Riding the trade winds

Asia’s trade-driven recovery

A robust though uneven economic recovery is underway in 2021. This is evidenced in the recent IMF upward revision of global economic growth forecasts to 6% in 2021 and 4.4% in 2022, from 5.2% and 4.2% respectively.[1] This optimism is grounded in part on the expectations that additional fiscal support will drive momentum towards a vaccine-powered recovery. Among the different regions, emerging Asia is tipped to outperform with a strong 8.6% growth in 2021, though the recovery of ASEAN countries will likely only materialize in 2022 because of a slower pace of vaccination.

A key driver underpinning Asia’s recovery is improving trade performance.[2] It was estimated that Asia-Pacific collectively lost USD2.2 trillion in trade in 2020,[3] based on the pre-pandemic growth forecasts. Part of this is being gradually recouped on the back of improving exports of East Asia markets since early 2021. Merchandise exports from China have risen by a strong 38% year-on-year in the first half, while Japan and South Korea reported sanguine growth by 23% (Jan-Jun) and 29% (Jan-May) respectively. The robust performance of Asian exports reflects in part an uptick in domestic demand in Western advanced markets. Generous stimulus packages have helped to keep household balance sheets in relatively good shape, and the release of pent-up demand upon removal of lock-down measures has fuelled domestic consumption. Meanwhile, the resumption of production has lagged in advanced markets because of supply chain disruptions and labour shortages. This results in a strong demand for Asian exports, particularly on products like computer chips, of which Asia has a large global market share.

Figure 1: Growth of merchandise exports, 2020 and Jan-Jun 2021

Source: CEIC

The vigorous growth in early 2021 partly reflects a low base effect from last year. Even allowing for the large shrinkage in trade during the pandemic, the overall picture still points to strong export volume growth. Figure 2 indexes merchandise world trade to 100 in 2010. After a sharp drop during the pandemic, the level of world trade has recovered tangibly to above the pre-pandemic level.

Figure 2: World Trade Index, 2010=100

Note: Dotted line refers to trend growth before the dips from the Global Financial Crisis and COVID-19 pandemic.
Source: World Trade Monitor, CPB Netherlands Bureau for Economic Policy Analysis.

The global economic recovery from COVID-19 has been more robust than after the Global Financial Crisis (GFC) slightly a decade ago. This is reflected in the trade taking a sharp rebound to already surpassing the pre-pandemic level. It is worth noting that global trade never recovered to its pre-GFC trend level (blue dotted line) while based on current momentum, COVID-19 will probably be less disruptive to global trade. A second point to note is that trade, both in volume and as a percentage of GDP, has flattened since late-2010s. Notwithstanding the improvement in 2021, there are lingering doubts on whether this represents a cyclical uptick or a shift in fundamentals that drive global trade. The sustainability of current strong trade performance could have a strong bearing on the longer-term outlook of Asia.

Trade and globalisation

Trade and globalisation are intrinsically related. The advancement of globalisation since the 1970s has heralded strong increases in global trade volume, alongside the proliferation of global supply chains and production models. The importance of trade in growth, as measured by trade as a percentage of GDP, increased from 27.3% in 1970 to 60.5% in 2012.[4] It has since drifted at around that level until 2019, when the last data point was available. While the reasons behind the peaking or slowing of globalisation (i.e. “de-globalisation” or “slobalisation”) are well-documented, it helps to take a quick recount:

  • Maturity of the global supply chain and slowing international vertical specialization[5]
  • Lack of further progress in global trade accords and trade liberalization
  • Intensifying trade conflicts, including the US-China trade disputes (rising protectionism)
  • Rising share in global output of emerging markets, which have lower trade-income elasticity
Figure 3: Factors contributing to “peak globalisation”

Source: Peak Re

A proximate factor to consider is supply chain restructuring post-pandemic, even though such a trend has been observed before the pandemic, as manufacturers and procurement managers adjusted constantly to changing relative costs and shifting global geo-politics. The disruption brought by the pandemic has added haste to stakeholders to refocus their supply chain to increase resilience. This is taking the form of relocation to another production base, shortening of the supply chain to reduce complexity, or re-shoring to lower geopolitical risks and logistic uncertainties. Some have opted to have redundant supply chains to minimize the impact of disruption. Overall, it is expected that the process to structure and de-risk the supply chain will be a multi-year project that, over the longer-term, could depress on global trade volume. However, in the near-term, efforts to meet pent-up demand and bypass supply bottlenecks are adding to trade activities.

Sustainability of an export-driven recovery in Asia

The near- to medium-term economic outlook of Asia, in particular East Asia, will to a major extent be dependent on the sustainability of the current strong momentum in trade and exports. A deeper dive into the topic can also help to inform the debate on globalisation vs de-globalisation, which will be of equal importance in defining the outlook of Asian markets.

