GLOBAL TRADE - Euler Hermes
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Economic Research
GLOBAL TRADE
November 2018
Photo by Benjamin Child on Unsplash
THE SHOW MUST GO ON
04 Global trade: It’s the cycle, stupid!
06 3 reasons to believe a trade war can be
avoided
09 2019: Where to go and who will grow?
12 What should businesses watch out for?
Global trade by Euler Hermes Economic Research
EXECUTIVE Global trade of goods and services remained quite resilient this year
despite the US’ protectionist rhetoric. In 2019, trade momentum is set
to soften to +3.6% (down from +3.8% in 2018) in line with global
SUMMARY growth. Protectionism will stay under control but further escalation to
a trade feud (average US tariffs above 6%) could cost half a point of
GDP growth. The price tag of an all-out trade war (average US tariffs
above 12%) could reach two points of GDP and precipitate a global
recession.
There are three reasons to believe a trade war can be avoided. First,
pragmatism in America. Second, the Chinese trade safety net plays a
role. Third, protectionism fatigue might kick in. We expect a more
constructive approach to trade on the US's side. Moreover, China’s
retaliation has not wreaked havoc on global trade so far. At the
Mahamoud Islam, Senior Economist for Asia
same time, trade facilitation reforms and new agreements are some-
+852 3665 8989
Mahamoud.ISLAM@eulerhermes.com
what compensating for the US-China quarrel.
In 2019, the top five destinations for exporters will be the US
(+USD193bn of additional demand for imports), China (+USD161bn),
Germany (+USD67bn), India (+USD58bn), and Japan (+USD48bn).
The best performing sectors will be services (+USD365bn of export
gains) and electronic and electric (E&E) products (+USD337bn). Ser-
vices will benefit from the rise of the middle class in emerging mar-
Ana Boata,, Senior Economist for Europe
kets and the ongoing servitization of the manufacturing sector which
+33 184 11 4873
Ana.BOATA@eulerhermes.com
is accelerated by digitalization.
In spite of trade tensions, Chinese exporters could gain as much as
+USD146bn in new exports in 2019. American (+USD134bn), Indian
(+USD71bn), German (+USD64bn), and Dutch (+USD52bn) compa-
nies might also make significant export gains. Asian and African new-
comers could rise to the Export Wall of Fame.
Ludovic Subran, Global Head of Macroeconomic Research Apart from the impact of protectionism, businesses should prepare
at Allianz and Chief economist at Euler Hermes for a higher cost of trade, trade diversion, and rising political risk.
+33 184 11 5399 First, the trade financing gap (USD1.5tn) will rise as monetary and
Ludovic.SUBRAN@eulerhermes.com
financial conditions tighten (in USD terms), while currency, political
and non-payment risks will increase. Second, trade diversion could
create winners and losers. Asian trade pivots should benefit the most.
Last, we expect 400 new protectionist measures globally (compared
to 560 in 2017). Yet sophistication, as well as confiscation and expro-
priation risks, could increase as the economy experiences a soft land-
Francois de Panisse Passis
ing.
+33 184 11 4873
Francois.dePanissePassis@eulerhermes.com
2
November 2018
Photo by Joakim Honkasalo on Unsplash
Global trade
in 2019 USD 1.3 trillion
3
Global trade by Euler Hermes Economic Research
GLOBAL TRADE
IT’S THE CYCLE, STUPID!
Global trade of goods and services remained relatively resilient
this year despite the US’ protectionist rhetoric
In 2017, global trade recovered by In 2019, trade momentum is set to etary policy in the US is expected to
USD1.9tn after losing c.USD3tn over soften in line with the softening of lead to slower investment growth
2015-2016., helped by a synchro- GDP growth. Not more, not less. and less momentum – especially in
nized improvement of demand from Emerging Markets.
The growth in the volume of global
major economies.
trade of goods and services is esti- We expect two additional rate hikes
In 2018, trade is expected to grow mated to decelerate to +3.6% in next year in the US and a first rate
by +3.8% as the volume of merchan- 2019 (from +3.8%) and value growth hike in Q4 2019 in the Eurozone; and
dise trade continued to rise above is set to slow to +6.3% (from +7.2%). third, with regard to trade prices,
the 2012-16 average performance In USD terms, trade is expected to though we expect Brent oil prices to
in a range of 2 to 4% supported by a increase by 1.3tn in 2019 (from 1.7 in decrease to USD69/bbl in 2019 on
solid growth in global demand1. 2018). average, resilient currencies and
stronger inflation should support
Trade prices continued to expand The economic assumptions behind
trade growth in value terms. As for
supported by more elevated com- this forecast are: First, global eco-
our policy assumptions, all eyes on
modity prices. Protectionism has had nomic growth decelerates slightly in
America First.
