foreign direct
investments (FDI) in countries such as China, India,
Philippines and Indonesia suggests ample scope for
more FDI. Now that business confidence is recovering
in most advanced economies, ING expects a recovery
of their outward FDI to add to the already visible
increase of outward FDI by Asian countries such as
China. These developments will increase the trade in
intermediates and thereby push up the ratio of world
trade growth to growth of GDP.
- The geographic spread of trade- and offshore
enhancing innovations (e.g. in ICT and logistics) is far
from finished. Some countries, like India, have below
average internet penetration which means above
average costs of trade formalities. Although there are
no reliable data available to quantify the effect on
trade of an optimal spread of these technologies, we
expect it to be significant.
- In the long run innovations like 3D printing and
robotics will be trade diminishing, but in our view
they will not have the scale to seriously push down
the growth rate of trade in the short to medium
term. Besides, at the same time, trade enhancing
innovations like lighter containers are appearing as
well.
- The composition of trade will shift towards more
demand for tradable consumer goods in developing
countries, reflecting the rise of their middle classes,
and less demand for tradable consumer goods in
advanced economies, reflecting ageing. Given the
expected further increase of the share of developing
countries in the world economy and their above
average import ratios, especially in Asia, these
developments will add up to a stimulus for the world
trade- GDP ratio in the medium term.
The world trade comeback / April 2015
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- Another potential structural driver of trade that can
push the ratio upwards is trade in services. The ICT
revolution makes products tradable that were not
tradable before (retail sales, education, etc). This
development has been on hold since the start of the
crisis. But with consumption and investments rising in
advanced economies, where consumers and producers
have the best access to internet, services might
provide renewed stimulus to world trade in coming
years.
- On the downside, the conflict in the Ukraine could still
lead to an escalating trade war between the West and
Russia, which would be a clear negative for trade since
Russia is a significant player in world trade. Harm to
trade could also stem from increased exchange rate
volatility if the current currency battle escalates.
- On the upside a closing of the recent draft agreement
between Western governments and Iran, with its
economy the size of South Africa’s, would be a
positive for world trade.
ING Commercial Banking
The world trade comeback / April 2015
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IIntroduction
The current debate
With a projected growth of 3.7% in 2015 (IMF 2015), world
trade will, for the fourth year in a row, fail to clearly outpace
world GDP growth. This marked difference with the fifteen
years in the run up to the financial crisis has led some to
believe that world trade growth will not return to outpace
world GDP. The deadlock in the Doha negotiations, the lack
of new big entrants in the world of free trade, reshoring of
production, and technological developments like 3D printing
and robotics are just some of the arguments used by the
proponents of this hypothesis. In this ING Trade Special
we will weigh these arguments and put forward some
arguments of our own to assess the future of world trade.
Why bother about trade growth?
Trade is more than just a side product of growth. It can
be an independent source of growth with positive effects
on the standard of living. Frankel and Romer (1999) have
shown that a 1% increase in the share of trade to GDP raises
per capita income by at least 1.5%. Exporters are more
productive and when they enter the foreign market they
raise the overall productivity level in the industry (Wagner,
2012). There is also some evidence that exporters learn by
exporting and experience faster productivity growth rates
relative to enterprises that limit themselves to domestic sales.
In addition, catering to a larger market enables companies to
achieve internal and external economies of scale and thereby
reduce the unit costs of production.
Trade improves welfare also by allowing countries to
focus on the production of goods and services for which
they have a comparative advantage. Liberalization of trade
usually results in lower prices for (tradable) consumption- and
investment goods. In addition, consumers and producers
enjoy more product varieties as trade involves huge amounts
of intra sector cross border exchange of goods and services.
ING Commercial Banking
The world trade comeback / April 2015
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400
200
IITrade through the decades:
ups and downs
0
1980
1984
1988
1992
1996
2000
2004
2008
2012
Figure 2. Value of world trade in services. 1980=100
The growth of world merchandise trade in value terms
averaged 10% a year over 1961-2013, well above the
average nominal growth of world GDP (8%, figure 1). But
trade growth has varied considerably across decades. In
particular, world merchandise trade has been volatile. This
can be expected, given the price volatility of important
trade classes like commodities and fuels. Between the start
of 2012 and the fourth quarter of 2014 nominal world
merchandise trade has on average grown by 2.4% per
year, less than the average growth of nominal world GDP
(2.8%), thereby clearly lagging its trend.
1,200
1,000
800
600
400
In comparison, the historical growth rate of the value of
trade in services has been lower, with 8% annually over
1980-2013. But at the same time trade in services has
been less volatile. Nevertheless, world trade in services has
been also lagging its trend recently (figure 2).
The recent slowdown of trade is also evident in volume
terms, but less markedly (figure 3). The average annual
growth rate of world trade in volume terms has been 5.7%
since 1970 and only 3.3% since 2012. More importantly,
world trade growth no longer outpaces growth in world
GDP. During the fifteen years leading up to the crisis, growth
200
0
1980
1984
1988
1992
1996
2000
2004
2008
2012
ING Global Markets Research; Data Source: WTO.
Figure 1. Historical growth of world merchandise trade, nominal values
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
_
_
_
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
Growth of merchandise trade value
Growth of world GDP
Average growth of world trade
* Throughout the report trade is defined as imports plus exports; Data Source: WTO.
ING Commercial Banking
The world trade comeback / April 2015
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of world trade grew 1.9 times faster than world GDP growth.
Taking into account earlier decades, during which trade
growth deviated less from production growth, the ratio has
been 1.7 on average between 1970 and 2013 (figure 4 and 5).
The fluctuation in the world trade to world GDP ratio over
the
decades is the result of the fact that trade levels (imports
15%
and exports) are about three times as volatile as GDP. Engel
et10%
al. show this in their 2011 study.
But the deep economic crises in the beginning of the 1980s
and the beginning of the 1990s, the Asian Crisis of 1997
and the bursting of the dot com bubble in 2000/2001 also
left clear marks on world trade and the trade to GDP ratio
(figure 3).
During economic downturns, increased uncertainty
reduces the incentives of customers to commit to large
purchases. This reduces the demand for durable goods
disproportionately as businesses and consumers can usually
hold on somewhat longer to their current durables. Trade
in durable goods on average accounts for 70% of imports
and exports in OECD countries (Engel et al., 2011). Because
of the over representation of durable goods in cross border
trade, an economic downturn hurts trade disproportionately.
5% depends heavily on economic stability. In periods
Trade
of economic calm, world trade growth has markedly
0%
exceeded its long term average. The 1993-1997 and 20032007
-5% periods are good examples of this (figure 3). Economic
turmoil on the other hand is bad news for world trade. The
-10% of the Global Financial Crisis (GFC) in 2008 is the best
start
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
example of this. The scarcity of liquidity, the very sharp drop
These past experiences show that it is normal for trade
of business confidence and the lack of trade finance caused
growth to decrease faster than GDP growth during a
World trade volume growth of goods and services
Real world production growth
world trade in 2009 to show its biggest decline since WW II.
crisis. In addition, weak trade growth often lingers on in the
_
_
_
_
Average growth of trade volume
Average growth of world production
Figure 3. Historical growth of volume of world trade in goods and services
15%
10%
5%
0%
-5%
-10%
_
_
1981
1983
1985
1987
1989
1991
World trade volume growth of goods and services
Average growth of trade volume
_
_
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Real world production growth
Average growth of world production
ING Global Markets Research; Data Source: IMF & OECD.
Table 1. Volatility and Co-movements in International Trade
Volatility and
Comovment in
International trade
Standard Deviation
of GDP (%)
Average
1.51
Relative Standard Deviation*
Correlation with GDP
Real
Imports
Real
Exports
Net
Exports/GDP
Real
Imports
Real
Exports
Net
Exports/GDP
3.25
2.73
0.78
0.63
0.39
-0.24
Corr
(IM, EX)
0.38
* Average for OECD sample in the period 1973-2006. Source: Engel & Wang (2011); ING Global Markets Research;
**Standard deviation relative to the standard deviation of GDP
ING Commercial Banking
The world trade comeback / April 2015
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A
R
A
W
Figure 4. Recent developments in trade growth and
GDP growth (in volumes)*
Examining the historical development of trade relative to
world GDP in more detail gives some answers. The world
trade to world production ratio has varied considerably across
decades.World
In the
1950sGrowth
and 60s, when trade and production
Production
both grew fast, the ratio was around 1.65 (figure 5). In the
Average
Tradebefore coming down steeply in the
1970s the
ratioGrowth
wentof up
1980s.
15%
10%
5%
Trade volume growth
So, from a long term perspective the trade-income
relationship characterizing this period is not anomalous. But
compared to the 1990s and the first 8 years after the turn of
the century, during which the ratio was 1.9 on average, the
current performance of world trade is weak even compared
to most other periods of economic downturn. For the period
after 2011, the ratio is around 1 on average.
0%
-5%
-10%
-15%
_
_
2008
2010
2012
_
Trade volume growth
2014
World production growth
Average growth of trade
* Historical average based on the period 1970-2014. Forecast for 2015 based on IMF
estimates. ING Global Markets Research; Data Source: IMF & OECD.
aftermath of a crisis (Freund, 2009). The current situation
fits this pattern (figures 3 and 4). This raises the question
whether the current slowdown in trade is ‘just’ a typical
(post) crisis development or represents a real structural break.
The period from the 1990s up until the start of the financial
crisis was the heyday of the latest wave of globalization.
Among other things this period is characterized by the
inclusion in world trade of Eastern European countries,
Russia and, of course, the spectacular contribution of China
to the growth of world trade. Multinationals implemented
numerous global value chains which steeply increased the
trade in intermediate goods. These global value chains
were made possible by the ICT- revolution that spectacularly
cut the cost of coordinating work between geographically
distant locations.
