1 The Changing Geography of World Trade: A Transatlantic Perspective 1 Ramin Kader & Stephan Raes 1. Introduction International trade and investment are of fundamental importance for an open and medium sized economy like the Netherlands. The current and future growth potential of the Netherlands, therefore, crucially depends on developments in the size, patterns and composition of trade and investment. Whilst this importance of trade and investment will be a given for the years to come, the precise developments of trade and investment are hard to predict, certainly in the longer term. However, over the last few years a substantial number of studies have been published that document future developments in world trade. 2 Some of these are scenario studies, some use gravitational models, some are based on further macro-economic modeling, and some are trend analyses. 3 In combination, these studies offer considerable insight in developments in international trade up until This paper by the Royal Netherlands Embassy in Washington DC aims to systematically map what is currently known on the future of world trade. It focuses in particular on the role of the transatlantic economy in world trade up until This focus on transatlantic trade not only comes from the clear interest of the Netherlands in this, but also for two other reasons. The first involves the existing imbalance between the current media attention on the growing role of emerging markets in world trade and the existing pattern of world trade in real terms, as well is expected developments. This paper shows that the sometimes existing idea of the withering away of the transatlantic economy in international trade needs substantial nuance. Secondly, the increased attention for liberalizing transatlantic trade and investment since November 2011, makes it all the more relevant to assess the expected developments in the absolute and relative significance of transatlantic trade as a baseline scenario for this process. In this paper a variety of trade forecast studies are analyzed and compared with each other. The next section gives an overview of what is expected to happen in world trade at large. Section three concentrates on changing market shares and growth rates of countries and regions in world trade. Section four looks at the changing geography of world trade, in terms of changing weights of different trading routes and flows. Finally, section five examines the role of the transatlantic partnership for both the US and EU, and how this changes in the coming decades. 2. General World Trade Forecast ( ) World trade will continue to grow strongly World trade is expected to grow in the coming decades, even faster until 2030 than in the period This growth is expected to be exponentially, which means that year-after-year the absolute value of total trade will be increasing more and more, and until 2030 faster than expected GDP-growth. As a result of this, Citigroup expects that world trade will rise from 61% of world GDP in 2010 to 76% in In absolute terms, world trade is expected to increase from $37trn in 2010 to $287trn in As a result, the total amount of world trade will therefore be almost eight times as large in 2050 compared to This paper was written as a background document for the medium term policy analysis (meerjarig interdepartementaal beleidskader, MIB) of the Royal Netherlands Embassy in Washington DC. Ramin kader and Stephan Raes are respectively Trainee and Head of the Economic Department of the Netherlands Embassy. 2 See References. Since hardly any of these studies include forecasts on foreign direct investments, this paper focuses on international trade. Since many of the studies have been written - and use data from - before the recent economic crisis, the effect of this on structural growth and trade have in most cases not been taken into account. 3 The paper does not include studies that focus on the effects on trade of the reduction of barriers to trade. For an overview of such studies from a Transatlantic perspective, see: Reichwein, M., Beukeboom, M., Raes, S. (2011) Transatlantic Perspectives for Global Economic Recovery: in Search of Congruence of US and EU interests in Export Growth, discussion paper, Washington DC, Johns Hopkins, SAIS,
2 2 including all world regions, with Emerging Asia by 2025 becoming the world s largest trading region For all world regions trade is expected to grow. Figure 1 shows the development for the five largest trade regions. It indicates that around 2025 Emerging Asia will overtake Western-Europe to become the world s largest trade region. Although the US and Europe by 2025 will no longer dominate global trade, Citigroup expects that nevertheless total trade of the US and EU will grow substantially from $18trn in 2010 to $69trn in Figure 1: World trade (constant, $ trn) Africa Em Asia W-Europe N-America Adv Asia Growth in services trade will be higher than in goods Forecast studies mention the trade in services will grow faster than goods during This shift is for a part caused by the emerging economies (like China and India) where rapid economic growth will lead to the emergence of a new global middle and rich class, which will increase overall demand, in particular for services. Carnegie estimated that this class will account for an increasing share of total population of the G20 developing countries, reaching 48% by 2050 compared to 11% in Citigroup also acknowledged the rise of services in share of total trade. However, they expect this rise to be more modest, increasing from 19% of total trade in 2010 to 24% in Shifts in World Trade Shares Emerging Asia s share in world trade will increase substantially Figure 2 shows that the share of Emerging Asia in world trade will increase significantly during the two coming decades and will continue to increase at a lower rate after that. This transition towards the Emerging Asian countries has already started and studies expect that China and India alone will account for almost one-fifth of global trade flows by Besides that, it is expected that in of the largest 30 economies will consist of emerging economies, where the emerging economies will collectively be larger than the developed economies. primarily at the cost of Western-Europe The increase in Emerging Asia s share (from 17% in 2010 to 38% in 2050) goes hand in hand with the reduction of Western-Europe s share (34% in 2010 to 17% in 2050). North American and Western-European trade together accounted for almost 50% of total world trade around 2010, but their share is expected to half, resulting in a quarter of total world trade in As such, the expected share of Emerging Asia in world trade later this century will be considerably less than that of Europe and North America in earlier periods. In other words, world trade will be more multipolar, and less dominated by a single region.