a very limited impact so far; yet sen- 2019 (+3.1% from +3.2% in 2018).
timent, as reflected by the decline of Such deceleration can be attributed
major economies’ manufacturing to the US (+2.5%; -0.4pp), the Euro-
PMIs, has been affected by trade zone (+1.7%; -0.2pp), and China
threats. (+6.3%; -0.3pp). Second, tighter mon-
Figure 1 Global Trade Growth
15%
Price Volume Value
9.3%
10%
7.2%
6.3%
5% 3.6% 3.8%
2.8%
3.0% 2.1%
2.2% 4.8% 3.8% 3.6%
0%
-1.6%
-5%
-10%
-10.6%
-15%
18f 19f
Source: Euler Hermes
1
Global economic growth rose by +3.2% in 2018 helped by stronger economic growth in the US (+2.9% in 2018 from +2.2% in 2017), a solid
4
growth in China (+6.6%) and the Eurozone (+1.9%).
Photo by rawpixel on Unsplash
Protectionism will stay under control. to an estimated 5.2% (which corre- situation, milestones include a US im-
Earlier this year, we introduced a pro- sponds to the level of tariffs of the plementation of 25% tariffs (currently
prietary analytical framework around 1980’s). Another way to look at it is to
at 10%) on USD200bn worth of im-
growing trade threats – Protectionism: consider the amount of trade that is ports from China; and a US slap of
Trade Games, Trade Feud or Trade covered by tariffs currently. The WTO 25% tariffs on USD50bn imports from
War?. We defined three scenarios estimates that new import-restrictive China and USD200bn imports of vehi-
based on a sensitivity analysis of the measures imposed by G20 countries cles. With such measures, the average
average US tariffs ([3.5-6%]; [6-10%]; from mid-May 2018 to mid-October US tariffs would go above 6% and the
and close to 12%); the number of pro- 2018 cover USD481bn of trade (more volume of global trade growth would
tectionist measures; and the resulting than six times the amount reported be cut by -2pp over two years. Growth
global trade dynamics ([2-4%]; [0-2%], from mid-October 2017 to mid-May would be hit by one third to half a
or contracting). We called them re- 2018). We are now getting closer to a point in the three major economies.
spectively trade games, trade feud, trade feud situation but our main as- For a trade war scenario to manifest,
and trade war. While the first half of sumption is that protectionism contin- the average tariffs to 12% due to 25%
2018 pointed to prolonged trade ues to be under control. tariffs on all imports from China and
games with negligible impact (on 25% tariffs on USD200bn of total US
An escalation to a trade feud scenario
growth, trade, inflation, and financial automotive imports. Global trade
could cost half a point of GDP in
markets) apart from defiance and growth would be cut by -6pp over two
growth; a trade war would cost two
volatility, President Trump’s Septem- years and a global recession becomes
points of GDP growth. For our base-
ber 23rd announcements bumped the very likely.
line scenario to move to a trade feud
average US average tariffs by +1.7pp
Figure 2 US average tariffs
60
Average tariff on dutiable imports (%)
Trade games
GATT 1st round, Geneva 1947 -35%
Trade feud
tariff reduction
50 Trade War
Foreign Trade & Competitiveness Act, Pdt
Reagan, 1988
40
WTO & proliferation of
FTAs
Reopening of WW II & post-war Restructuring U.S.
liberalization trade policy
30 trade
NAFTA signing, Pdt
Clinton, 1994
Trade Act of 1974
20
Steel Tariffs, Pdt
Bush, 2002
1979-1980: +1.7
10 pp vs 2017
GATT 6th round, Kennedy 1967 -38%
tariff reduction
0
Sources: National Statistics, Euler Hermes
5
Global trade by Euler Hermes Economic Research
THREE REASONS TO BELIEVE
A TRADE WAR CAN BE
AVOIDED
Pragmatism in America, the Chinese trade barriers between the EU and keep trade balance in surplus.
trade safety net, and protectionism the US and encourage the EU to buy
So far, US protectionist measures
fatigue more US goods. November political
have been counter-productive. Past
developments tend to confirm our
The determinants behind our central trade spat with Japan can explain
view of a potential positive outcome
assumption come from the practice why. The China-US trade deficit for
of this conflict: talks between China
of trade agreement in the US, the the first 9 months of 2018 accounts
and the US have resumed; President
decisive role that China plays as a for -USD318bn, +10% higher than
Trump hinted at a potential trade
trade safety net, and protectionism last year in the same period.