● Inc
● Re
● Bu
Figure 5. Growth of world trade, and world GDP; the ratio of world trade growth to world GDP growth in volumes
15% axis)*
(right
World Production Growth
10%
10%
2,5
Average Growth of Trade
5%
Trade volume growth
0%
8%
2,0
-5%
-10%
6%
-15%
_
_
1,5
2008
Trade volume growth
4%
2010
_
2012
2014
World Production Growth
1,0
Average Growth of Trade
2%
0,5
0%
0,0
1950-1960
● Trade volume growth
1961-1970
● GDP growth
1971-1980
1981-1990
● Ratio of trade growth to GDP growth
1991-2000
_
2001-2008
2009-2015
Average trade to GDP growth
* The ratio of world trade growth to world GDP growth on right axis. ING Global Markets Research; Data Sources: IMF & OECD
ING Commercial Banking
The world trade comeback / April 2015
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● Do
● Ot
A structural break in world trade?
Figure 6 shows that the current trade growth level is
deviating from the trend. It indicates a structural decline in
growth rates since the start of the financial crisis.
However, given that trade growth has varied markedly across
the decades, the selection of a time period for calculating a
trend line is extremely relevant. Calculating, for example, the
trend line for the period from 1980 onwards, results in the
different conclusion that current developments do not really
lag the trend (figure 7)!
of a structural break in the trade-income relationship in the
1990s relative to the preceding decades. So structural breaks
do occur and this is not surprising given that there is no
economic law that guarantees that trade should grow faster
than GDP. There is a priori no reason why world trade is
not experiencing a structural break today.
Nevertheless, formal tests conducted by IMF- and World Bank
economists Constantinescu et al. (2015) confirm the existence
However, a formal test for a structural break requires a
sufficient number of observations after the break and
consequently we are unable to perform one. Nevertheless,
to assess the likelihood of a structural break, we proceed by
analyzing developments in some of the drivers of the tradeproduction ratio.
Figure 6. World trade value in goods and services, 1949=100, trend line based on 1949-2008
40100
35100
30100
25100
20100
15100
10100
5100
100
'48 '50 '52 '54 '56 '58 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
ING Global Markets Research; Data Source: WTO
Figure 7. World trade value in goods and services rebased: 1980=100
1200
● In
● Re
1000
● Bu
● D
800
● O
600
400
200
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
40100
ING Global Markets Research; Data Source: OECD & WTO
35100
ING Commercial Banking
30100
The world trade comeback / April 2015
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● In
● Re
III What drives the ratio of trade
to GDP?
What is behind the decline of the ratio of world trade to
world GDP since 2011? Many reasons have been put forward
and we will add some. We will have a look at the following
drivers and also have a tentative look into the development
of these drivers in the near future.
a Shifts in import demand
b Protectionism / Free Trade Agreements
a) Shifts in demand
The fall in the growth rate of world trade can partly be
attributed to relatively weak import demand from Europe
(figure 8). This relates first of all to the lagging economic
growth in the EU. IMF figures show that while the world
economy showed an average growth rate of 3.2% during
2009-2014, the GDP of the EU grew on average only 0.2%
per year. The EU economy has lagged the growth of the
world economy before, but this time by more than during
previous downturns.
c exchange rate battle and macro policies
Given the overrepresentation of Europe in world trade
Europe accounts for 35% of world trade, while it accounts
for 25% of world GDP, the relatively weak performance
in Europe has been a significant factor in explaining the
slowdown in world trade growth. But the effect on the ratio
of world trade growth to world GDP growth is limited. This
is due to the fact that every percentage point of lower EU
growth not only diminishes world trade growth significantly,
but also growth in world GDP.
Because the EU is overrepresented in world trade relative
to world GDP, slower EU growth pushes down the ratio
somewhat. But it can only explain a small part of the decline
in the ratio from 1.85 during 2000- 2008 to 1.04 during
2012-2014. A “what if” analysis shows this. If the EU were
to have had the same economic growth as the US during
d Offshoring / Reshoring
e Foreign direct investment
f Innovations and trade
g Trade finance
h Geographical division of trade
i Product division of trade
Figure 8. Monthly import volume rebased: January 2008=100
250
200
150
100
50
0
m1
_
m5
m9
2008
United States
m1
m5
m9
m1
m5
2009
_
2010
EU (28) extra-trade
m9
m1
m5
m9
2011
_
m1
m5
m9
m1
2012
m5
2013
m9
m1
m5
m9
2014
China
ING Global Markets Research; Data Source: IMF
ING Commercial Banking
The world trade comeback / April 2015
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Figure 9. Deviations of pre- crisis trend for different
demand components
Figure 10. World average import ratio and its main
regional drivers
50,0
115
Government Expenditure
105
40,0
95
30,0
85
20,0
75
10,0
65
Euro Area
● Investment
USA
● Consumption
World
0,0
Developing
● Government expenditure
* Index, trend volume in 2014 = 100. Bars below or above show deviations from pre-
_
Consumption
Investment
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
World
_
Developing economies
_
EU28 (European Union)
ING Global Markets Research; Data Source: World bank development indicators
crisis trend (1980-2008). Data Source: World Bank, UN Comtrade data; ING Global
Markets Research.
2012- 2014, the ratio of world trade growth to world GDP
growth would have nudged up by ‘just’ 7.5% from 1.03 to
1.08.1
Besides the amplifying influence on world trade of Europe’s
disproportionate share in trade, there is a second reason why
Europe has put extra downward pressure on world trade
and the ratio: a recent shift in the composition of European
demand. Investments have suffered more in Europe than in
other regions (figure 9). This is relevant because investment
is the demand category with the highest import sensitivity.
So,115
the shift away from investments in Europe has been
an extra negative for European imports and thereby
for105
world trade, but has had a smaller effect on the ratio of
world trade growth to world GDP growth.
95
If Europe’s investments would have developed just as in the
US during the 2012- 2014 period, the ratio of world trade
growth to world GDP growth would have risen from 1.03 to
1.15 a tentative estimate shows. 2
The main reason for the ratio to have fallen so
significantly since its peak in trade growth to GDP
growth 2008 is that import ratios stopped rising. This is
World
volume
growth of goods because
and servicesimport ratios
Real world
growt
partly
a trade
cyclical
phenomenon
haveproduction
a
Average
growth of tradereflecting
volume
growth of world pro
cyclical
component,
the pro cyclicality Average
of demand
for durable consumer goods and investment goods that are
over represented in world trade. This is why the import ratios 50
Government
of the EU
and theExpenditure
world were also stagnant or decreasing
50
during
the
economic
downturns at the beginning of the
Consumption
45
45
1980s
and
the
beginning
of the 1990s (figure 10).
40
_
_
35
_
_
Investment
40
30
85
25
35
20
75
1 if the EU had US growth levels (2.2% per year instead of 0.4%), the extra 1.8%
would lead to 0,25 (EU share in world GDP)* 1.8% = 0.45% of extra world GDP
65
Area
USA
World
Developing
per year. It Euro
would
also lead to 0.35
(EU share in world
trade)*1.8 = 0.63%
of extra
world trade per year. Add 0.63% to the average growth rate of world trade (3.3%)
● and
Investment
● Consumption
Government
Expenditure
the growth of world
trade would have been●
3.93%.
Add 0.45%
to the world
15
2 Europe’s investment is 20% of Europe’s GDP. If 60% of this is imported, this
10
translates into 30% of total imports (trade ratio = 0.40). If the deviation of
5
investment demand from the trend had not been -30%, but -10% (as in the US),
0
'80
'86 would
'88 '90have
'92been
'94 6%
'96 higher
'98 '00
'02 '04 '06
'08 trade
'10 '12
total'82
EU-'84
imports
(0.30*20pp).
World
growth
30
25
20
would have been 2.1%- point higher (0.35* 6%). World GDP would have been
GDP growth (3,2%) and we find that world GDP growth would have been 3.65%.
1.5% higher (0.30*6%). Given the GDP rate of 3.2 and the trade growth of 3.3, the
The ratio of world trade growth to world GDP growth doesn’t rise much though. It
ratio would be 1.15 instead of 1.03
would have been 1.08 (3.93/3.65) instead of 1.03 (3.3/3.2).
ING Commercial Banking
15
10
The world trade comeback / April 2015
12
5
0
'80
Looking forward, the (cautious) economic upturn of the
world economy will cause world trade to rise more than
world GDP because thus durable goods make up 70% of
world trade in goods. We assume that the cycle will bring
the ratio in Q4 2016 to the same level as after the first two
years following the recession at the beginning of the 1980s
(1983-84). That was a period which also wasn’t blurred by
any huge upward structural stimulus on trade (contrary to
the recessions in the beginning of the 90s and 2000s). A
recovery that resembles the recovery in the 1980s will shift
up the ratio from 1 for 2012-2014 to 1.2 at the end of 2016.
Figure 11. Percent of imports affected by trade
restrictions
1,4
1,2
1,0
0,8
0,6
This normal cyclical effect will be reinforced by the reversal
of the specific European effects that were mentioned above.
The increased overrepresentation of Europe means that the
European recovery will push up the ratio more than during
economic recoveries in the past. Moreover, a normalisation
of European investments may push the ratio up another 0.1
percentage points.
