This article provides color around the recent decline of trade in several Asian countries. It also presents a way for companies operating or planning to operate in Asia to position their thinking in both regional and country level.
Summary of the key take-aways:
The global decline of trade, measured as percentage of GDP, has been a bit over one percentage point in 2012-2015, but this decline has been much more dramatic in Asia. For instance, China’s imports and exports have both fallen a whopping 5 percentage points to 17% and 20% respectively of its GDP during the past five years. The imports have dropped just slowly enough to be able to maintain a modest but diminishing surplus.
The phenomenon of declining trade (measured as percentage of GDP) seems to be nearly ubiquitous in Asia: Hong Kong, Singapore, South Korea, Malaysia, Indonesia, Thailand and India all have suffered a decline both in their exports and imports. A notable exception in the peer group has been Vietnam, where both exports and imports have skyrocketed: up 14 and 15 percentage points to 94% and 91% of GDP respectively. But with international trade in the peer group in the trillions of US dollars, this addition of a few tens of billions of US dollars has been mainly felt at a local level.
The lost trade volume is no small issue. Take Singapore, for instance: $16k of the exports per capita have evaporated during the past five years, and imports have declined by $17k per capita. This enormous loss in trade has still resulted in an increase of surplus by $1k per capita as exports have declined slightly slower than imports. Maintaining a trade surplus has been monumental for Singapore in keeping the GDP growth in positive territory with capital formation decreasing, household consumption going nowhere and government spending having been the only other element growing in current dollar terms.
Like Singapore, most of the countries have been able to sustain a trade surplus over the years of diminishing trade. India, Philippines and Japan, which saw a trade deficit in 2015, all saw it already in 2012. On one hand, the trade surplus should not come as a surprise given that plenty of goods consumed in the developed world are manufactured in these countries. But on the other hand, it does highlight their recent reliance on surplus as a source of growth.
Comparing something like China and Singapore may not be very insightful, with China’s GDP at $11T and Singapore’s at $300B. What is interesting though, is to discuss the implications of the overall trend at regional as well as country level. At regional level, the direction leaves no room for interpretation: trade has alarmingly diminished across Asia with imports down from $6.2T to $4.8T and exports from $6.3T to $5.3T among the peer group during the comparison period. This huge recent drop poses several key questions for multinational companies: What are my options if the trend continues further? If the trend turns, what bets will position me well to capitalize on the revitalization of international trade? Overall, how will I prepare myself to continue to prosper in the long term in the region?
It’s encouraging to see how China’s stand towards international free trade has become more positive despite (or perhaps because of) the declining trend. The Belt and Road initiative (this beloved child has many other names also, such as One Belt One Road, The silk Road Economic Belt, and the 21st Century Maritime Road, to name a few) is an ambitious $1T initiative by China to take more control over global trade. It intends to accomplish this together with 60 participating countries. The initiative will result in several geographical corridors from China to other regions. The key objectives of the initiative are well defined: to further develop undeveloped western parts of China, to increase trade of goods and services across the Asian and Eurasian region as well as to diversify China’s import sources. In this regard, at regional level, companies planning to operate in Asia should be scanning for opportunities to capitalize on this mega-trend early on to stay ahead of the competition. One way to accomplish this is to align and optimize the organization’s demand-supply network geographically in such a way that it can best reap the benefits of the corridors.
At country level, each country will continue to carefully (or less carefully) assess their policies on how to address the issue of a gloomy trade climate, where a natural tendency to strive towards trade surplus easily leads into a spiraling protectionist behavior. Unfortunately, taking any strategic course corrections when it comes to trade policies will continue to result in sometimes unpredictable geopolitical repercussions of varying sizes. Such course corrections might manifest for instance in a global super power pressuring a country to reverse any new policies that are harmful for the super power. Accordingly, companies operating in these countries should prepare to see high level of uncertainty, and a nimble approach with limited reliance on international trade while being able to capitalize on its emerging opportunities may be a proper way forward. For a manufacturer, for instance, this could mean setting up and running a factory in a country where there is a strong belief for a sufficient local demand, while also ensuring the set-up enables capitalizing on the longer-term opportunities of the new emerging international trade structure as they come up.
Source for economic data: World Bank. All dollars in current US dollars. Comparison period: 2012-2016. 2015 data used where 2016 data not yet available.
Date posted: 24.10.2017