deal by the end of this year with Chi-
fatigue, whereby companies and
na. Yet, successive negative remarks Moreover, one lesson learned from
countries have been adapting to
from US officials (Pence, Lighthizer) the past is that it takes more than a
sophisticated protectionism in the
suggest that the process will be price shock to revert a trade deficit.
past years.
lengthy. The Plaza accord shows a caution-
We do expect a more constructive ary tale about the effect of price
China’s retaliation to US rivalry is not
approach to trade from the United adjustment on the trade balance. In
breaking global trade. Domestically,
States. The rebalancing of the politi- September 1985, G5 countries dele-
a first step would be to maintain a
cal landscape after the midterms gates met and announced that the
downward bias for the RMB. We
calls for a less aggressive stance on USD was undervalued and that they
estimate that -10% depreciation of
trade. Moreover, the example of the would correct the situation. The JPY
the RMB per USD would help ab-
revamped NAFTA (with Mexico, appreciated by +46% between Sep-
sorb a tariff cost of USD50bn (c. 25%
Canada) and KORUS (with South tember 1985 and December 1986.
tariffs on USD200bn imports from
Korea) deals and the easing of ten- Contrary to what could be expected
the US).
sions with the EU tend to confirm our from such a deterioration of price
view that: the US uses threats as a A second step would be to set a soft competitiveness, the trade balance
tool for negotiations; obtaining a economic patriotism policy to force against the US remained in surplus
trade deal is the end-game. As the the US to negotiate. This could in- (Figure 3). Non-price competitive-
US is by far the largest outlet for clude: (i) non-regulatory measures ness elements such as productivity
Canada’s and Mexico’s exporters, a such as an anti-US campaign, a boy- and efforts to innovate mattered.
major trade partner and political cott of some US products; (ii) regula- Indeed, the growth of GDP-to-
ally for South Korea, the Trump Ad- tory measures that affect American Employed Labor Force in Japan os-
ministration had the upper hand in companies operations in China. cillated between +1.5% and +5.1%
the negotiation. between 1985 and 1991, while it
The latter could consist in tighter
ranged in the US from 0.8 to 2%. In
Regarding China and the EU, the regulation at the customs, more diffi-
our view, this example suggests that
resolution of tensions may last a bit cult rules for basic and routine pro-
it would take more than a tariff
longer as both markets are much cedures (set up of a company, reve-
(price) shock to derail the Chinese
larger and less dependent on the US nues repatriation to the US, e.g.).
export machine. Productivity growth
than the previous ones.
China has already employed this is strong and the country is continu-
In that context, our scenario envi- strategy in the past when South Ko- ously investing in innovation. China's
sions lengthy negotiations that could rea decided to install a US made total expenditures on research and
lead to an agreement by the end of Terminal High Altitude Area Defense development have increased to
2019, with: (i) China’s extending the anti-missile system (THAAD). A third c.USD279 billion in 2017 (+14% y/y).
opening of its domestic market to US step would be to encourage innova- These account for 2.1% of GDP
corporates; (ii) moves to reduce tion and productivity in order to against 2.8% in the United States.
6
November 2018
Figure 3 JPY per USD and US-Japan trade balance
300 0
-10
JPY per USD (left)
250
-20
Trade Balance with Japan (USD bn,
right) -30
200
-40
150 -50
-60
100
-70
-80
50
-90
0 -100
Sources: IHS, Euler Hermes
China acts as a global trade safety domestically; boost imports growth 2018. This new integrated market will
net and wants to open up faster. With and global trade ultimately. We esti- account for 13% of global GDP, 7% of
full policy mix support, we forecast mate that: a tariff cut of 1pp could the global population and 16% of
import growth in China to remain boost global trade by +0.3pp. global trade. The Regional Compre-
strong at USD 161bn in 2019. In addi- hensive Economic Partnership, which
Trade facilitation reforms and new
tion, since December last year, China gathers almost all Asia-Pacific big
free trade agreements are partially
cut import tariffs (except for the US) players (China, Japan, India, South
compensating for the US-China quar-
for a certain number of consumer Korea, Australia, New Zealand, and
rel. Out of the US, countries tend to
goods including food products, phar- ASEAN) is currently in negotiation and
favor free trade initiatives. The last
maceuticals, garments, cosmetics and a deal could be reached next year.
edition of the World Bank Doing Busi-
home appliances, and passenger The grouping will represent nearly
ness (Doing Business 2019) points to a
cars. In November 2018 in particular, half of the global population, 32% of
positive trend: trading across borders
1585 industrial products, including global GDP and 30% of global trade.
sub-score have increased in almost all
machinery, electronic devices, textile Last, there are also free trade initia-
major economies (see Figure 4), and
and construction material, have seen tives that are ongoing and are ex-
especially in emerging markets that
a tariff cut. Moreover, China stepped pected to bear fruits gradually. The
used to have poor scores such as In-
up initiatives to open its market to Belt and Road, for instance, is getting
dia, Indonesia or even China. One-
neighboring countries, namely India, traction, with more countries getting
third of G-20 countries improved their
South Korea, Bangladesh, Laos, and involved, and enlarged financial ca-
score.