All told, these cyclical effects might result in a ratio of world
trade growth to world GDP growth of 1.25 at the end of
2016.3
Besides cyclical factors, structural developments also have
been at play. In the fifteen years up to 2008 the average
import ratio in the world rose almost every year and
cumulatively it rose 63%, from 19% to 31%. The inclusion
of China and other countries into the world of free trade, but
also the enhanced economic integration in the EU (creation of
the single market), pushed up import ratios (figure 10). Now
that import ratios are no longer rising structurally, the ratio of
world trade growth to world GDP growth is hovering around
1. For the ratio to keep rising after the upward impulse from
the cycle, upward pressure is needed from structural drivers.
3 Investments in the EU will rise by 3.2% on average in 2015 and 2016 in the EU
(compared to 0.9% last year). Because of the share of 20% of investments in EU
GDP, this increase of 2.3 pp will bring an extra contribution of investments to GDP
of 0.46% per year in 2015 and 2016. Given a constant import ratio this also raises
1,3
1,3
Oct. 2011Oct. 2012
Oct. 2012Oct. 2013
1,2
1
0,9
0,4
0,2
0,0
Oct. 2008Oct. 2009
Nov. 2009Oct. 2010
Oct. 2010Oct. 2011
Source: Emine et al. (2014); ING Global Markets Research
Summing up: World trade has been hit disproportionately by the
recession in Europe due to its high share in world trade and the
overrepresentation of investment in the decline of European (import)
1,4
demand. If the budding European recovery continues, world trade
will1,2
grow disproportionately and the ratio of trade growth to
world GDP growth will rise more than was common during earlier
1,0
economic upturns. But for the ratio to come close to its long term
0,8 of 1.7, import ratios would have to be pushed up again by
average
1,3
1,3
structural factors.
0,6
1
1,2
0,9
b) 0,4
Protectionism/ Free trade agreements
Since
the start of the financial crisis protectionism has been
0,2
on the rise, but it would be incorrect to blame the recent
0,0
slowdown
in tradeNov.
on 2009the emergence
of Oct.
protectionist
Oct. 2008Oct. 20102011Oct. 2012measures.
Unlike
previous
crises,
such
as
the2012
great depression
Oct. 2009
Oct. 2010
Oct. 2011
Oct.
Oct. 2013
in the 1930s, the financial crisis of 2008 was not followed by
a huge increase in trade protection. Protectionist measures
have affected only slightly over 1% of world imports
for the period after the financial crisis (Figure 11).
EU imports by 0.46 pp a year. This EU extra growth per year leads to 0.25 * 0.46
= 0.12 pp of extra world GDP per year and 0.35 *0.46 = 0.16pp of extra world
trade per year. Given the starting point of a growth rate of 3.4 for world trade and
for world GDP in 2014 the forecasted extra investments drive the growth of world
trade in 2015- 2016 to 3.56% on average and 3.52% for world GDP. This results
in a ratio of 1.02, 0.02 more than in the average ratio during 2012-2014. This
overrepresentation effect also happened during the recovery in 1983-1984, but then
the overrepresentation was half of today’s. So the net effect is a rise of the ratio of
0.01. The increased EU overrepresentation in world trade creates a similar affect
for the recovery in consumption and pushes up the ratio by 0..04pp. So the total
The WTO World trade report (2014) and several academic
studies have documented the low growth of trade
restrictions in the aftermath of the Lehman crash. Gawande
et al. (2011) show that even though the crisis brought about
increased demands for protection, these demands had a very
limited effect. The economic interest of domestic enterprises
that are involved in cross border value chains have provided
an effective counterweight to rising trade protection
tendencies during the crisis.
upward effect of the overrepresentation is 0.05pp, which makes the ratio 1.25 in
our forecast.
ING Commercial Banking
The world trade comeback / April 2015
13
Figure 12. Percent of developed and developing country imports affected by trade restrictions
Developed G-20
Developing G-20
Other Measures
Other Measures
Trade Remedy
Trade Remedy
Local Content
Local Content
Import duties, quotas or taxes
Import duties, quotas or taxes
Customs Procedures
Customs Procedures
0.00
● 2010
● 2011
0.05
0.10
0.15
0.20
0.25
0.0
● 2012
● 2010
0.1
0.2
● 2011
0.3
0.4
0.5
● 2012
Source: WTO (2014,) WTO monitoring database and UN Comtrade; ING Global Markets Research
Table 2. Average tariff rates for different country groups
Average Tariff Rates
Most-favoured nation (MFN) rate
Average 2009-2011
Change since 1996
Bound rate
Average 2009-2011
● Inc
Change since 1996
● Re
World
8.5%
-2.0%
27.0%
-3.8%
Developed
2.7%
-1.9%
6.3%
-1.3%
● Do
G-20 Developing
10.1%
-5.5%
29.2%
-9.8%
● Ot
Other Developing
13.0%
-1.7%
29.6%
-7.1%
7.1%
-2.1%
42.2%
-2.4%
Least Developed Countries
● Bu
* Note: Changes are from average 1996-98 to average 2009-11.
Source: World trade report 2014; ING Global Markets Research
Developing countries have engaged in relatively higher
trade protection mainly in the form of customs procedures,
import quotas and tariffs, especially in 2012 (Figure 12).
Developed countries on the other hand (figure 12) have
engaged predominantly in trade remedies (using existing
escape routes within current anti protectionist regulations).
Nevertheless, in both country groups the percent of trade
affected by new protectionist measures is, as said, limited.
Widespread membership of institutions such as the World
Trade Organization has curbed nationalistic trade policies and
enabled international trade cooperation. In 2014 free trade
has taken a hit from the mutually-imposed sanctions
between the West and Russia in response to the conflict
in the Ukraine.
The inclusion of (former) communist regimes in the world of
free trade has been one of the key drivers of growth of world
trade during the past two and a half decades. Therefore,
some have claimed that since major transition economies
have already integrated into the world marketplace, there
will be little room for trade growth in the future. We tend to
disagree. Although a very large step has been taken, many
countries cannot yet be characterized as free trade countries.
Table 3 shows that, although average tariffs are at historically
low levels, they can still be reduced significantly. This is
especially true in developing countries.
ING Commercial Banking
The world trade comeback / April 2015
Since 1996, developing countries within the G20 have
slashed average tariffs by a third. Nevertheless, the average
14
still stands at 10%, almost five times as high as the average
tariff in the developed world. The average level in other
developing countries is even higher and they have made
less progress in reducing tariffs. The same story holds for
the upper bound of the tariffs: developing countries have
much higher rates. This means that there is still scope for
trade agreements to reduce tariffs and thereby increase
world trade. At the same time this also means that the
developed world has less to offer in the negotiations when it
comes to tearing down tariff walls.
But tariffs are just a fraction of trade costs. Non-tariff
barriers such as customs procedures, product standards,
anti-dumping legislation and labelling standards can very
well be legitimate, but they are also used to deter trade.
Non tariff barriers now deter trade flows more than tariffs.
Empirical studies find that when countries are limited in
imposing tariffs because of international trade agreements,
their governments often use non-tariff measures to protect
domestic industries. Enterprises find customs procedures
to be a significant obstacle for participation in global value
chains (WTO 2012).
The global competiveness report for 2014-2015 shows that
customs procedures have a significant effect on the trade
of some emerging economies. In some countries customs
clearance procedures can still take up to 30 days. Brazil is
one of the countries that have very high customs burdens
and has also seen a deterioration in this area over the past
five years. Besides Brazil, customs procedures deteriorated in
several other big markets including China, South Africa and
Turkey (see table 3).
Table 3. Burden of customs procedures, selected
economies, 2015 and 2010*
Burden of customs procedures
2009-2010
2014-2015
Advanced economies
5.00
5.08
China
4.57
4.35
South Africa
4.32
4.14
Indonesia
3.70
4.03
Peru
3.81
3.96
Thailand
4.06
3.91
India
3.91
3.91
Turkey
3.40
3.79
Romania
4.08
3.70
Russian Federation
2.73
3.59
Philippines
2.98
3.53
Brazil
2.89
2.68
* (7=best and 1=worst)
Data source: Global Competitiveness Report; ING Global Markets research
ING Commercial Banking
So, both tariff and non-tariff data show that there are ample
opportunities to increase world trade and thereby world
welfare by reducing trade barriers. It is no wonder that the
World Trade Organization (WTO) started the multilateral
Doha round in 2001, aiming to remove trade barriers.
But negotiations have stalled for years now. Divergent
stances have emerged on agriculture subsidies, industrial
tariffs, non-tariff barriers, services and trade remedies.
Along these lines, most lines of contention have emerged
between developed economies (led by EU, USA, Japan)
and developing economies (led by India, Brazil, China, South
Korea, South Africa). Disagreements between the US and EU
over agricultural subsidies have also hindered progress.
However, one major multilateral trade deal is the Bali
Agreement (end 2013) which aims, among other things, to
reduce customs procedures. Implementation was held up by
India until November 2014, but it is currently in the process
of parliamentary ratification by all WTO member states. Once
implemented, this agreement will make a difference. As
result of modernization of their organization, customs agents
and forwarding companies should be able to complete
all the necessary paperwork even before the shipment
arrives at the harbour of destination, contacting just one
single office. The potential benefits of the Bali agreement
are substantial. According to the Peterson Institute of
International Economics step by step implementation of
the Bali agreement could increase global trade by as much
as $1000 billion, equally divided between developed and
developing countries. This is equal to an increase of 4.1%
of global trade and a rise of 1.2% of world GDP. It will take
several years -we estimate 5 years- to reap these fruits, but it
will drive up the ratio of world trade growth to world
GDP growth by almost 0.2 percentage points.
The Bali agreement brings hope for the Doha round which
was initially scheduled for completion in 2005. The stalling of
these talks has led countries to turn to bilateral and regional
agreements to stimulate international trade. From 1958 to
1999, 75 regional trade agreements were notified to the
WTO. From 2000 to 2011, the number of additional regional
trade agreements has jumped to 156 (WTO). Taking into
account that the implementations of the most recent trade
agreements has not been fully completed, we forecast that
these regional trade agreements wil lead to extra trade and
thereby push up the ratio of world trade to world GDP by 0.1
during 2016-2020.
