by Etienne Charlier
I just read a report by Standard Chartered Bank about the evolution of World trade: “Global trade unbundled”. It gives views on how global trade will evolve after the great financial crisis. But it also provides interesting data and views on China trade itself.
I am quoting here some points from the report that are valuable for people actively sourcing or considering sourcing industrial parts from China. You can access the full report here (pdf).
"The majority of trade continues to be between developed markets, 58% if we include intra-EU trade, but this has fallen from 81% in 1990. Excluding intra-EU trade (a large part of which is in the euro), developed-market (DM) exports were overtaken by EM [emerging markets] exports in 2011 and now stand at 48%, down from 73% in 1990 (see image below).
"The rising importance of emerging markets in world trade has been associated with the growth in South-South trade corridors (trade between developing markets). The shares both of South-South and of North-South trade (trade between developed and developing countries) have expanded over the last twenty years at the expense of North-North trade, which has steadily dropped to 36% in 2012 from 56% in 1990 (See figure below). This decline has almost completely been matched by the rise in South-South trade, which increased to 24% from 8% over this interval.
China contributed over half (8.7%) of this 16% increase in South-South trade.
"Asia is often characterised as following a ‘flying geese strategy’, where the production of manufactured goods continuously moves from the more advanced countries to the less advanced ones as labour costs rise.
"As emerging markets move up the value chain, they are producing higher value-added products that can increasingly compete with those produced in developed markets.
This trends toward more sophistication goes for manufactured products but also for the overall supply chain structure:
"According to the ECB report, vertical specialisation in high-tech products increased substantially over the last two decades, especially in East Asia. Since the mid-1990s, low- and middle-income countries have expanded their market share in intermediate product categories such as chemicals or medium- to high-tech manufacturing such as machinery and transport equipment, with an increase in export share to 31% in 2010 from below 10% in 1995.
With cost increasing in many large emerging markets and transportation cost seemingly increasing as well, many claim that globalisation and offshoring benefits are mostly harvested.
"[This] underestimate some fundamental changes in the nature of world trade, as they still look at trade in a very traditional framework.
"The difference between the traditional supply chain model and today’s more complex supply chains lies in the fact that trade is now not so much in goods but in tasks, a reflection of growing specialisation that allows the same product to be both imported and exported by the same country. For example, while the iPad is said to be manufactured in China, China actually only makes a portion of the final product, importing the rest from other countries like Korea and Taiwan.
"This difference is highlighted by the rise in the import content of exports, now estimated to be around 40%, compared to only 20% in the 1990s according to the WTO (WTO 2012). Data from the OECD confirms this trend. The WTO expects it to rise to 60% by the 2030s, suggesting that specialisation and globalisation will continue, albeit at a slower pace.
"About one-third of China’s exports are hi-tech products, while about one-sixth of imports are classified as hi-tech. Assuming that all hi-tech products imported are exported after an incremental value-add, net exports would comprise about one-sixth of exports. In fact, at least some of the hi-tech goods imported will stay in China, so we can conclude that hi-tech value-added in China amounts to somewhat more than one-sixth of export.
"[But, emerging markets] wages remain well below those in the West. In our view, this suggests that wages have not risen enough to signify the end of the global supply chain or a slowdown in world trade; reshoring is likely to be only a modest trend.
Standard Chartered believes that the nature of trade may be shifting.
[...] "instead of vertical supply chains, where developing economies produce only low value-added goods, the nature of trade might shift to one of horizontal supply chain integration, where economies trade parts and components of similar products with each other to give buyers more variety and efficiency.
"The most famous example of this is the exports of parts and components of automobile exports from one developed country to another such as from the US to Canada or France to Germany and vice versa. The argument is that while there might be a limited comparative advantage in engaging in trade of similar products between countries at similar levels of development, it is still advantageous to undertake this trade, as it provides economies-of-scale efficiencies for producers as well as greater variety of choice for consumers.
"It is very hard to find reliable data that would help disentangle the impact of re-shoring on world trade from that of the steep crisis-led decline in global demand. However, according to a survey conducted by the Boston Consulting Group (2013), around half of 200 US companies with sales of over USD 1bn is considering the possibility of bringing production back to the US.
Still, a much smaller percentage (20%) of these companies is actually looking to bring back production over the next two years. Moreover, even if some companies bring back factories from overseas, their suppliers may still be in cheaper wage countries.
"[In a survey of 375 companies in the Pearl River Delta in China,] we found that while moving capacity out of China is now being considered, only 13% of respondents said they would leave the country to save costs.
There has been an increase in the proportion looking to move inland from the Pearl River Delta since 2012, but the majority said that they would invest more in capital equipment within China itself.
"A recent paper from the Peterson Institute suggested that China is the only genuine mega-trader to have emerged since the time of the British Empire (Subramanian and Kessler 2013). In addition, China is also already the biggest trade partner for almost all the Asian countries.
"There are several reasons why we remain constructive on China’s position as the leader of world trade:
"First, China stands to gain considerably from the ongoing recovery in the developed world.
The [developed markets] growth outlook is picking up now so China should benefit overall. The United States was, until recently, China’s biggest export destination. 45% of China’s exports to the United States are machinery and electrical equipment, which amounted to USD 169bn in 2013, bigger than the total exports of several [emerging markets] countries. These exports will grow as US consumption increases and demand for technology rises.
"Second, China remains a leading force in world trade, having consolidated its position as key player in global supply chains. As we argued above, while China’s low-cost advantage is eroding, the pace of movement of manufacturing to lower cost countries or to reshoring/onshoring by developed countries is likely to be slow.
China is moving up the value-chain, increasing its share of medium- to high-technology exports. Almost a third of China’s overall exports are hi-tech products, particularly mechanical and electronics products (Figure 40). While many of these exports are still only assembled in China, they require semi-skilled labourers as well as technology infrastructure. We believe it is unlikely that there will be significant migration of these processes out of China for lack of suitable replacement centres, with both the infrastructure and the scale to accommodate these exports.
Locations such as Vietnam, Bangladesh and Sri Lanka certainly provide cheaper options than China for low-end exports such as clothes and toys, particularly as Chinese wages continue to rise. However, it will likely prove hard for migration of semi-skilled, value-added activities, such as the assembly of tech products, to these economies in the absence of significant investment in infrastructure and an increase in the availability of skilled labour. Additionally, reverse migration to Taiwan or back to the United States is unlikely, as the cost of labour in China is significantly cheaper than in developed markets.