Trade Remains a Certainty in an Uncertain Future

As a more affluent population powers a regional economic focus, flows to and within Asia will further persist.

ANY discussion of trade today inevitably finds itself focused on the trade war. The Economist picked “tariffs” as its word of the year in 2018, when the editors admitted to using the word three times as often compared to the year before.

Date

30 Apr 2019

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A second word choice might well be “tensions”, as in the absence of a full-fledged trade conflict, tensions over tariffs persist.

In 2019, the worst spillover effects are fuelling broad-based uncertainty over global growth prospects. A portion of this pain is being felt in Asia, as concerns about weakening growth in China, a slowdown in US momentum, and worsening business and investor sentiment remain topical for market participants. 

Yet one positive trend that has attracted far less attention in the media is the fact that in spite of a flow of tough talk, something is still working in Asia. In 2018, the region’s export volumes increased again to US$6.5 trillion, maintaining an upward trajectory that has been reflecting momentum for nearly a decade.

From a regional perspective, according to the International Chamber of Commerce, Asia will account for 38% of global trade flows by 2020.

Despite a slowdown in China, we believe that elevated growth rates in Asia-Pacific, relative to other markets worldwide, will continue to power the region forward. Between 2008 and 2018, the average GDP growth rate for Asia-Pacific was 6.3%, compared with a weighted average of 1.4% for the US and Western Europe combined.

That’s because Asia is home not just to China but also to the emerging economic powerhouse known as the Association of Southeast Asian Nations (Asean). The closely linked economies of that particular grouping are growing rapidly, driven by rising domestic consumption and a growing middle class. For this region, Citi forecasts GDP growth of 4.9% in 2019 and 2020.

The growth story also extends to India, which is increasingly integrating into the region’s economic development. The economy has great potential and we forecast GDP growth rates of 7.4% in 2019 and 7.6% in 2020.

The practical effect of variable growth rates across the region is that despite fuelled uncertainty, when we break the whole picture down, the situation becomes more nuanced.

That’s why at Citi, uncertainty and rhetoric aside, we believe that the age-old need of people and nations to exchange goods and services with each other will increase trade flows.

Globally, we expect trade will not contract, but rather evolve, to become more geographically diverse. Trade flows will increasingly shift towards markets where opportunities and costs are attractive and we believe flows are likely to rebalance between different trade corridors, especially through Asean markets.

As a more affluent population powers a regional economic focus, flows to and within Asia will further persist. Asia-to-Asia interregional capital flows have grown substantially from 2010 to 2017, to over US$1.6 trillion. That amounts to more than two times the flows from Europe to Asia and over five times the flows between the US and Asia in the same period.

These flows represent a powerful growth engine for the region. Banking our clients along the region’s trade corridors, we grew intra-Asia trade revenues by 22% last year.

Such shifting flows, exacerbated by increasing costs in China and ongoing trade tensions, are also prompting many companies to re-evaluate and potentially reconfigure their supply chains.

While we expect these changes to have some measurable impact over the next three years or so, one thing that is clear is that supply chains will need to be nimbler and allow for greater flexibility for trade partners to prosper.

Trade in the future
While trade tensions may detract some value from the region’s growth potential, we believe the region will continue to take precedence in trade over the next few decades. Digitization, urbanization and other social and technological advances will continue to power the regional economy.

First, digitization has propelled the emergence of a thriving Asia e-commerce economy. Digital adoption, driven by mobile and instant payments, have enabled financial inclusion and boosted consumer power. Digital platforms and ecosystems have come to dominate the convenient provision of goods and services in markets including China and increasingly so, in Asean.

A 2017 report by Google and Temasek estimated that Southeast Asia’s internet economy could exceed US$200 billion by 2025. Driven by the region’s obvious potential, Asean is also the birthplace of some of today’s world-recognized unicorns and digital natives including GO-JEK, Grab and Tokopedia. 

These economic activities are fuelling growth, which in turn is stimulating trading activity.

The impact of digitization on cost reduction will also drive trade trends positively. Technologies including blockchain can significantly decrease the paperwork and time involved in the movement of goods. Solutions that incorporate artificial intelligence and the “internet of things” will be able to reduce logistics costs.

Applying these advanced technologies, businesses will be able to design supply chains that allow for far more flexibility. Technology could further encourage supply-chain sustainability as climate change and sustainable finance emerge as stronger priorities for public and private sector participants in time to come.

Looking forward, digitization will mean that governance for data privacy, security and cross-border data flows will need to be in place and be consistent to spur on competition and growth. Governments and private sector players will consequently need to strengthen their capabilities to manage vulnerabilities and cyber-threats.

It is encouraging to see some of these efforts already getting underway. As an example, at the recent World Economic Forum meeting in Davos, 75 countries announced the launch of formal negotiations to develop rules on e-commerce under the umbrella of the World Trade Organization.

Positive sentiments toward trade are also deepening Asia’s commitment to modernize and consolidate trade agreements, both multilateral and bilateral. Such developments will continue to reinforce already rising Asian self-sufficiency.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Free Trade Agreement is now in force and there are moves to expand it while Regional Comprehensive Economic Partnership (RCEP) negotiations are ongoing involving Asean and its major partners.

While the future of the global economy continues to be uncertain, what we see on the ground in the region is a certain resilience, where an estimated over 60% of the world’s GDP growth will come from in the next ten years.

With a global network that spans over 100 countries and deep roots in Asia, Citi is uniquely well-positioned to support our clients as they embrace change and uncertainty. As The Asset enters its third decade, I am certain you too are embracing the future as we are. 

Over the past 20 years, you have witnessed and covered significant developments globally and in Asia, some of which have changed the course of business and the world. I look forward to a continued strong partnership with your publication and we at Citi look forward to toasting your next milestone.

Francisco Aristeguieta is CEO of Citi Asia Pacific. 

Date

30 Apr 2019

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