Game of Trade: Unbowed, Unbent, Unbroken? Ludovic Subran, Chief - - PowerPoint PPT Presentation

Game of Trade: Unbowed, Unbent, Unbroken?

Ludovic Subran, Chief Economist Mahamoud Islam, Senior Economist Marco Hauschel, Research assistant Paris, 23 November 2017

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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

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Growth in Global Trade of Goods and Services (in %)

Game of Trade, November 2017

Global trade is expected to increase by +3.9% in volume and +6.3% in value terms in 2018 , on the back

• f 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.

47 48 49 50 51 52 53

• 21
• 15
• 9
• 3

3 9 15 21 27 05 07 09 11 13 15 17 Global Merchandise (goods) trade growth y/y (CPB, left) EH TMI (right scale)

Growth in Global Trade of Goods and Euler Hermes Trade Momentum index

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• 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

Additional Import Needs by Country (Goods & Services, in USD bn for 2017 and 2018)

Game of Trade, November 2017

In value, strong demand growth will come from China, the US and the Eurozone

5 Source: IHS, Euler Hermes

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.

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Potential Merchandise Export Gains by Country (in USD bn for 2017 and 2018)

Game of Trade, November 2017

Europe is back in the global trade race. By 2018, the Eurozone will be the top export performer

• 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.

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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

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• Recovering commodity prices and

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

• f Machinery & Equipment (+168bn)

and Chemicals (USD134bn)

The Commodities Gods May Surprise in 2018

Sector Gains For Goods Exports (in USD bn)

Game of Trade, November 2017

The strong performance in the leading sectors is due to the recovery in commodity prices while the USD remained cheap

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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

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Number of New Protectionist Measures By Country

Game of Trade, November 2017

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.

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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.

Financial Balkanization

Game of Trade, November 2017

Difficult access to financing stems from a continued balkanization of financial flows, pro- relocation policies in advanced economies and global monetary policy normalization.

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Game of Trade, November 2017

Geopolitical conflicts remain a key determinant of the reshuffling of trade routes

If Trump withdraws from NAFTA, this will be a historical event for global trade, as it is considered a flagship FTA. Growing tensions in the Middle East may impact the Strait of

• Hormuz. Any supply shock could

endanger the recovery of trade. Heightened risk on the Korean peninsula has already impacted

• trade. China banned imports of

certain South Korean products. Tensions with Russia and Brexit pose a threat to the trade outlook

• f European countries.

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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

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• Driver #1: Stronger corporate balance sheets

encourage companies to reinvest earnings

• abroad. Companies broke a new record of

USD7tn of cash on balance sheets

• Driver #2: Risk appetite is back
• Business confidence are at optimistic

levels (above 50 for manufacturing PMIs, e.g.) and investor confidence is high

• Equity markets are supportive and M&A

activity is still strong

• Driver #3: Corporates in the new economy to

drive a new wave of globalization?

• Corporates want to leverage their

competitive advantages (Grab and Lyft)

• Corporates want to circumvent

protectionism and regulatory burden (Samsung and Alibaba partnership)

Game of Trade, November 2017

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%).

200 400 600 800 1000 1200 1400 1600 1800 2000 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Worldwide Investment Inflows Forecast (in USD bn)

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Game of Trade, November 2017

Bilateral agreements and regional trade partnerships are under (re-)negotiation in all the regions of the world around three leading economies All states have taken an active role in fostering industrial policies from the US to Europe to Asia Example #1: China’s Belt and Road Initiative (BRI)

• China’s BRI will act as a catalyst to accelerate

investment inflows in participating countries

• China’s investment and construction projects have

increased by +USD960bn, with Asia leading (44%

• f total) before Europe (22%)
• It will help Chinese companies reduce industrial
• verhang (export surplus capital), while

internationalizing their operations Example #2: Japan’s and India’s Asia-Africa Growth Corridor (AAGC)

• Japan and India set up the AAGC, which will raise

FDI flows towards India and East Africa.

• Japanese companies will work on the construction

and infrastructure projects

In Asia, China positions itself as a champion of globalization, pushing forward the Regional Comprehensive Economic Partnership (RCEP). The EU moves closer towards cooperation with both Japan (currently renegotiating its economic partnership) and Canada (CETA). After the US withdrawal, the TPP could be implemented with the remaining countries led by Japan (Australia, Japan, Mexico, e.g.)