Sri Lanka with significant tariffs cut for pabilities. The initiative gathers now
imports of soybeans, beef, liquefied Moreover, there is a certain number 80+ countries (60+ in its beginning)
petroleum gas, textiles, and medical of game-changing Free Trade Agree- which represent nearly 36% of global
X-ray devices. While it is too early to ments that could be effective soon. GDP, 68% of the world’s population,
assess the impact of such moves, The Comprehensive and Progressive 41% of the global trade and 46% of
these measures are expected to: re- Agreement for Trans-Pacific Partner- global savings.
duce input cost for corporates, sup- ship (TPP without the US) has already
port consumption growth as house- been ratified by six nations and is set
holds get access to cheaper products to come into force on 30th December
“Protectionism should stay under control. Yet an escalation
to a trade feud scenario could cost half a point of GDP in
Ludovic Subran, Global Head of
growth; a trade war would cost two points of GDP growth.”
Macroeconomic Research at Allianz
and Chief economist at Euler Hermes
7
Global trade by Euler Hermes Economic Research
Figure 4 G-20 Trading across borders (100 = best score)
120
DB 2018 DB 2019 OECD avg
100
80
60
40
20
0
Source: World Bank Doing Business
Could plurilateral agreements be G20s are calling upon countries to farmers, workers and companies, I
the (trade) new normal? The World come back to their senses and let go have instructed our U.S. Reps not to
Trade Organization (WTO) is at full of tweet storms. At the same time— endorse the Communique as we
speed: its dispute settlement process beware of protectionism fatigue. look at Tariffs on automobiles flood-
has functioned reasonably well. ing the U.S. Market!”.
President Trump does not like to
Efforts to modernize the WTO and
leave international summits without At the 29th NATO summit, on July
maintain the current international
flamboyance. On July 9th, 2017 (one 11-12 in Brussels, Donald Trump
trading system are intensifying. Ma-
day after the G20 in Hamburg), he once again hit the retweet record by
jor disagreements between WTO
confirmed by tweet his will to “fix opening the summit with blistering
members relate to the way to ad-
bad trade deals” despite an adopt- criticism of Germany, calling it a
dress intellectual property rights,
ed declaration on further trade inte- 'captive of Russia'.
industrial and agricultural subsidies
gration the previous day.
and new realities such as digitaliza- These invectives detracted from the
tion and e-commerce. In the same way, he instigated the summit's goal of projecting unity in
trade feud with China three days the face of Russian aggression.
In September, the EU released a
before the Davos summit in January
concept paper to improve the insti- In Buenos Aires on November 30th
by imposing the first tariffs on wash-
tution with tighter rules on industrial and December, 1st 2018, leaders of
ing machines and solar panels.
subsidies, new rules to reduce barri- the world will meet again.
ers to services and investment, and a While much of these imports do not
more fine-tuned dispute settlement come from China, the statement On the official agenda, trade; on the
mechanism. One example of the made clear that Chinese dominance officious agenda the so-called Thu-
multilateral system pulling itself by of the global supply chain was a cydides’ trap: The US, worried about
its bootstraps is the current platform concern. the growing influence of China, de-
under negotiation around e- cided to attack first economically.
At the G7 summit on June 8-9, Presi-
commerce – which started in 1998
dent Trump had initially agreed to Throughout history such situations of
and has stalled because of categori-
sign on the communique traditional- paranoia versus hubris have often
zation issues and resuscitated in Bali
ly cobbled together by the countries resulted in a military conflict - 12
(2013) in line with the Trade in Ser-
at the end of the summit saying that times out of 16 to be exact2.
vices Agreement (TiSA). In spite of
America was still on board with the
failing rounds, the WTO is now open The final declaration will certainly
liberal democratic project it helped
about plurilateral agreements – advocate for trade liberalization
build in the ashes of WW2.
which involve only some members – and against isolationism at a time
or trade compacts which could re- However, somewhere in the Pacific when a soft landing is visible in the
place consensus agreements. It cer- on his way to meet KJU, the US Presi- three major economies.
tainly is not enough to counter- dent declared: “Based on Justin’s
balance the many trade-related false statements at his news confer- But it is hard to predict what would
risks but certainly shows that a new ence, and the fact that Canada is be the following morning’s tweet.
model is possible. charging massive tariffs to our U.S.
