With Asia now clearly the world’s largest economy, China-led regional integration has become the key driver of global trade growth. As intra-Asian trade approaches $4 trillion around 2020 – surpassing intra-EU trade – companies may need to rethink the impact that an increasingly integrated Asian market has on their future growth and global competitiveness.
China’s first wave of Industrialization drove fundamental changes in global trade patterns. Between 1990 and 2012, China emerged from being a small to middling player global trade to become the top trade partner for most countries. China “bears” contend that this rapid emergence is a temporary phenomenon based on hyper competitiveness in labor-intensive exports that is now coming to an end.
Such complacency obscures the dramatic and permanent reordering of global trade patterns that is now underway. Two pivot points mark the boundaries of a new alignment in global trade that is rapidly taking shape:
1. All major economies will soon rank China as their largest trading partner.
2. While the importance of China grows for these former economic engines of global trade growth, China’s – and the world’s – primary source of trade expansion will come from the rapid economic integration within the Asian region.
The first pivot point is less a forecast than a simply statement of fact. China’s two-way trade with Japan overtook US-Japanese trade in 2007, setting the stage for the global transformation that continues to unfold. By 2009, China had replaced the US as Germany’s largest trade partner. In 2014, China-US trade will surpass US trade with the EU and with Canada, traditionally the top two US trade partners.
OECD’s Top Trading Partner
In the “new normal” of the post-2013 world, China’s role will continue to grow. The global implications of this shift are profound – both politically and economically – in their own right (detailed in a subsequent article). But the critical dimension of the “new normal” likely to have the most immediate impact on corporate thinking stems not from China’s dominant role in trade with the OECD economies. Instead, companies need to focus on the declining importance of the OECD markets in China’s export mix as the rapid integration of Asian regional economies becomes the driver of global trade expansion, with China playing the central role.
The complexity of this new engine of global growth is likely to provide the most immediate and actionable shifts in the 2014-15 business environment.
Just as the economies of the EU and the US have become more closely linked to China, China’s export dependence on each of these markets has progressively declined. While superficial analyses conveniently dismiss this decline as part of the backwash from the Western debt crisis of 2008, it is clear that:
• China’s exports to these markets continued to grow even while US/EU overall non-oil imports stagnated and China’s currency appreciated
• Expanding Asian intra-regional trade has replaced exports to the “big three” traditional markets as China’s primary source of growth
• Both trends were already apparent before the Western crisis
What is going on?
The continued growth of China’s overall market share in the US and EU is neither a surprise nor a mystery. While China’s traditional competitiveness in labor-intensive products has been eroded by rising domestic costs and an appreciating currency, two trends have more the counterbalanced the negative impacts.
First, Chinese manufacturers have responded to cost pressures in these traditional sources of export growth with strategies designed to boost productivity and switch to product categories where they can compete profitably. As a result, Chinese market shares in selected traditional labor intensive/light industry areas have stagnated or declined while others have continued to grow.
Second, China’s industrial structure is continuing to evolve and with it the country’s export mix. China’s export of so called “light” industries (SITC 6 & 8) have dropped relative to China’s exports of “machinery” (SITC 7).
Even within the broad “machinery” category, we have seen a dramatic upgrading of China’s role as “low end” products such as cassette recorders and transistor radios have been rapidly over taken by exports of more sophisticated consumer electronics goods and basic electrical transmission equipment has been overtaken by aircraft components and telecom equipment.
But even this type of more granular and insightful Western-centric navel gazing misses the more important transition underway: the West has already been overtaken by Asia as the primary source of global demand growth.
From “BRICs” to Asia
Japan’s spectacular economic decline after 1990 seemed to take the shine off the original concept of an Asian magneto driving the world economy. Over time and with tortured logic, various pundits have become enamored of less compelling multi-country constructs (“Emerging Markets” or “BRICS”) or – in the depths of the West’s debt crisis – the premature promotion of China as the standalone engine of global growth. In the search for new growth opportunities a recent Barron’s article uncovered a seer in Texas who has nominated16 (fairly random) mini-economies – ranging from Ethiopia to Peru – as “China’s successors”! The apparently desperate search for “new ideas” to help reinvigorate disproven investment themes continues to obscure the blindingly obvious: Asia now leads the world economy in both size and sustainable future growth.
The fact that the Asian Century has already begun should not surprise anyone: A region that contains the world’s second and third largest economies easily outranks either the EU or the US (with or without the rest of NAFTA).
2012 GDP Shares in a Tri-Polar World
(US$ billion at current prices)
But narrow focus purely on the scale of Asia’s two large and relatively stand-alone economies fails to capture the full complexity and dynamism of the opportunity that is now becoming apparent. Intra-regional trade offers a powerful lens through which to capture the economic energy being unleashed in the region.
Our Asian “diamond” groups the region’s key markets in somewhat non-traditional categories in order to illuminate the most dramatic changes underway.
Source: China Global Insight
Three key sets of insights become readily apparent:
1. China has overtaken Japan as the driver of Asian intra-regional trade
– China takes twice the exports from Asia that Japan buys. The speed at which China has emerged is the region’s dominant export market is driven by both the sustained weakness in Japanese demand but also the speed at which China has lowered its barriers to imports in contrast to the much slower pace of Japan’s trade liberalization even at a much later stage of industrial development. This ensures that China is fully integrated into global supply chains that both allow for sustained competitiveness while at the same time helping to meet the needs of Chinese consumers. We anticipate that China’s import from Asia will continue to expand at nearly twice the rate as Japan’s.
– NIC exports to China are nearly five times their exports to Japan. Not only does this reflect the greater openness of the Chinese market, but also the intensity of the industrial integration that has accompanied NIC direct investment in China (twice Japan’s cumulative investment in China).
– Developing Asia sells more to China than Japan, with China purchases growing at nearly twice the rate of exports to Japan. While industrial and agricultural raw materials have long been the leading categories of Chinese imports, manufactured goods now play a significant role.
2. Trade between other regional markets (ie excluding Japan and China) is set to become the second biggest driver of intra-regional trade
– NIC/Emerging Asia trade is rapidly approaching $1 trillion (ie Emerging Asia with NICs and intra Emerging Asia/Intra NIC) and is roughly the scale of the Japan’s trade with Asia today, but growing significantly faster
3. Total intra-Asian trade of $2.4 trillion is likely to overtake intra-EU trade of $3.6 trillion by 2020, even without significant reductions in current Asian trade barriers.
– Unlike EU integration, this has occurred much more rapidly and is driven entirely by market forces and economic common sense rather than via trade agreements, a Brussels-style multi-lateral bureaucracy or the need to create a single currency.
Asia – with its diverse cultures, levels of economic maturity and unique operational challenges at the national level – will never become “a single market”. But then neither will the EU nor North America. Nevertheless, astute companies have identified those common market characteristics and business linkages that can be converted into sources of competitive advantage across contiguous states. It may be time to re-examine our assumptions on the opportunities to drive growth and profitability by exploiting regional integration in the world’s largest market.