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• The service sector will account for 72%
• f worldwide GDP by 2018
• Move to service-oriented manufacturing

sectors (R&D, marketing and sales e.g.)

• Changing needs and consumption

patterns of burgeoning middle class (China e.g.)

• Digitalization allows streamlined supply

chains, better access to information and payments, optimized online sales platforms (help SMEs internationalize)

ICT Goods Exports and R&D Expenditure (in USD bn and Percentage of GDP

Game of Trade, November 2017

The third phase of globalization is driven by the digital and services revolution. ICT exports as a proxy for digitalization show that, beside the US and Germany, Asian economies are leading.

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Game of Trade, November 2017

Blockchain technology can accelerate trade by cutting through paper-intensive documentation, while reducing trade finance cost. It can also provide access to financial services to SMEs in Emerging Markets.

Three Advantages

• Access to financing. Provide access to

financing and reduce the financing gap (USD1.5tn p.a.) to SMEs in emerging market economies (China, India). Cross- border trade finance transactions (payments e.g.) can be executed automatically via smart contracts.

• Efficiency and Security. Digitalization of

traditional trade and shipping documents can increase efficiency and security at borders (approval process).

• Less regulatory risk. Reduction in

regulatory and compliance cost for

• banks. Lower fraud losses for

transactions that are registered on a block chain

World Bank Doing Business Indicators: 5 indicators to watch

Doing Business ranking Access to Financing Efficiency and Security Regulatory risk Getting Credit Protecting Min. Investors Cross-border Trading Resolving Insolvenc y Enforcing Contracts New Zealand 1 1 2 56 32 21 Singapore 2 29 4 42 27 2 Denmark 3 42 33 1 7 32 South Korea 4 55 20 33 5 1 Hong Kong 5 29 9 31 43 28 United States 6 2 42 36 3 16 United Kingdom 7 29 10 28 14 31 Norway 8 77 10 22 6 8 Georgia 9 12 2 62 57 7 Sweden 10 77 29 18 16 36 Macedonia 11 12 4 27 30 35 Estonia 12 42 76 17 44 11 Finland 13 55 62 34 2 46 Australia 14 6 57 95 18 3 Taiwan 15 90 24 55 20 10

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I. The US II. Mexico III. China

• IV. Japan

V. Germany

• VI. France
• VII. The UK
• VIII. Italy

Game of Trade, November 2017

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• US nominal exports of goods and services

are set to rise by +USD113bn in 2018 (after +119bn in 2017).

• As for merchandise exports (+USD74bn),

+USD24.9bn could go to Europe and +USD22.5bn to Canada and Mexico.

• Gains will come to a large extent from three

sectors: Chemicals (+USD13.8bn), Machinery and Equipment (+USD12.5bn), and Precious Metals and Jewelry (+USD10.9bn).

• Rising protectionism is unlikely to provide a

satisfactory answer to job losses in the manufacturing sector.

House US: Growth Behind the Wall?

Potential 2018 Merchandise Export Gains by Sector (in USD bn)

Game of Trade, November 2017

64% of merchandise export gains will be directed to North America and Europe

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• Mexico's exports of goods and services

are estimated to rise by +USD20.7bn in 2018 (after +USD10.4bn in 2017).

• Recovery in oil prices, strong US

economy, and planned US fiscal stimulus, successful pro-business structural reforms , and diversified trade partnership would help exports in the short run.

• Implementation of a new NAFTA deal is

unlikely before 2019. Mexico now turns to the Pacific Rim as it continues to reform its economy.

Game of Trade, November 2017

House Mexico: Growth Behind the Wall? Season 2?

Potential 2018 Merchandise Export Gains by Sector (in USD bn)

82% of Mexican goods export gains to come from North America in 2018

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• China’s exports of goods and services are

estimated to rise by a robust +USD129bn in 2018 (after +USD166bn in 2017) with strong gains in Electronic, Textile and Machinery and Equipment.

• Growing consumer appetite in Asia, lower

renminbi to support exports in the short run.

• The long-term trade strategy will be

premised on two major initiatives: the Manufacturing 2025 and Belt and Road Initiative (BRI).

• Two risks to watch: US protectionism (18%
• f Chinese exports) and rising wages

(+13% p.a. wage increase since 2001).