2
Out of the 4 which did not end into a conflict, 3 happened in the 20th Century: UK-US in the early 1900s, the Cold War or more recently Germa-
8
ny versus the UK and France in the 1990s.
November 2018
2019: IN SPITE OF RISKS
WHERE TO GO?
WHO WILL GROW?
The US, China, and the Eurozone +2.4% in 2019 (from +2.2% in 2018), Figure 5 Top 30 Additional Import Needs by Market
continue to be the best destinations unemployment rate to decrease to (Goods & Services, in USD bn for 2019)
for exporters. Despite rising trade 7.9% (from 8.2%). In other large ad-
tensions, imports from major econo- vanced economies namely Japan, 0 100 200 300 400
mies – namely the US, the Eurozone, South Korea, Switzerland, and Swe- United States 193
and China – are expected to remain den, imports are expected to grow China 161
essential. as firm currencies boost purchasing Germany 67
powers. India 58
We pencil a rise of +USD193bn in Japan 48
2019 for the US, of +USD260bn for In emerging markets, Emerging Asia
Netherlands 47
the Eurozone. will continue to record a solid import
South Korea 45
growth, reflecting a burgeoning do-
Hong Kong 41
In the US, the fiscal stimulus of the mestic demand and a rise of capital
France 37
Trump administration and a rise in and equipment goods imports as
Brazil 35
wages associated with the strength the region becomes more integrated Singapore 33
of the dollar will keep both domestic into global supply chains. Canada 29
demand and imports in-check. In We particularly expect a rise of im- United Kingdom 28
China, solid growth of private con- ports of +USD108bn for the ASEAN- United Arab Emirates 26
sumption and an opening of the 6 grouping and USD58bn for India Ireland 25
domestic markets are expected to in 2019. In the eastern part of the Poland 25
support import growth (+USD161bn EU, demand will remain relatively Vietnam 21
in 2019). In the Eurozone, improving firm as the positive economic out- Mexico 21
job markets and resilience in both look in the EU boosts income growth. Nigeria 19
investment and consumption will Malaysia 17
Poland will continue to lead the
Spain 15
support the rise of imports. trend with an import growth of
Taiwan 14
We expect wage growth to rise to +USD25bn.
Indonesia 14
Belgium 14
Thailand 14
Italy 13
“China acts as a global trade safety Australia 11
Norway 11
net, and wants to open up faster. We Philippines 10
Romania 10
Ma-
estimate that: a tariff cut of 1pp could
Source: Euler Hermes
hamoud Islam
Senior Economist for Asia
boost global trade by +0.3pp.”
9
Photo by Negative Space, PexelsGlobal trade by Euler Hermes Economic Research
Photo by Mikael Kristenson on Unsplash
Thanks to servitization, services ex- The Electronics and Electrical equip- next year.
ports are expected to post a growth ment sector will benefit from the
The latter is under stress and could
of +USD365bn (a pace relatively economic resilience in the largest
be hit severely over the next months
similar to 2018). electronics importers (China, US,
if the US were to impose a 25% tariff
Germany, and Japan). The mass
First, this will be driven by a contin- on USD200bn of automotive im-
adoption of IoT devices and the arri-
ued growth of the services sector in ports.
val of 5G technology, which has al-
emerging markets. China’s services
ready started to be commercially For now, we expect demand to re-
are expected to account for 53%
deployed, will foster the trend in main resilient, sustained by solid
GDP (from 52% in 2017) for instance.
2019. Machinery and Equipment demand in advanced economies
In these markets, the manufacturing
exports are expected to post resili- and continued expansion in emerg-
sector is becoming more service-
ent growth supported by a rise in ing markets such as China and India.
oriented with higher spending on
infrastructure spending mainly led
research & development, marketing Agrifood and textile industries hin-
by China as part of its fiscal stimulus
and sales, customer support and dered by strong price pressures.
and its Belt and Road Strategy. The
financial services. Strong competition may act as a
energy sector will be driven by two
drag on nominal growth.
Moreover, services are developing dynamics: a strong catch up in 2018
at a fast pace as the rise of the mid- as oil price increases rapidly on year Paper will continue to feel the heat
dle class leads to new consumer on year terms (around +31%), and a of the march towards digitalization.
needs. correction in 2019.