The “Transatlantic Trade and Investment Partnership” (TTIP)
is one of the free trade agreements under negotiation. This
potential agreement between the US and the EU will increase
exports by 6% in the EU and 8% in the US, according to
calculations of the Centre for Policy Research in London
requested by the European Commission. TTIP is expected to
increase the size of the EU and US economies by 0.5% and
The world trade comeback / April 2015
15
0.4% respectively. A working paper by Capaldo (2014) that
drew media attention in late 2014 suggests that TTIP will lead
to a contraction of GDP, personal incomes and employment
for the EU. This study highlights that gains in transatlantic
bilateral trade would go to the US at the expense of intraEU trade. Even if this draft study is correct, which we highly
doubt, because it assumes that costs of -trade are zero and
that there are no economies of scale- the agreement would
still stimulate world trade, because the money saved by the
substitution of the existing (more expensive) intra EU imports
by imports from the US will partly be spent on new imports.
In addition, the standardisation of rules and regulations will
also benefit other countries, potentially causing positive
spillover effects on trade globally.
Another agreement under negotiation is the Trans-Pacific
Partnership (TPP), a regulatory and investment treaty under
negotiation between 12 countries (Australia, Brunei, Canada,
Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
United States, and Vietnam). Countries such as South Korea
and Taiwan have also expressed interest. China is not part of
these negotiations. By leaving China out, the contract has
therefore often been portrayed as a method to contain China.
China is seeking trade cooperation under the Regional
Comprehensive Economic Partnership (RCEP), a potential
trade agreement for the ten member states of ASEAN
and Australia, China, India, Japan, South Korea and New
Zealand. These countries encompass 40% of world trade.
The issues negotiated are trade in goods and services,
intellectual property and investments, and dispute settlement
mechanisms. Countries such as Singapore and Malaysia, which
have relatively liberalized trade levels, are putting pressure
on India to lower barriers. India is moving with caution in the
regional trade deal as it fears increased imports from China,
with which it already has a trade deficit. But peer pressure
seems to be working. In the latest round of negotiations, India
made an offer to give duty free access to 70% of product
categories for the ASEAN economies and 40% duty free
access for the rest (China, Japan, Korea, Australia and New
Zealand). In the previous offer duty free access for 40% of all
product categories was granted for all 15 countries.
But the potential fruits from these trade agreements are still
far from being reaped. For these deals to be closed, quite
considerable resistance among vested interest groups, NGOs
and action groups has to be overcome to achieve ratification
by national parliaments and the EU parliament.
c) Exchange rate battle and macro policies
Besides tariff- and non-tariff barriers, exchange rate policies
can also be seen as trade policy. The quantitative easing that
was first pursued by the American and English monetary
authorities pushed down their exchange rates. This led
the Brazilian Finance Minister to speak of a trade war in
ING Commercial Banking
Washington in late 2010. The Bank of Japan (2013) and the
European Central Bank followed in 2013 and 2015 with
quantitative easing which weakened their currencies as well.
While the effect of depreciation on economic growth is
temporary, especially once other countries take similar steps,
expansionary monetary policies have driven up growth
through other transmission channels (costs of credit, wealth
effects). As a result, trade may have been higher than
otherwise would have been the case.
On the downside is the risk that the (openly or hidden)
exchange rate policies could turn into a series of competitive
depreciations or devaluations. A ‘race to the bottom’ is not a
zero sum game. Although countries can avoid losses in price
competiveness by joining the currency battle, this leads to a rise
in exchange rate volatility. Higher volatility in exchange rates
creates uncertainty about returns on foreign business or- if the
currency risk is hedged- at least higher costs of trade. Both
discourage cross border trade. Elevated exchange rate volatility
is a downward risk for trade that is to be taken seriously.
Another policy issue is the asymmetric approach of current
account imbalances. As long as nations with current account
surpluses refuse to implement reflationary policies (Germany)
or are not very successful in increasing domestic demand
(China, Japan), pressure will remain on deficit countries to
cut spending. This puts a drag on world trade. And it would
also be bad news for the ratio of world trade growth to
world GDP growth, if it were to affect the willingness to
invest and buy consumer durables, because durables are
over represented in world trade. Whether this happens will
depend on the effect that rebalancing has on the cycle. If it
causes an economic downturn then consumers and investors
can be expected to show this behaviour.
Summing up, the exchange rate battle is a negative for trade and the
asymmetric rebalancing of worldwide current account imbalances
has put a drag on trade and in turn could a negative for the trade to
GDP ratio.
d) Offshoring/ reshoring
The 1990s saw the birth of the global value chain. The ICT
revolution dwarfed the costs of communication and made cross
border coordination much cheaper. This made it affordable
for enterprises to break up their production processes and
locate each production phase in the country where costs of
production (including transportation costs) are lowest. Major
developed economies such as the US, Germany and the UK
started outsourcing (parts of) their production on a large scale.
Being an important part of total costs in most sectors, labour
costs became very important in choosing production locations.
Western companies offshored large parts of their production to
Eastern Europe and Asia. China, with its huge supply of cheap
The world trade comeback / April 2015
16
(rural) labour attracted a lot of FDI from Western companies.
According to the latest figures from Unctad (2013), in 25 years
China moved 15 places up the ranking of the stocks of foreign
direct investment, from 17th in 1990 to second place in 2013.
Excluding the stock of investments in Hong Kong, China is still
number four. As a percentage of GDP, inward stock of FDI is,
however, still relatively low in China (table 4).
Of course FDI is not only about investments driven by
offshoring and increasing FDI inflows do not by definition
point to offshoring. But other indicators also suggest a
development in the direction of offshoring or outsourcing.
The share of intermediate products acquired from low
wage regions (as a percentage of total intermediates used)
has been rising since the mid 1990s and has been more
pronounced since the turn of the century (see figure 23).
The rise of trade in intermediates has been one of the reasons
for the fast growth of world trade since the beginning of the
1990s. This is partly due to double counting. After all, the
value of an export product that is completely produced in one
country is booked only once in the recording of export values
(say 100). When the same export product with a value of 100
is produced with inputs of two other countries (each worth 30)
the registered export value for this product adds up to 160.
Recent developments suggest that there is a turnaround
in offshoring. Some well known Western companies have
brought production activity back from low-wage countries to
their home countries. Apple is bringing back activities from
Foxconn China to Silicon Valley in California, Philips withdrew
the production of razors from China and brought this back to
the Netherlands and Airtex Design Group is shifting part of
its textile production from China back to the US.
Recent surveys suggest that reshoring is not limited to a few
eye catching companies. According to a Boston Consultancy
Group survey, 54% of US companies are considering reshoring
or are actually doing so (2013). In a survey for the eurozone
by PricewaterhouseCoopers in the autumn of 2014 almost
60% of the surveyed companies said they had reshored some
activities during the past 12 months and slightly fewer than
50% plan to do so over the next twelve months. This survey,
however, shows at the same time that almost the same
share of eurozone corporations (55%) has offshored part of
their production during the last twelve months. Moreover,
the survey results gives no information about the size of the
operations. This makes it impossible to know whether the
stock of offshored business is still growing or is in reverse.
Nevertheless, the survey shows differences between countries
in the eurozone. Italy and Ireland are leading in the amount
of reshoring projects, followed by Spain and the Netherlands.
A survey by the Dutch Statistical Office (CBS, 2013) shows
that outsourcing by Dutch companies has diminished
compared with 2001-2006. Nevertheless, the share of
outsourcing to Russia and ‘other European Countries’
(including some east European countries) increased in the
first three years after the start of the crisis in 2008. Another
survey, done by TNS Nipo in 2013, showed that only 10%
of Dutch companies, who are among the biggest foreign
direct investors in the world, actually reshored production
and just 5% considered it. This is considerably lower than
the outcome in a PricewaterhouseCoopers analysis for the
Netherlands that concludes, based on the very small survey
group of 42 companies, that slightly over 60% of Dutch
companies have reshored over the last twelve months and
that 50% are considering it for the next twelve months.
What is behind this shift towards reshoring? Commentators
often refer to the relatively steep rise of wages in China (figure
13) which should diminish the advantage of offshoring to the
‘factory of the world’. Besides this, according to other analysts
labour costs will become less decisive as labour will be replaced
Figure
13. Average annual real wage rises, developing countries (‘97-2013)
16%
14%
12%
10%
8%
6%
4%
2%
0%
Philippines
Thailand
India
Malaysia
Peru
Bangladesh
Paraguay
Hungary
Indonesia
China
*Philippines, Thailand, Paraguay, Indonesia sample from (2013-2002); Source: ILO; Worldbank; ING Global Markets Research
ING Commercial Banking
The world trade comeback / April 2015
17
Figure 14. Average monthly wages for countries in Asia & Pacific
5000
4642
4000
3320
3694
2841
3000
1780
2000
1000
119
73
0
3419
Nepal
(2008)
121
174
Pakistan Cambodia Timor(2013)
(2012)
Leste
(2010)
183
197
215
215
Indonesia Vietnam Philippines India
(2013)
(2013)
(2013)
(2011/
2012)
391
411
Thailand Mongolia
(2013)
(2012)
565
613
651
Samoa
(2012)
China
(2013)
Malaysia
(2013)
Hong
Korea,
Kong
Republic
(China) of (2013)
(2013)
Japan
(2013)
New Singapore Australia
Zealand (2013)
(2013)
(2013)
** Peru and Turkey sample from (2013-2005); Source: ILO (2014); ING Global Markets Research
by capital such as robots and 3D- printing (see paragraph on
innovations). We now look more in detail at the possible drivers
of reshoring to get a better idea of the influence this will have
on the growth of world trade in the near future.