Game of Trade, November 2017

House China: Trade Is The Fury

Potential 2018 Merchandise Export Gains by Sector (in USD bn)

37% of Chinese merchandise export gains to come from Asia in 2018

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• Japan’s exports of goods and services are

forecast to increase by +JPY5.7tn in 2018 (after +7.9tn in 2017). Vehicles (+JPY970bn), Machinery and Equipment (+966bn) and Electronic (+702bn) will lead the trend.

• This is supported by a rise in new orders from

the US, Europe, Asia; an accommodative monetary policy with weak JPY.

• Government actions will also be supportive:
• Financial assistance (export credits,

investment loans etc.)

• Productivity-boosting measures

(innovation, labor market reform)

• Partnerships (EU, India) support

corporate internationalization

Game of Trade, November 2017

House Japan: Policies Are Power

Potential 2018 Merchandise Export Gains by Sector (in JPY bn)

52% of Japanese merchandise export gains to come from Asia in 2018

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• With real export growth expected at +3.8% in

2018, gains from merchandise exports could total +EUR68bn. Growth is driven by stabilized euro area countries (+EUR 49.5bn) and Asia (+EUR 9.0bn).

• The bulk of potential goods export gains

(58%) stems from Machinery and Equipment (+EUR 14.5bn), Chemicals (+EUR 12.5bn), and Vehicles (+EUR 12.3bn).

• Strengths: high degree of product

diversification and SMEs as market leaders (hidden champions)

• Threats: rise in protectionism and trade

barriers, and technological innovations

Game of Trade, November 2017

House Germany: The Khalasar of Trade

Potential 2018 Merchandise Export Gains by Sector (in EUR bn)

+EUR49.5bn merchandise export gains to Europe in 2018

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Game of Trade, November 2017

House France: Emmanuel Snow to the Rescue

Potential 2018 Merchandise Export Gains by Sector (in EUR bn)

60% of merchandise export gains to come from Machinery & Equipment, Agri- food, and Chemicals in 2018

• France’s external trade is currently among

the worst performers in the Eurozone. The Achilles of goods and services are nonetheless expected to rise by +EUR37bn in 2018 (after +EUR39bn in 2017) as demand for French goods and services increases.

• The majority of export gains in goods

(+USD21bn) come from Machinery and Equipment (+EUR5.5bn, including Aircrafts), Agrifood (+EUR4.4bn), and Chemicals (+EUR3.0bn).

• Two basic needs: More exporters and more

innovation in Exports

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• UK exports of goods and services look set to

increase by +GBP20bn in 2018 (after +50bn in 2017).

• As far as merchandise exports are concerned we

expect gains of +GBP11bn in 2018 (after +28bn in 2017) with three sectors making up the bulk of the improvement: Chemicals (+2.1bn), Machinery and Equipment (+2.0bn) and Jewelry and Precious Metals (+1.8bn).

• Demand for British exports is currently benefitting

from the cyclical upswing in Europe. Yet export dynamics will increasingly come under pressure as the formal Brexit date approaches given the uncertainty about the UK’s future trade regime. In the long run, post-Brexit restricted access to the EU Single Market will hurt UK exports.

Game of Trade, November 2017

House UK: The Red Divorce aka Brexit

Potential 2018 Merchandise Export Gains by Sector (in GBP bn)

+GBP2.1bn merchandise export gains to come from Chemicals in 2018

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• Exports of goods and services look set to

increase by +EUR33bn in 2018 (after +EUR37bn in 2017).

• Three sectors will make up the bulk of the

improvement in 2018: Machinery and Equipment (+EUR6.9bn), Chemicals (+EUR4.6bn) and Textile (+EUR3.3bn).

• Demand for Italian exports is currently

benefiting from the cyclical upswing in Europe.

• Yet export dynamics could come under

pressure if Italy fails to implement the necessary reforms to maintain its export competitiveness.

Game of Trade, November 2017

House Italy: Valyrian Steel

Potential 2018 Merchandise Export Gains by Sector (in EUR bn)

25% of merchandise export gains come from Machinery & Equipment in 2018

Economic Research Department Euler Hermes Group 1 Place des Saisons 92048 Paris La Défense Cedex France Phone +33 01 84 11 50 50 research@eulerhermes.com

http://www.eulerhermes.com/economic-research

Thank you for your attention!