Last, lower demand in the agro-
This trend is fostered by continued Ferrous and Non Ferrous metals chemical industry (around 6% of
digitalization, which enlarges oppor- and Vehicles are faced with signifi- total output), lower prices in petro-
tunities for corporates through new cant protectionist threats. The for- chemical (around 50% of total out-
trading platforms and a better offer- mer is already heavily targeted by put) due to strong competition from
ing of online services (online courses, protectionist policies and we expect the US will act as a drag on the sec-
online consulting, e.g.) a moderation in trade performance tor overall.
Figure 6 Sector gains for merchandise goods (USD bn)
0 200 400
Services 365
Electronic and Electric 337
Energy 148
Machinery & Equipment 110
Vehicles 74
Ferrous and non-ferrous 73
Chemical 49
Agrifood 47
Textile 38
Wood Paper 24
Source: Euler Hermes
10November 2018
Heavyweight exporters – China, the mand. In the Eurozone, the perfor- Figure 7 Top 30 – Potential Export Gains by Market
US, and Germany – are best posi- mance will be mainly driven by de- (Goods and Services in USD bn for 2019)
tioned to benefit from trade growth. mand from the EU (60% of trade is
China, the US, and Germany remain intra-regional) as emerging markets 0 50 100 150 200
on top of our export gains. In China, show signs of weakness and a weak China 146
currency depreciation and front- euro encourages corporates to look United States 134
loading of exports to the US help for local suppliers. Germany, France, India 71
explain the strong rise of exports in and Italy, in particular, are expected Germany 64
2018. In the medium term, we ex- to post a rise of export of USD64bn, Netherlands 52
pect Chinese trade initiatives, name- USD28bn, and USD16bn respective- Vietnam 40
ly the Belt and Road and potentially ly in 2019. Brazil 36
Hong Kong 35
the RCEP, to help diversify exports.
Asian and African newcomers could Singapore 34
Note that China’s exports to Belt make it to the Export Wall of Fame. Canada 31
and Road markets account for a We expect strong performance from Japan 30
third of total China’s merchandise manufacturing countries in Asia, Ireland 30
exports while the US accounts for Eastern Europe, and Africa. These France 28
19% of merchandise exports. In the markets will likely benefit from: the Malaysia 27
US, the export acceleration of 2018 rise of protectionism in the US (as South Korea 26
should be based on higher capacity corporates will look for new suppli- Poland 22
to export energy, alongside higher ers out of China and the Eurozone), Taiwan 22
oil prices, as well as a stable de- the advancement of the Belt and United Arab Emirates 20
mand at a global level. Road project (which should improve Indonesia 20
connectivity within these three re- Mexico 18
The same factors should explain the gions), and the development of Chi- Thailand 18
deceleration of exports in 2019, with na’s value chain (which should bene- Spain 18
lower energy prices and an ex- fit low-end producers in both emerg- Philippines 18
pected deceleration of global de- ing Asia and Africa). Norway 17
Nigeria 17
Australia 17
United Kingdom 17
Italy 16
“The US, China, and the Eurozone will Saudi Arabia
Belgium
13
11
continue to be the best destinations for
Source: Euler Hermes
Ana Boata,
exporters in 2019. We expect a rise of
Senior Economist
for the Eurozone
imports of goods and services of
+USD193bn from the US, +USD161bn
from China and +USD260bn for the Eu-
rozone.”
11Global trade by Euler Hermes Economic Research
WHAT SHOULD BUSINESSES
WATCH FOR IN 2019?
Opportunities should continue to The trade finance gap is estimated Agreement for Trans-Pacific Partner-
attract companies ready to interna- at USD1.5tn. ship and the Regional Comprehen-
tionalize but there are three main sive Economic Partnership. This
Second, trade diversion has already
risks they should prepare for: a high- offers new opportunities in terms of
started and could disrupt supply
er cost of trade, trade diversion, and organization for corporates. In the
chains. Corporates could focus on
political risk beyond protectionism. case of the RCEP for example, we
local markets and secured trade
expect Chinese corporates to invest
First, the cost of trade will mechani- routes, to keep revenues in check as
and build factories in Cambodia,
cally increase in 2019. On top of the risk of supply chain disruptions
Laos, and Myanmar in order to man-
increased tariffs, and time to clear has increased with US-China trade
ufacture low-end products (textile
customs because of uncertainty, tensions.
and electronic).