The role of labour costs
Labour costs per product have been rising fast in some
countries that serve(d) as a production location for Western
companies. China leads the pack with an average real wage
increase of almost 14% a year since 1997, followed by
Indonesia, Turkey and Hungary (see figure 13). At the same
time wage moderation has taken place in several important
advanced economies, leading some commentators to
conclude that offshoring is no longer profitable.
While it is true that wages have risen considerably more in
emerging markets than in developed markets, this doesn’t
mean that China and other emerging markets are no longer
attractive for offshoring. These are several reasons for this.
First of all, as figure 14 shows, labour costs in developing
economies are still a multiple of labour costs in emerging
markets. Even in China, the average wage level is still five to
eight times as low as in advanced Pacific economies such as
Japan and Australia.
Secondly, high wage increases have in many emerging
markets been accompanied by high productivity rises. As
figure 15 shows this has either put a lid on the rise of unit
labour costs relative to developed markets (Philippines,
Malaysia and Indonesia), limited it significantly (China,
Thailand) or even prevented unit labour costs from rising
(India, Poland, recently South Africa). It must be said however
that the depreciation of some currencies (such as the Indian
rupee) vis- a vis the dollar has also helped.
Figure 15. Unit labour cost index in $ for emerging markets, 2005 = 100
250
200
150
100
50
0
● 2000
India
Poland
● 2005
Malaysia
South Africa
● 2010
Philippines
Indonesia
Thailand
Turkey
China
Brazil
Vietnam
Russian
Federation
● 2014
ING Global Markets Research; Data Source: Oxford Economics
ING Commercial Banking
The world trade comeback / April 2015
18
● Inc
● Rep
● Buy
● Do
● Oth
Figure 16 Unit labour cost index in $ for developed economies (2005= 100)
175
140
105
70
35
0
● 2000
Greece
Japan
● 2005
United
States
United
Kingdom
● 2010
Netherlands
Germany
France
Belgium
Canada
Italy
Switserland
Australia
● 2014
ING Global Markets Research; Data Source: Oxford Economics
Table 4. Stock of inward Foreign direct investments
Although China still has a large market share in several low
as % GDP
tech mass production goods it has entered a phase in which
FDI stock as % of GDP
2000
2007
2013
it produces more knowledge intensive medium and high
175
Vietnam
47.3
40.8
47.8
tech goods. Other developing countries are partly taking
Malaysia
54.1
39.1
46.6
over the role of low cost production location. The clothing
140
Thailand
24.7
36.9
45.4
industry is an example. Although China still is an important
player in this industry, those companies that no longer
Indonesia
18.5
26.6
105
offshore or outsource to China often (re)locate to other Asian
India
3.5
8.8
11.8
countries such as Vietnam and Bangladesh instead of bringing
70
Philippines
17.0
13.7
11.0
production back home. This process will repeat itself. As long
China
16.2
9.3
10.3
as there are countries where unit labour costs are much lower
35
than in developed economies offshoring remains attractive
from a cost perspective. Countries such as India, Malaysia
0
Belarus
12.5
9.9
23.2
Greece
Japan largeUnited
United
France
Belgium
Canada
Italy
Switserland
Australia
and the Phillipines
have
and young
labourNetherlands
forces, so Germany
States
Kingdom
Bulgaria
21.0
90.1
99.6
there still is ample space for offshoring. Also when looking at
Croatia
13.0
75.9
56.1
foreign direct investment stock in these countries, there seems
to be room for increased investment through offshoring.
Czech Republic
36.8
62.3
68.6
Hungary
49.3
70.2
85.6
Poland
20.0
42.0
48.8
Republic of Moldova
34.8
42.6
49.3
Romania
18.6
36.9
45.4
Russian Federation
12.4
37.8
26.8
The Philippines, India and also China still significantly lag the
average for developing Asia. The Philippines saw a steep rise
in inward FDI in the second half of the 1990s but stagnated
afterwards at a level far below the average of developing
Asia (table 4). After a sprint in the five years up to the start
of the financial crisis, India is not even close to FDI levels
common in countries like Malaysia, Vietnam and Thailand.
Even China is among the countries with little foreign direct
investment relative to the size of their economy. This is
related to the fact that FDI in China has been restricted
to certain sectors. Nevertheless, the government is about
to loosen this restriction. At the latest National People’s
Congress last March prime minister Li Keqiang indicated that
the economy will open further, lifting the ban on FDI for
some sectors that currently don’t permit it. Besides, cheap
labour in the inland of China keeps it an interesting location
for offshoring. Some transnational corporations currently
Source: Unctad; ING Global Markets Research
ING Commercial Banking
The world trade comeback / April 2015
Serbia
77.9
Slovakia
34.2
63.6
61.5
Slovenia
14.5
30.4
32.5
7.1
24.0
17.6
Latin America
23.8
32.4
44.2
Developing Asia
25.7
30.0
26.7
World
22.9
32.0
34.2
Turkey
19
● Inc
● Re
● Bu
● Do
● Ot
Figure 17. Development competitiveness index for selected economies
5,5
5,1
4,7
4,3
3,9
3,5
Bangladesh
● 2009-2010
India
Vietnam
Brazil
Russian
Federation
Philippines
Indonesia
Thailand
China
Advanced
economies
Malaysia
● 2014-2015
ING Global Markets Research; Data source: Global competitiveness index (2014-2015 & 2010-2009).
prefer to move their production facilities from the more
expensive coast to the inland of China instead of moving to
another country or reshoring it back home.
production to countries such as Poland and Czech Republic.
Low wages relative to the level of education and skills made
these countries attractive production locations. The transfer
of technological knowledge that resulted from offshoring
has helped these countries to reach higher technological
and productivity levels. This has pushed up wage levels, but
broadly in line with productivity increases according to ILOdata, making these countries still attractive for offshoring.
With the labour force relatively well educated and trained,
it is possible to outsource more knowledge intensive tasks
within value chains, a development that is already taking
5,5
Companies taking advantage of these ongoing offshoring
5,1
possibilities in several Asian countries, will keep world trade
in intermediate products going in the years to come.
4,7
Several Eastern European countries also remain attractive for
4,3
offshoring. Since the 1990s European companies, for example
in the transport industry, offshored significant parts of
3,9
3,5
Figure Bangladesh
18. Decomposed
index, China
India 2014-2015
India Competitiveness
Vietnam
Brazil
Russian and
Philippines
Indonesia
Institutions
● 2009-2010
Innovation
● 2014-2015;
Thailand
Federation
7
China
Advanced
economies
● Inc
● Re
● Bu
● Do
● Ot
Malaysia
Infrastructure
India
6
5
Business sophistication
4
3
China
Macroeconomic environment
2
1
Market size
Health and primary education
Technological readiness
Higher education and training
Financial market development
Goods market efficiency
Labor market efficiency
● India
● China
*7= best and maximum; 0=worst and minimum; ING Global Markets Research; Data source: Global competitiveness index 2014-2015.
ING Commercial Banking
The world trade comeback / April 2015
20
● Inc
● Re
place. Jobs related to the participation of central and eastern
European economies in value chains of Western companies
are increasingly highly skilled, research from ING shows.4
over the past five years. The gains have been bigger in several
emerging markets than in advanced economies (figure 17).
The Philippines and Indonesia are among the countries
that stand out. India on the other hand has not been able
to improve its non-wage competitiveness factors. This
counterbalances its relatively favorable unit labour cost
position. India has reached growth rates equal to China and
has high potential, reflecting its market size, its enormous and
young labour force and the widespread use of the English
language. But the country is still trailing China in almost all
aspects of competitiveness (figure 18). It is characterized by
a low level of average education, a weak healthcare system,
dependence on foreign capital due to a current account
deficit and an improving but still underdeveloped physical
infrastructure. These factors mean that India hasn’t fully
exploited its potential yet. President Modi, who took office last
year, has set in motion a process of implementing significant
reforms to address some of the mentioned weaknesses of the
Indian economy. This policy seems promising.
Turkey, another country that integrated heavily in cross
border value chains, on the contrary, has shown a strong
increase in unit labour costs. The same holds for Russia. The
average wage growth in these countries has not nearly been
compensated by a proportional rise in productivity (Figure 16).
Consequently, Russia and Turkey have suffered considerable
losses in cost competitiveness over the last decade.
Summing up: several developing countries have lost (some) appeal
as production locations because of rising unit labour costs. However,
there are still (big) developing economies that maintain their offshoring
appeal from a cost perspective. Not only India comes to mind, but also
countries like the Philippines, Malaysia, Poland and South Africa. In
addition, (the inland of) China still holds appeal for offshoring.