Table 1 below lists the key considerations to support or rebuke the continuation of strong trade growth in the near to middle term. The balance of considerations suggests Asian exports will remain robust in the coming years but this will need to be supplemented by a sustained recovery in domestic demand to drive Asia’s next stage of economic development.

Table 1: The future of Asian trade: Positive and negative considerations
Positive considerations Negative considerations
• Supply-side bottlenecks, for example, in computer chips, favour demand for Asian exports, particularly from South Korea and Taiwan. This is likely to last for some time before new production facilities are available. The rise in demand is structural, for instance, because of changes in the way people work.
• Trade in services still remains in the doldrums. [6] Services globally account for two-thirds of economic output and more than half of the world’s jobs[7]. Unless a sustained recovery in the services is in order, the current global recovery may not be sustainable. Many Asian markets, particularly those in SEA, are increasingly dependent on trade in services.
• With more markets coming out of lock-down, consumer demand should stage a more board-based recovery thus adding to demand from Asia producers. Once recovery broadens to cover most markets and some of the supply-side bottlenecks are eased, it is conceivable that trade will gain further. • There are concerns that uncertainty about the timing and scale of stimulus packages (and government fiscal supports) could lead to lower trade and investment activities into 2021.
• The coming into force of RCEP and CPTPP (as well as other regional FTAs) will reinforce the growth in trade. Furthermore, many FTAs also cover services so will bolster the growth in services trade. FTAs can help to improve supply chain visibility, lower transaction cost (including tax and tariffs) and create an open and transparent framework to support supply chain development. • The restructuring of the global supply chain could take multiple years and some of the impact on trade/investment would show up only slowly.

Is the “new normal” really the “old normal”?

On balance, trade is expected to remain a strong supporting factor underpinning Asia’s economic growth in the coming years. Yet, this raises the awkward question of whether this post-pandemic “new normal” will be any different from the “old normal”, when Asian markets relied primarily on exports to drive economic growth for the last few decades.

A renewed reliance on exports could dent recent efforts to shift to more balanced growth featuring a bigger contribution from domestic consumption to drive sustainable development. This could also reignite debates on trade balance–which was one of the key arguments that triggered the Trump-era US-China trade war. During the first five months of 2021, the US trade deficit reached a record USD406 billion, higher than the pre-pandemic Jan-May 2019 level of USD346 billion.[8] A sustained increase in trade deficit could risk more bickering between trade partners and leave Asian markets vulnerable to policy risks overseas.

Within the realm of trade development, there is an increasing shift in focus towards sustainable trade. Trade is helping to achieve SDGs. For instance, the impression improvement in the poverty front in Asia can be partly attributed to the wave of trade liberalisation and increasing globalisation since the 1990s. Yet, sustainable development requires taking into consideration economic, social and environmental impacts at every level, trade included. While some Asian markets are deemed to have strong credentials in maintaining sustainable trade practices, others are lagging (see Figure 4).[9] In order to maintain trade as one of the growth drivers, Asia will need to step up efforts in achieving higher sustainable trade standards.

Figure 4: Sustainable Trade Index 2020

Source: Sustainable Trade Index 2020, Hinrich Foundation

Trade is blowing winds into the sails of Asian growth. In order to enable trade to support the long-term domestic and global goals of growth and development, it needs to be complemented by more vibrant domestic consumption demand and a stronger focus on sustainable trade practices.

[1] Source: World Economic Outlook Database, IMF.

[2] Trade is a time-honored way to drive economic growth in Asia, which in turns has been instrumental in reducing poverty and lifting people’s living standards. In China alone, trade-led growth has helped over 700 million people escaped poverty. The figure for Asia as a whole is estimated at 1.3 billion. See Hinrich Foundation Sustainable Trade Index 2020, Hinrich foundation, 27 October 2020.

[3] Trade and investment “indispensable” to post-COVID recovery in Asia and the Pacific, UN meeting says, ESCAP, 29 January 2021.

[4] Source: The World Bank.

[5] See: The Global Trade Slowdown: Cyclical or Structural?, IMF Working Paper, January 2015

[6] East Asian economies drive global trade recovery, UNCTAD, 10 February 2021

Services globally account for two-thirds of economic output and more than half of the world’s job. Source: East Asian economies drive global trade recovery, UNCTAD, 10 February 2021

[8] Source: CEIC. The US trade balance in service has been on a declining trend since 2017 and hit record lows in early 2021.

[9] The Sustainable Trade Index measures the capacity of 20 economies—including 19 in Asia, and the US—to participate in international trade in a manner that support the long-term domestic and global goals of economic growth, environmental protection, and better social equity.