trade financing is expected to be-
While the value of global trade con-
come more costly, in line with tight- This would make the Chinese supply
tinues to grow in both 2018 and
ening monetary and financial condi- chain more competitive but will also
2019, foreign direct investment
tions in dollar terms, as well as a open new markets for Chinese com-
worldwide could decrease by -14%
specific increase of currency, politi- panies. Both external strategies
in 2018 before a modest uptick in
cal and non-payment risks. would lead to a diversion of supply
2019 (+5%)3. In the US, companies
chains. Intermediate consumption
For every 100 basis points of in- are experiencing a boom – and a
hubs will be scrutinized.
crease in US 10 year interest rates, lesser incentive to go after trade
trade finance costs increase by 80 outlets abroad. Out of the US, past Asian pivots will benefit the most
basis points. Currency depreciation the wait-and-see mode, corporates from global trade re-wiring.
risks come on top, as most emerging try to secure their supply chain.
Figure 8 and 9 help identify the loca-
markets’ currencies are expected to
Blue wire trade – red wire trade: tions that could benefit the most
depreciate (to the dollar) by another
Duplicating supply chains or bank- from the trade’s new normal.
5 to 10% in 2019.
ing on competitive and neutral
Figure 8 shows the countries that
Policy mistakes (miscommunication trade hubs to avoid tariffs?
have recorded the largest gains in
on macro-policies and pro-cyclical
In the face of growing trade threats, global market share for intermedi-
macro-policies) have become very
and political risks including Brexit ate goods exports (electronic com-
costly for demand; the cases of Ar-
and bilateral tensions as in the Gulf ponents, engines, e.g.) over 2006-
gentina and Turkey where recession
countries, company boards and the 2016. This is a crucial indicator of
prevails are important to note. Vul-
risk managers’ community have countries integration in the global
nerable countries include Brazil,
started to discuss secured trade supply chain.
Russia, South Africa, and to a lesser
routes either banking on neutral and
extent India, Philippines, Indonesia, China tops the ranking by far. The
competitive trade hubs that are not
Romania, and Hungary. markets that follow (South Korea,
subject to protectionist measures
Vietnam) are solid contenders but
In addition, insolvencies have been from major economies, or by region-
catching up to China will take time.
up for the third consecutive year alizing their value chains along
globally by more than +5% with Asia trade areas. For instance, a compa- Figure 9 shows the average growth
and Latin America contributing the ny could decide to operate: in the of stock of Inward FDIs and average
most to the number of companies USMCA FTA (US Mexico Canada growth of trade for selected coun-
going bust. Last, trade to/from Free Trade Agreement) world; along tries over 2014-17 (post Taper Tan-
emerging markets is already affect- mega trade agreements such as the trum and after the start of the Belt
ed by the scarcity of trade finance. Comprehensive and Progressive and Road Initiative).
3
Global foreign direct investment inflows fell by 41% y/y in H1 2018 because of the repatriation of foreign earnings by US companies from their
12 foreign affiliate after the tax reform. Short-term indicators provide a more nuanced picture with M&A sales decreasing by -1% y/y in H1 2018
and announced Greenfield investment growing by +42% y/y.November 2018
Figure 8 Intermediate goods exports: Change in global market share, % – Top performers
China //
7.1
South Korea 1.59
Viet Nam 0.94
Mexico 0.92
Taiwan 0.75
Malaysia 0.67
Thailand 0.52
India 0.51
Poland 0.39
Czech Republic 0.37
Romania 0.31
Slovakia 0.26
Turkey 0.25
Israel 0.12
Hungary 0.09
Indonesia 0.07
Egypt 0.05
Lithuania 0.05
Bulgaria 0.05
Serbia and Montenegro 0.04
Sources: IHS, Euler Hermes
One feature of new manufacturing It is unlikely that China will be re- In Asia, these markets are found in
hubs is a strong growth of foreign placed soon as the key supplier. The ASEAN. Malaysia, Thailand, and
direct investment associated with a market is still extremely competitive Indonesia are already integrated
strong growth of trade. Corporates (taking market share aggressively), into the global supply chain and are
invest in factories in the new mar- foreign investment is strong, and its competitive; Vietnam, Philippines,
kets, import capital goods and start Cambodia, and Laos are becoming
position in the global supply chain is
selling from these markets. We use more integrated.
China as a benchmark. In the North crucial. In the longer term, we see
East part of the graph, we see the new players emerging and diversion In Europe, Romania and Poland are
new manufacturing hubs which are effects due to new trade policies the best positioned with modest
mainly Asian markets (Bangladesh, and corporates strategies will likely growth of investment and strong
Vietnam, Cambodia, Laos, e.g.). exacerbate this trend. growth of trade.