Other drivers of Offshoring
Costs are only one part of the story. Other factors also
determine the attractiveness and competitiveness of a
country. Many developing economies have been able to
substantially improve their non wage competitiveness index
The positive development of non wage competitiveness
in countries like China, Thailand and Turkey (figure 17)
counterbalances their relatively unfavorable wage cost
developments. The level of competitiveness of China is
almost as good as that of the advanced economies and
better than in almost every other Asian country. It should be
4 ING, 2014, Valuing a close connection II
Figure 19. Competitiveness Index 2014-2015 for emerging and developing regions and advanced economies**
Institutions
Innovation
6,0
Infrastructure
Advanc
4,0
Emergi
Business sophistication
Macroeconomic environment
2,0
Emergi
Market size
Health and primary education
Technological readiness
Higher education and training
Financial market development
_
Emerging and developing Europe
_
Goods market efficiency
Labor market efficiency
Emerging and developing Asia
_
Advanced economies
* 7= best and maximum; 0=worst and minimum;
** Group Emerging and Developing Asia: Bangladesh, Bhutan, Cambodia, China, India, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Nepal, Philippines, Sri Lanka, Thailand,
Timor-Leste and Vietnam;
***Emerging and Developing Europe: Albania, Bulgaria, Croatia, Hungary, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia and Turkey Source: Global competitiveness
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The world trade comeback / April 2015
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Figure 20. Competitiveness, emerging & developing Europe for 2015 and 2010*
Institutions
Innovation
Infrastructure
6
Emergi
4
Emergi
Business sophistication
Macroeconomic environment
2
Market size
Health and primary education
Technological readiness
Higher education and training
Financial market development
Goods market efficiency
Labor market efficiency
_
_
Emerging and developing Europe 2009-2010
Emerging and developing Europe 2014-2015
* 7 = best and maximum; 0 = worst and minimum; ING Global Markets Research; Data Source: Global competitiveness index (2015 and 2010).
said that this is to a significant degree influenced by the fact
that market size is related to population size. Nevertheless
China is also competitive in many other fields that determine
attractiveness of a country. But Malaysia tops the bill and is,
according to the Global Competitiveness Index, even more
competitive than advanced economies!
The prospects for further improvements in competitiveness
for developing countries in Asia seem quite good.
Traditionally weak infrastructure has been an impediment
for some low-income Asian countries in attracting FDI
and promoting industrial development. Today, rising FDI
in infrastructure industries, driven by regional integration
efforts and enhanced connectivity through the establishment
of corridors between sub regions, is likely to accelerate
infrastructure build-up and improve the investment climate,
Unctad concludes in its World Investment Report 2014. The
decision to set up the Asian Infrastructure Investment Bank
(AIIB) is the latest step in further development.
Figure 21. Developments in competitiveness for economies in developing Europe*
4,6
4,4
4,2
4,0
3,8
3,6
Albania
● 2009-2010
Serbia
Croatia
Montenegro
EDE
Macedonia
Hungary
Romania
Bulgaria
Turkey
Poland
Lithuania
● 2014-2015
* 7 = best and maximum; 0 = worst and minimum; **EDE= average for emergining and developing europe- calculated with the omission of countries without data in both
periods.ING Global Markets Research; Data Source: Global Competitivness Index 2014-2015.
ING Commercial Banking
The world trade comeback / April 2015
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Figure 22. Top ten increase in road networks 1990-2005 period (%)
120
100
80
60
40
20
0
India
Korea, Rep. of
Oman
Macedonia
Saudi Arabia
Nigeria
Niger
Bolivia
Gambia
Pakistan
Data source: World bank; Source: World Trade Report (2013); ING Global Markets Research;
A comparison between emerging Asia and emerging and
developing Europe (figure 19) shows that emerging Asia has
better labour market efficiencies and a larger market size.
Emerging and developing Europe on the other hand has
120%
significantly
better education, technological readiness and
physical infrastructure. On average developing Europe holds
100%
the
edge. Figure 20 shows that developing Europe has been
continuing to improve its appeal. Like most Asian developing
80%
economies,
its competitiveness has increased. Both regions
therefore are far from being out of the picture as attractive
60%
production
locations. It comes therefore as no surprise that,
for example, automotive companies still move production
40%
locations
from France and Germany to Eastern Europe, as
Cooper Standard announced in January 2015.
20%
Summing up: Determinants of competitiveness other than labour
0% have improved in many Asian countries and still are at
costs
India
Korea, Rep. of
OmanMacedonia
Saudi Arabia
Nigeria Niger Bolivia GambiaPakistan
attractive levels in emerging and developing Europe. This enables
both regions to maintain their offshoring appeal.
Offshoring: the facts
How have corporations responded to all the above changes
in determinants of offshoring? Recent data are not available
but data until 2012 suggest that rising wage costs in several
Asian and Eastern European countries have not significantly
discouraged the process of offshoring. On the contrary,
after the dust from the financial crisis settled, companies
from advanced economies resumed offshoring (Figure 23).
Offshoring is measured by the ratio of imported intermediates
from low-wage countries to total intermediates used in
the respective country (which can also include outsourcing,
which also has a downward effect on home production and
employment). The figure shows that net offshoring to Asia
is rising across all major advanced economies. Offshoring to
Eastern Europe is popular with European companies.
Table 5. Quality of overall infrastructure (7=best) for the
2010-2015 period
Quality of overall infrastructure
2009-2010
2014-2015
Infrastructure investments
Infrastructure deserves extra attention because of its
important role in facilitating trade. The empirical literature
suggests that doubling the length of paved roads boosts
trade by 13% and doubling the number of paved airports
per 1,000 square kilometres boosts trade by 14% (World
trade report 2013). India is aware of these benefits and
invested heavily in its underdeveloped road networks
over 1990-2005. Another country that invests hugely in
infrastructure is the Republic of Korea (Figure 22).
Advanced economies
5.53
5.51
Turkey
4.16
5.10
South Africa
4.74
4.49
China
3.99
4.36
Indonesia
3.15
4.17
Russian Federation
3.34
4.13
Thailand
4.77
4.07
Romania
2.37
3.79
Some emerging markets have experienced substantial
improvements in the general quality of infrastructure.
Most notably, Turkey, Indonesia, Romania and Russia
have made substantial advances in the quality of their
overall infrastructure in the past five years (table 5). Other
countries such as Thailand, South Africa and Brazil show
a deterioration for the same time period. They need much
more investment.
India
3.21
3.75
Philippines
3.12
3.66
Peru
3.00
3.50
Brazil
3.43
3.11
ING Commercial Banking
* 7 = best and maximum; 0 = worst and minimum; ING Global Markets Research;
Data source: Global Competitiveness Index
The world trade comeback / April 2015
23
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Figure 23. Net offshoring for selected advanced economies per region
USA
Germany
Italy
0,035
0,07
0,07
0,030
0,06
0,06
0,025
0,05
0,05
0,020
0,04
0,04
0,015
0,03
0,03
0,010
0,02
0,02
0,005
0,01
0,01
0,000
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
0,00
UK
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
0,00
France
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Netherlands
0,035
0,035
0,07
0,030
0,030
0,06
0,025
0,025
0,05
0,020
0,020
0,04
0,015
0,015
0,03
0,010
0,010
0,02
0,005
0,005
0,01
● In
0,000
_
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Asia
_
Eastern Europe
_
0,000
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
0,00
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
● B
Brazil and Mexico
● D
* Orange = offshoring to Asia; Green = offshoring to Brazil and Mexico; Blue = offshoring to Eastern Europe. Source: Marin (2014) and Timmer (2012). ING Global Markets Research
Summing up our findings on reshoring, anecdotes and survey
evidence indicate that reshoring has increased over recent years.
But they show at the same time that offshoring is continuing.
Information on the net score is missing. Hard data is available for
indirect indicators of offshoring and this points to the ongoing
dominance of offshoring, at least until 2012. This aligns well with
the fact that other determinants of attractiveness of emerging
countries, besides labour costs, have improved in many Asian
countries and in emerging and developing Europe. This has enabled
them to maintain their offshoring appeal. We expect offshoring
to continue in the years to come but at a slower pace. The rapid
expansion of the pre crisis period will probably not return, reflecting
the counterweight of reshoring.
e) Foreign Direct Investment
As already discussed, the rise of global value chains have
been accompanied by a boom in foreign direct investment by
Western companies in Eastern Europe and Asia. While the crisis
put a lid on FDI, it has recovered and, as a percentage of world
GDP is higher now than before the crisis. The stock of FDI in
most Eastern European countries has increased. In developing
Asian countries it has diminished on average since the crisis,
but this doesn’t hold for all Asian nations (table 4 on page 19).
ING Commercial Banking
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FDI flows have been low since the start of the crisis, but
2013 could well have been the turning point. According
to Unctad’s World Investment Report 2014 the value of
announced greenfield projects recovered, with an increase
of 9% to a healthy level but still far below historical levels.
Cross-border M&A increased by 5%.
The geographical division is different this time. Developing and
transition economies largely outperformed developed countries,
with an increase of 17% in the values of announced greenfield
projects and a sharp 73% rise in cross-border M&A. Countries
such as China are increasingly looking abroad to spend the large
surpluses accumulated with the export led growth model. At the
same time in developed economies the level of both greenfield
investment projects and cross-border M&A has declined, by
4% and11% respectively5. Figure 24 shows that the decline of
inward FDI in developing countries (as a percentage of GDP) is
somewhat smaller than during the economic downturn after the
5 The weak FDI by developed countries is a contrast with the picture that emerges
from figure 23. An explanation could be that the rise shown in figure 23 is mainly
caused by outsourcing rather than offshoring production (outward FDI).
The world trade comeback / April 2015
24
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Figure 24.
Investment
and
FDI in developing
Investment
and FDI
in developing
economies;economies;
% of GDP % of GDP
35%
3.77%
28%
4%
3.89%
25.5%
As % of GDP
5%
31.5%
21%
3%
2.84%
2.22%
14%
2%
0.86%
7%
1%
0%
_
0%
1981
1983
Investments (LHS)
1985
1987
_
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Inward foreign direct investment flows (RHS)
Data Sources: UNCTAD and IMF WEO; ING Global Markets Research
bursting of the dotcom bubble. This could be caused by the fact
that, this time around, emerging economies started investing in
other emerging economies.
All in all, the underperformance of FDI compared to total
investments has been a lot smaller this time around. After
the bursting of the internet bubble, the total investment ratio
of developing countries kept on rising, just as in the current
crisis (figure 24), but FDI in developing countries fell deeper
than during the recent risis.
