Game of Trade: Unbowed, Unbent, Unbroken? Ludovic Subran, Chief Economist Mahamoud Islam, Senior Economist Marco Hauschel, Research assistant Paris, 23 November 2017
Trade Stark: “Growth is Coming” I. Global Trade Outlook II. The Three Destination Kingdoms III. The Eurozone to Conquer the Export Throne IV. The Commodities Gods May Surprise in 2018 The White Walkers of Trade I. The Protectionist Wall II. The Winds of Winter Affect Capital Circulation III. Geopolitics: The Breaker of Trade Flows The New Globalization Dragons I. Cash Has No Frontier II. Industrial Policy and Regional Blocks III. The Services and Digital Dividends Game of Trade, November 2017 2
Global trade is expected to increase by +3.9% in volume and +6.3% in value terms in 2018 , on the back of a global cyclical pickup (US, EU, China in sync) and supportive monetary and financial conditions. While global trade lost USD3tn between 2014 and 2016, it is expected to recover this amount by 2018. Growth in Global Trade of Goods Growth in Global Trade of Goods and Services and Euler Hermes Trade Momentum index (in %) Global Merchandise (goods) trade growth y/y (CPB, left) 27 53 EH TMI (right scale) 21 52 15 51 9 3 50 -3 49 -9 48 -15 -21 47 05 07 09 11 13 15 17 Game of Trade, November 2017 3
In value, strong demand growth will come from China, the US and the Eurozone Additional Import Needs by Country (Goods & Services, in USD bn for 2017 and 2018) • Countries, where companies should increase their export efforts, have the highest additional import needs: China (+USD407bn), the US (+325bn) and Germany (+USD245bn) are the top 3. • This favorable outlook is supported by: I. A firm rise in domestic private consumption in China II. Robust domestic consumption and powerful currency in the US III. Synchronized expansion of demand in European countries Game of Trade, November 2017 4
Size matters (value increase), and so does speed (volume growth). Clusters of Destinations by Performance and Potential 1. King’s Landing refers to established markets where additional imports needs are above +USD40bn so sizeable demand. 2. Westeros includes markets where imports growth will rise above global average. These markets are not large enough to generate sizeable imports needs but growing integration in the supply chains of established markets provide a solid anchor for demand growth. 3. Essos refers to markets where real imports growth would be lower than global average. 5 Source: IHS, Euler Hermes
Europe is back in the global trade race. By 2018, the Eurozone will be the top export performer Potential Merchandise Export Gains by Country (in USD bn for 2017 and 2018) • China will lead with USD295bn cumulated export gains in 2017-2018 • Germany follows with USD250bn and the US comes in third with USD232bn • Summing up, total Eurozone export gains over the period amount to USD956bn. This is three times the gains of China, and four times those of the US. Game of Trade, November 2017 6
The winners are manufacturing hubs in Eastern Europe (Poland, Hungary) as well as specialized, high-end goods exporters (Germany, France) Growth in Real Exports of Goods and Services and Change in Market Share 1. Trade Maesters are the strongest group of countries, including competitive primary commodity exporters and production hubs. 2. The Night Watch countries refer to economies that will lose market share, but can maintain strong export performance 3. The Wildlings are historically rich economies with a below- average export performance and which currently lose market share 7
The Commodities Gods May Surprise in 2018 The strong performance in the leading sectors is due to the recovery in commodity prices while the USD remained cheap Sector Gains For Goods Exports • Recovering commodity prices and (in USD bn) revived demand from Advanced Economies and Emerging Markets help Energy (+USD578bn cumulated in 2017 and 2018) and Non-ferrous Metals (+USD216bn)) exports • Accelerating private consumption in Asia and innovation efforts to boost Electronic (+USD406bn)and Electrical product (+USD193bn) exports • Strong investment cycle and rising industrial production to bolster exports of Machinery & Equipment (+168bn ) and Chemicals ( USD134bn) Game of Trade, November 2017 8
Trade Stark: “Growth is Coming” I. Global Trade Outlook II. The Three Destination Kingdoms III. The Eurozone to Conquer the Export Throne IV. The Commodities Gods May Surprise in 2018 The White Walkers of Trade I. The Great Wall: Trade Protectionism II. The Winds of Winter Affect Capital Circulation III. Geopolitics: The Breaker of Trade Flows The New Globalization Dragons I. Cash Has No Frontier II. Industrial Policy and Regional Blocks III. The Services and Digital Dividends Game of Trade, November 2017 9