Figure 9 FDI Inward Stock and Trade of Goods and Services (growth average over 2014-2017)
16%
Philippines
14%
Vietnam
Trade of goods and services
Cambodia
12% Côte d'Ivoire
10% Bangladesh
Romania
Sri Lanka
8%
Poland Morocco
6% Mexico
Costa Rica Lao P.D.R.
Malaysia Myanmar
Germany Italy Turkey
Pakistan
4% China
Australia Japan India
France
United Kingdom
United States
Canada Kenya
2% South Africa
Argentina Saudi Arabia
Thailand
Indonesia
Brazil Nigeria Colombia
Panama
0%
Chile
Russia
-2%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
FDI inward stock
Sources: UNCTAD, IMF, Euler Hermes
13Global trade by Euler Hermes Economic Research
Last, tariffs are the tip of the iceberg. ist rhetoric did not concern trade restrictive measures among the G-20
Other forms of protectionism, politi- countries recently (+40 from mid-
directly but the benefits from critical
cal risk, and Fait du Prince could sectors such as energy, and agricul- May to mid-October). Globally, our
increase further in 2019. On top of ture. As the economy enters a soft calculations indicate that the US
more costly trade routes, transaction landing, more interventionism and tops the ranking accounting for 20%
risks as exemplified by growing defensive strategies could be enact- of the implemented measures. Pro-
sanctions or targeted regulatory ed. tectionist measures are very specific.
risks on highly visible and strategic They targeted specific countries such
Cautious optimism prevails on pro-
sectors – such as automotive –, as as China, followed by Canada and
tectionism-at-large. Figure 10 shows
well as confiscation and expropria- the US, as well specific sectors.
the number of protectionist
tion risks on assets, especially critical China was targeted by 369
measures that have been imple-
infrastructure could be a second
mented by country since 2014 with a measures during the period 2014–
phase to mounting protectionism. 18.
focus on top contributors.
From the United States to Germany On top of the US and China, several
The number of protectionist
and France, to China, government economies have also adopted non-
measures kept increasing since
interventions against foreign takeo- tariff trade barriers especially in
2014, yet the pace is slowing. After
vers have increased, in both number 560 measures in 2017, the first nine Metals, Chemicals, and Construc-
and visibility4. months of 2018 saw an increase of tion, or Agrifood, and Machinery &
In several countries in Latin America 294. And based on current trends, Equipment. Going forward, visible
(Mexico, and Brazil), in Asia we could end the year with 400 and strategic sectors could face sig-
(Indonesia e.g.), in Europe (Italy), in measures implemented. The WTO nificant headwinds.
Africa (South Africa), the protection- figures indicate an increase of trade
Figure 10 Number of protectionist measures adopted by year and distribution by sector
1400
1320
1193 26%
1200 Protectionist measures
1095 worldwide
Other sectors
1000
8%
909 Energy
8%
800 Transport
9%
Chemicals
600 560 11%
Machinery &
Equipment
16%
400 Metals
294
14% Agrifood
12% 12% 13%
200 11% 10%
22%
Share impacting the
US and China
0
Sources: GTA, Euler Hermes calculations
4
Committee on Foreign Investment in the United States or CFIUS, Außenwirtschaftsverordnung, and Decret Montebourg are the names in the
US, Germany in France respectively of the legal proceedings which help limit foreign acquisitions of critical companies and assets domestically.
5
Our estimates are based on Global Trade Alert Database. We adopted a broad definition (similarly to GTA) of protectionism and include all
initiatives that can hinder another country’s commercial interest. We focus on measures that have been initiated and implemented by national
bodies.
14November 2018
Photo by Charles Deluvio on Unsplash
15Director of Publications: Ludovic Subran, Chief Economist
Euler Hermes Allianz Economic Research
1, place des Saisons | 92048 Paris-La-Défense Cedex | France
Phone +33 1 84 11 35 64 |
A company of Allianz
http://www.eulerhermes.com/economic-research
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FORWARD-LOOKING STATEMENTS
The statements contained herein may include prospects, statements of future expectations and other forward -looking
statements that are based on management's current views and assumptions and involve known and unknown risks and
uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such forward -
looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situa-
tion, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets (particularly
market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including from natural ca-
tastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi )
particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rat es
including the EUR/USD exchange rate, (ix) changes in laws and regulations, including tax regulations, (x) the impact of
acquisitions, including related integration issues, and reorganization measures, and (xi) general competitive factors, in
each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more
pronounced, as a result of terrorist activities and their consequences.
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any information required to be disclosed by law.
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