Due to the rise of FDI by developing and transition
economies, their shares in the worldwide flow of greenfield
investment and M&A projects were at historically high levels
in 2013 (68% and 31% respectively). We are witnessing a
broadening of the number of countries that do outward FDI,
implying that offshoring now has more engines than only
Western companies.
f) Trade finance
The availability of trade finance has also been put forward in
the debate on reasons behind the slowdown of trade. Trade
finance and the guarantee facilities that come with it in many
Western countries are undeniably important drivers behind
trade as they reduce risk. Therefore, reductions in trade
finance can have a significant effect on trade growth. This is
especially the case for emerging markets in Asia where trade
finance is relatively important. A recent survey of developing
country suppliers reveals that access to trade finance is one
of the key obstacles for them to participate in global value
chains (table 6).
Both surveys and academic literature suggest that disruptions
to trade finance have economically significant effects on
global trade volumes. A report published by the BIS (2014)
claims that trade finance could have accounted for one fifth
Recently, weak FDI flows from advanced economies do not
mean that there is no scope for developed economies to
increase their FDI in developing countries. The relatively low
stock of inward FDI in countries such as China, India, Philippines,
Indonesia and Turkey (table 4) suggests ample scope, especially
because most of these countries have continuing appeal as
locations for producing goods and services. The fact that
domestic investment has been high in developing countries
supports the view that expected returns on investments in
those countries are still attractive. Moreover, interest rates are at
historical lows and many Western multinationals hold large cash
holdings, so financing greenfield or M&A investment should not
be a problem.
Source: World Trade Report (2014); ING Global Markets Research
ING Commercial Banking
The world trade comeback / April 2015
Table 6. Barriers hindering participation in value chains
Developing Country Suppliers
Difficulties connecting developing country suppliers to value chains
Transportation Costs and Delays
42%
Access to Trade Finance
40%
Customs Procedures
36%
Import Duties
23%
Supply Chain Governance
23%
25
Figure 25. Contribution of lack of trade finance to trade decline, Q4 2008- Q2 2015
0
-5
-10
●
-15
●
-20
-25
_
GDP
●
●
●
All
Advanced economies
EMEs
_
●
All
_
EMEs
Exports
Imports
Trade finance
Advanced economies
● Trade
Other factors
Source: BIS; ING Global Markets Research
of the drop in trade volumes in the three quarters following
the Lehman bankruptcy (Figure 25). The sub prime crisis in
the US led to a liquidity crisis in developed economies because
it was unclear which banks were hit. All banks became risk
averse and held on tightly to their own means of liquidity. This
liquidity preference made it very hard to obtain trade finance.
However, after the first couple of quarters of the financial
crisis access to trade finance seems to have been a less
important bottleneck for trade. This is partly because the
liquidity crisis eased following money market operations by
central banks and with some governments stepping in with
(extra) guarantees for export financing. A survey of global
lending conditions revealed that demand increases above
supply increases had been limited up to 2012 and that supply
has started outpacing demand since, resulting in more trade
financing being involved in trade (figure 26). Trade finance has
increased by 200% over 2007-2013 while trade has grown by
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Figure 26. Demand and supply of trade finance
70
60
50
40
30
20
_
2010
Supply of trade finance
2011
_
Global funding conditions
_
2012
2013
Demand for trade finance
* Demand and supply conditions as indicated in the IIF Emerging Markets Bank Lending Conditions Survey. Values above 50 indicate improving conditions while values below 50
indicate deteriorating conditions.
Source: BIS; ING Global Markets Research;
ING Commercial Banking
The world trade comeback / April 2015
26
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only 50% over the same period (BIS, 2014). The more active
role that regional banks started to play in trade finance has
also helped to diminish the scarcity of supply of trade finance
from large transnational banks (BIS, 2014).
The costs of trade finance don’t seem to have been a major
bottleneck either. The low official interest rates increasingly
prevalent over the last couple of years have translated into lower
costs of trade finance. Together with ongoing government
guarantees, this has helped to keep trade going, also to more
risk prone countries. Once official interest rates become less
accommodative the opposite will happen. Absolute interest
rates will rise and put upward pressure on costs of trade
finance. But given the current extremely low level of official
interest rates, we don’t expect the costs of trade finance to rise
quickly to levels that would hurt trade significantly.
Looking at the years to come, we don’t expect that the
supply of trade finance will return to being a bottleneck for
trade growth. After all, even one year after the liquidity crisis
in 2008/2009 world trade was able to show growth of 15%.
Summing up: the reductions in supply of trade finance were
responsible for one fifth of the collapse in international trade directly
after the outbreak of the financial crisis. However, the availability of
trade finance has improved over recent years. Therefore, we cannot
contribute a significant proportion of the recent slowdown in trade
to developments in trade finance. We do not expect trade finance to
be a major bottleneck for trade in years to come.
g) Innovations and trade
Innovations have lowered trade costs spectacularly in the
past. For example, the invention of the telegraph, telephone,
jet engines, containerization and the ICT- revolution, all had
a huge impact on world trade. Currently work is being done
to further reduce the transport costs of trade. For example,
making containers much lighter using composite material
can be a new stimulus for world trade. This would resolve
the problem that when container ships sail home they are
loaded with empty containers that weigh two tones each.
Lightweight foldable containers would, by lowering transport
costs, stimulate world trade. Also the ICT revolution hasn’t
reached all countries fully. Some countries, including India,
have below average internet penetration which means above
average costs of trade formalities. Consequently, ICT will
continue to stimulate trade in the years to come.
On the other hand innovations like 3D printing and robotics
can reduce trade. For the time being, the quality, reliability and
costs of 3D printing are unfavorable compared to production
along standardized assembly lines. Nevertheless, this can
change and then the effect on trade could become noticeable.
business production. 3D is useful within the trend towards
customization of products and production of smaller series.
Because of the fact that many companies demand that their
suppliers supply a broad spectrum of goods to them, of
which only a couple are needed frequently, many suppliers
have substantial stocking costs. Once the extra costs of
3D- printing become less than the cost of stocking large
quantities, local instant production with 3D printers becomes
an interesting alternative for mass production. Once this is
the case, it will push cross border trade down because mass
production often takes place in one country, from which
products are exported to the customer.
For business-to-consumer production it will be more difficult
for 3D printing to have a large impact. This end of the
market is very competitive, with low value added per item,
making it very sensitive to the relatively high costs of 3D
printing. It can influence niche markets, for example sneakers
and clothes, where consumers might be prepared to pay a
higher price for unique customized items instead of mass
produced standard items. But the macro- effects of this will
probably not be significant.
Robotics can lead to a further substitution of labour by capital.
If robots make the input of labour unnecessary, low cost
countries lose their competitive edge. For the time being this is
not the case on a large scale. The car industry has been using
robots for a long time and nevertheless has been offshoring a
lot of production during the past two decades. Stil, robotics can
potentially bring back earlier offshored production.
Summing up: at the same time that potentially trade reducing
innovations are arising, like 3D printing and robotics, there are
other innovations in the making, like container innovations, that will
stimulate trade growth. And many countries haven’t fully reaped the
fruits of the ICT revolution yet.
h) Geographical division of trade
The share of developing economies in world trade has been
rising since the start of the 1990s, at the expense of developed
economies (figure 27). Nowadays developing countries are
responsible for almost half of world trade, compared to little
over a quarter at the beginning of the 1990s. This trend in
trade follows the trend in GDP shares. Due to much higher
economic growth, the share of developing economies in world
GDP has risen to 40%, from 24% in 1980, according to WTO
figures. Especially Asia has shown impressive growth in GDP
and trade, with China leading the way.
3D printing could lead to more local production and thereby
diminish cross border trade, especially for business-to-
The rise of developing economies has not only increased the
size of world trade but has also contributed to the rise of the
ratio of world trade to world GDP. This ratio rose from 20%
in 1990 to 30% in 2008, mainly thanks to the rise of the
trade to GDP ratios in most developing countries since
the start of the 1990s.
ING Commercial Banking
The world trade comeback / April 2015
27
Figure 27. Share in world trade of developed and
developing countries
80%
60%
40%
20%
0%
_
1980
1990
_
Developed trade
2000
2005
2010
2012
Developing trade
ING Global Markets Research; Data Source: UNCTAD, IMF
The financial crisis put this development on hold. It caused a
sharp drop in the ratio in 2009 (figure 10). In 2010 however
the trade ratio recovered to a large extent, but has decreased
slightly afterwards. The medium and long term outlook
for the ratio of world trade to world GDP will depend
to a significant extent on developments in developing
countries.
Besides differences between regions in economic growth,
differences in the composition of demand will also
influence the growth of trade. As an example, ageing in
Developing
Trade leads to rising demand for health
developed
countries
services.Developed
Although
health tourism is on the rise, health
Trade
services are still not much traded across borders. So, ageing
puts downward pressure on the import intensity in
developed economies. On the other hand, most emerging
markets and other developing countries have young
populations. With economic growth the middle classes in
these countries will (continue) to rise in size. The middle
classes tend to have a large demand for consumer durables
like mobile phones and other communication products,
cars, and luxury goods. These consumer durables are over
represented in cross border trade So, the rise of the middle
classes in developing economies will put upward
pressure on their import ratios.
Although luxury goods from Western countries are very
popular with middle classes in emerging countries, demand
from consumers and producers in emerging countries in
general is increasingly being met by products from other
developing countries. This is reflected in the fact that trade
between developing countries has risen faster than trade
80%
between advanced economies and developing countries. Over
70%
1990- 2011 South-South trade increased from 8% of world
trade to 24% (figure 28). Intra-regional trade represents
60%
a large and rising percentage of total exports from Asian
50% in
countries. This share has grown from 42% in 1990 to 52%
2011, so that it now represents the majority of Asian trade.