The stock of protectionist measures remains high (Figure 7) with the bulk of these measures coming from the US (23%) and India (12%). 400 new protectionist measures in 2017 vs. 759 in 2016. The US adopted 16 new measures against China this year, vs. 4 last year. Number of New Protectionist Measures By Country Game of Trade, November 2017 10
Difficult access to financing stems from a continued balkanization of financial flows, pro- relocation policies in advanced economies and global monetary policy normalization. Financial Balkanization Financial balkanization • Cross-border bank lending fell -0.2% y/y in Q2 2017 • Trade financing gap is estimated at USD1.5tn annually, of which 40% in developing Asia, mainly for SMEs Pro-relocation policies (fiscal incentives e.g.) in Advanced Economies create diversion of capital flows from emerging markets Normalization of monetary policy in major economies raises costs of credit and imports in USD terms. Downward pressure on EM currencies. Game of Trade, November 2017 11
Geopolitical conflicts remain a key determinant of the reshuffling of trade routes Tensions with Russia and Brexit pose a threat to the trade outlook of European countries. If Trump withdraws from Growing tensions in the Middle Heightened risk on the Korean NAFTA , this will be a historical East may impact the Strait of peninsula has already impacted event for global trade, as it is Hormuz . Any supply shock could trade. China banned imports of considered a flagship FTA. endanger the recovery of trade. certain South Korean products. Game of Trade, November 2017 12
Trade Stark: “Growth is Coming” I. Global Trade Outlook II. The Three Destination Kingdoms III. The Eurozone to Conquer the Export Throne IV. The Commodities Gods May Surprise in 2018 The White Walkers of Trade I. The Great Wall: Trade Protectionism II. The Winds of Winter Affect Capital Circulation III. Geopolitics: The Breaker of Trade Flows The New Globalization Dragons I. Cash Has No Frontier II. Industrial Policy and Regional Blocks III. The Services and Digital Dividends Game of Trade, November 2017 13
After a contraction in 2016 (-2%), global investment inflows should plateau in 2017, especially because of tighter regulation in China. We expect a modest recovery in 2018 (+3%). Worldwide Investment Inflows Forecast (in USD bn) • Driver #1: Stronger corporate balance sheets 2000 encourage companies to reinvest earnings abroad. Companies broke a new record of 1800 USD7tn of cash on balance sheets 1600 • Driver #2: Risk appetite is back • Business confidence are at optimistic 1400 levels (above 50 for manufacturing 1200 PMIs, e.g.) and investor confidence is high 1000 • Equity markets are supportive and M&A activity is still strong 800 600 • Driver #3: Corporates in the new economy to drive a new wave of globalization? 400 • Corporates want to leverage their competitive advantages (Grab and Lyft) 200 • Corporates want to circumvent 0 protectionism and regulatory burden 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 (Samsung and Alibaba partnership) Game of Trade, November 2017 14
Bilateral agreements and regional trade partnerships are under (re-)negotiation in all All states have taken an active role in fostering the regions of the world around three leading industrial policies from the US to Europe to Asia economies Example #1: China’s Belt and Road Initiative In Asia, China positions itself as (BRI) a champion of globalization, pushing forward the Regional • China’s BRI will act as a catalyst to accelerate Comprehensive Economic investment inflows in participating countries Partnership (RCEP). • China’s investment and construction projects have increased by +USD960bn, with Asia leading (44% of total) before Europe (22%) The EU moves closer towards • It will help Chinese companies reduce industrial cooperation with both Japan overhang (export surplus capital), while (currently renegotiating its economic partnership) and internationalizing their operations Canada ( CETA ). Example #2: Japan’s and India’s Asia -Africa Growth Corridor (AAGC) • Japan and India set up the AAGC, which will raise After the US withdrawal, the TPP FDI flows towards India and East Africa. could be implemented with the • Japanese companies will work on the construction remaining countries led by Japan (Australia, Japan, Mexico, e.g.) and infrastructure projects Game of Trade, November 2017 15
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