Although some BRIC countries are currently showing a
growth slowdown (China) or are in recession (Russia and
Brazil), the expectation still is that developing markets on
average will grow faster than developed economies. This
40%
will happen not only over the medium term but also in the
short run. For 2015 and 2016 the IMF expects the emerging
The rising share of South-South trade in world exports 30%
economies and other developing countries to grow almost
is also explained by the increasing number of regional
20%
twice as fast as the advanced economies. This means that
trade agreements between southern countries. These
10%
the weight of developing countries in world GDP and world
account for the majority of new regional trade agreement
trade
will
increase
further.
concluded since 1990. The fact that some elements of these
World
trade
volume growth
of goods and services
Real world production growth
_
_
_
_
Average growth of trade volume
0%
1980
Average growth of world production
Figure 28. shares in world trade by region
100%
8%
12%
13%
16%
35%
36%
37%
20%
21%
37%
37%
41%
2008
23%
24%
38%
38%
40%
37%
36%
2009
2010
2011
80%
33%
60%
40%
56%
51%
50%
20%
0%
● North-North
1990
1995
● North-South
2000
● South-South
46%
2005
● Unspecified destination
ING Global Markets Research; Source: UNCTAD, IMF
ING Commercial Banking
The world trade comeback / April 2015
28
Figure 29. Shares of product groups in worldwide export ‘of goods’
3%
3%
10%
12%
29%
15%
● Agricultural products
9%
7%
9%
● Other
2%
2%
1990
2011
12%
9%
3%
14%
● Iron and steel
● Chemicals
● Other semi-manufactures
10%
8%
● Fuels and mining products
● Office and telecom equipment
23%
6%
● Automotive products
● Textiles
11%
3%
● Clothing
● Industrial machinery
ING Global Markets Research; Source: WTO
agreements still have to be implemented is another reason
to expect more South-South trade in the years to come, with
rising trade to GDP ratios in this part of the world.
Summing up: Import intensity of developed economies could
stagnate or decline with ageing induced shifts in demand towards
non tradables. On the other hand, in developing countries the
combination of relatively high economic growth and catch up
demand for tradable consumer goods will stimulate world trade.
Given the increasing share in the world economy of developing
economies, the later effect will probably dominate in the long run.
As already mentioned, the fast growth of the middle classes
in emerging economies means that their demand for imports
will make up a larger share in the composition of traded
goods and services. This means that the demand for typical
middle class consumer goods, such as office and telecom
products, will continue to grow fast.
Services
The share of services rose until 2005. Since then it has fallen
back to the level of 1990 (figure 10).
Thanks to the ICT revolution, live communication with
i) Product division of trade
very distant places has become easy and cheap. This has
Agricultural products have seen their share in trade fall
created the possibility for low wage countries such as India
steadily
at theProducts
beginning of the
last and miningtoproducts
become large
suppliers
●
Other over time, from 57%
● Agricultural
● Fuels
● Iron
and Steel of ICT
● helpdesk
Chemicals services and
century
to 12% in 1990,●and
9%
2011,
according
the Products
accounting services.
●
Other semi-manufactures
Office
andin
telecom
equipment
● to
Automotive
● Textiles
● Clothing
WTO.
Manufacturing
products’ share on the other hand has
●
Industrial
Machinery
risen steeply. This made up 40% of trade in 1900, rising to
The rise of transnational enterprises and their global value
70% in 1990 and peaking at 75% in 2000. Fuels and mining
chains has also caused more trade in services, for example
products have been on the rise due to higher prices. This
in transport and business services. A significant part of these
resulted in a decline in the share of manufacturing products,
services is exchanged within these transnational enterprises.
to 65% in 2011. The commodity boom is currently in reverse
For example, the payment of royalties within transnational
with the sharp decline in the oil price and lower prices for
enterprises can be substantial and is booked as services.
other commodities in place for several years.
Two-thirds of world trade now takes place within
American import demand for crude oil has been decreasing
multinational companies or with their suppliers.
since its peak of 11.5 million barrels per day in 2004, to
But the influence of the ongoing implementation of ICT
below 7 million barrels a day in 2015. This is due to the shale
inventions is broader than these well known examples.
revolution that has put downward pressure on worldwide
Services that once were non-tradable, including retail sales,
imports of fuels. Until 2013 world trade in fuels kept rising
medicines or educational courses, have become tradable
though because increasing demand in other countries
through e-commerce, e-medicine or e-learning. This
overshadowed the decline in US demand. Currently European development is just starting, with consumers still hesitant
demand is picking up, related to the economic recovery, but
about doing cross border business online out of fear that
demand from most emerging markets have been slowing
they cannot claim their money back if something goes
with the cooling of their economies. Because the growth of
wrong. But similar fears restricted domestic on line business
the world economy is not declining and emerging markets
when it started. So services can be a driver of growth
production is relatively energy intensive, world demand for
of world trade in the near future, especially if we take
oil in volumes is still on the rise.
into account that import sensitivity of services has risen.
ING Commercial Banking
The world trade comeback / April 2015
29
Figure 30. Share of commercial services in goods and
services
20%
Share
Share of commercial services in goods and services
19%
18%
17%
16%
15%
18.7%
14%
18.8%
18.9%
19.5%
18.7%
17%
13%
15.9%
12%
11%
10%
1980
1985
1990
1995
2000
2005
2011
ING Global Markets Research; Source: World Trade Report 2014
Moreover, currently services face relatively high trade barriers
compared to commodities and manufacturers. This means
that when the various (inter) regional negotiations, of which
lowering barriers for trade in services is an important goal,
succeed, a considerable impulse should result for world trade
that will put upward pressure on the trade to GDP ratio.
● In
● Re
● Bu
● D
● O
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The world trade comeback / April 2015
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IV Conclusions
Some believe that the slowdown of world trade and the
decline of the ratio of world trade growth to world GDP
growth is here to stay and marks the end of globalization.
However, we believe that a significant part of the slowdown
is temporary. World trade growth may return to outpace
world GDP growth, although not by as much as before the
financial crisis. The main driver of the rise of the ratio was the
increase of import ratios. Although at a significantly lower
pace, we see import ratios rising again because:
• In economic upturns, currently expected for 2015 and
2016, the demand for investment goods and consumer
durables rises disproportionately. This will cause world
trade to rise more than world GDP because durable goods
make up 70% of world trade. Based on experiences
during earlier periods of recovery, this will push up the
ratio of trade growth to GDP growth from 1.0 during
2012- 2014 to 1.2 at the end of 2016.
• This normal cyclical effect for the world economy is
reinforced by the European recovery because Europe
is more overrepresented in world trade than in earlier
periods of economic recovery. Moreover, European
business investment has been falling more strongly than
usual during the recent downturn. A normalisation
of investments will push up world trade growth
disproportionately, because investment goods are
relatively import sensitive. These effects will push the
ratio up another 0.05 percentage point. So, these cyclical
effects together wil lift the ratio from 1 to 1.25 at the end
of 2016.
Besides these short term cyclical effects we see some
medium term and long term structural developments in
favour of trade.
• Implementation of the Bali agreement on lowering
customs procedures will push up world trade by 4.1%
and world GDP by 1.1%. On the assumption that it will
take five years to implement this agreement in equal
steps (so that the benefits, in terms of the upward effect
on trade growth and GDP growth will be spread out
equally over this period), the Bali agreement will push
up the ratio by 0.14%. This will bring the trade growth
to GDP growth ratio close to 1.4 if the economy is still
in an upturn (otherwise the cyclical effect will push
the ratio down again). Taking into account that the
implementations of recent trade agreements has not been
fully completed, we forecast the ratio to come close to
1.5 during 2016-2020.
ING Commercial Banking
• If negotiations on the Transatlantic and Pacific
trade agreements (TTIP and TPP) deliver results that
are acceptable for European, American and Asian
governments and ultimately parliaments, this will also
have an upward effect on global trade in the long run.
This will lift the ratio as well. What this means for the
medium term (the next five years) is unclear because it is
not known when negotiations will be finished and what
the outcome will be.
- Trade will also be stimulated by continuing offshoring
of production to developing economies. Although
reshoring has increased, offshoring will continue to
dominate in the years to come because there are
many developing countries that have maintained or
improved their attractiveness as production locations,
notwithstanding wage cost rises in some of them.
Now that business confidence is recovering in most
advanced economies ING expects a recovery of their
outward FDI. These developments will increase trade
in intermediates and thereby lift the ratio of world
trade growth to growth of world GDP. Because there
are no good quantitative data on the relation between
offshoring and trade, the exact effect on the ratio
cannot be calculated.
- The spread of trade- and offshore enhancing
innovations (such as in ICT and logistics) is far from
finished. Some countries, like India, have below
average internet penetration which means above
average cost of trade formalities. There are no reliable
data available to quantify the effect on trade of an
optimal spread of these technologies.
- On the downside, the conflict in the Ukraine could still
lead to an escalating trade war between the West and
Russia, which would be a clear negative for trade since
Russia is a significant player in world trade. Harm to
trade could also stem from increased exchange rate
volatility if the current currency battle escalates.
- In the long run innovations like 3D printing and
robotics will be trade diminishing, but in in our view
they will not have the scale to seriously push down
the growth rate of trade in the short to medium
term. Besides, at the same time, trade enhancing
innovations like lighter containers are appearing as
well.
The world trade comeback / April 2015
31
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ING Commercial Banking
The world trade comeback / April 2015
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please contact:
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