3 3 whilst the share of other trading areas will stay relatively the same over the coming decades North-America s share will decline also, but with a much smaller amount compared to Western- Europe s (from 13% in 2010 to 8% in 2050). Surprisingly, shares of the other trading areas will remain relatively unchanged during , with the exception of Africa s slightly rising share and Japan s slightly decreasing share. 100% Figure 2: Share of world trade (%) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Adv Asia Africa Aus&NZ CEE CIS Em. Asia LatAm Mid Eest N-America W Europe Advanced economies growth rates in trade will converge over time Figure 3 shows that the growth rates in trade will decline over time, with the exception of Africa s growth rate. Additionally, the figure indicates a convergence of the growth rates for the advanced economies (Advanced Asia, North-America and Western-Europe). With growth rates for Emerging Asia decreasing as well, the world trade arena not only becomes more multipolar but also more balanced as to its dynamics. HSBC in its forecast of growth rates of trade is slightly less optimistic, apart from an even stronger performance for Africa than Citigroup s.
4 % Figure 3: growth in trade (%) 12.00% 10.00% 8.00% 6.00% 4.00% % 0.00% Adv Asia N-America W-Europe Em Asia Africa The fastest grower in world trade? Egypt Although out of the analysis above one might expect that China and India (the Emerging Asian countries) will have the highest growth in trade in the coming decades, this is not the case. HSBC concluded that Egypt s trade will grow the fastest (11.90% annually until 2025), with - indeed - India (7.7%) and China (7%) following. 4. Trade Flows The largest gains in shares of world trade will be in intra Emerging Market trade World trade constitutes a changing myriad of trade flows, together accounting for a complex geography in trading routes. Currently, trade amongst the advanced economies and between advanced and emerging economies accounts for the bulk of world trade (almost 90%). Forecasts expect that the share of trade between advanced and emerging economies is remarkably stable, although it will or course increase in absolute terms. The share of intra Advanced Economies trade, on the contrary, is expected to decline to around 25% by 2030 and 15% by As figure 4 shows, the trading route that will gain most in importance is that amongst Emerging Economies themselves. These intra-flows in 2010 accounted for 13% of world trade, and are expected to increase to 38% in From a different perspective, in the newly evolving geography of trade, the share of intra group trading (amongst EMs or AEs) in 2050 will be roughly comparable to 2010.
5 5 Figure 4: Share of world trade (% share of world trade) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% AE-EM Intra AE Intra EM By 2050 intra Asian trade will have the highest share in world trade Figure 5 gives a more detailed picture of this changing geography of world trade. Citigroup s economists forecasted the top 10 trading routes in the world during In 2010 intra- European trade had the largest share in world trade (almost 20%), which will decrease dramatically in the coming decades, resulting in a share of only 6% in Trade flows between the transatlantic economies accounted for 5.8% in The transatlantic share is expected to decline as well and by 2050 will no longer be in the top 10 of trading partners (accounting for 3.1% in 2030, ranked 9 th place). The second largest trade partnership in 2010 was Advanced Asia with Emerging Asia (9.8%) which will have the highest share in 2030 of 15.8%. Thereafter, the share in world trade between advanced and emerging Asia will stabilize. Another important rise is the light blue line in 2015 (see figure 5) which stands for the trade between the emerging Asian countries. In 2010, this partnership was not in the top 10 list of the world, nevertheless, in 2050 it will account for the second largest trade flow (12.5%). Besides that, the figure also shows some newcomers, like the emergence of trade between the Middle East and Emerging Asia which will account for 5.8% in 2050; and between Africa and Emerging Asia which will account for 6% of total world trade in Trade between China and India will grow the fastest during Ernst & Young forecasted the trade growth of trade routes between countries from India s export to China is expected to experience the fastest growth (22% annually); second place is China s export to India, which will annually grow at a rate of 18.5%. Thus, the trade relation between China and India will increase the most in medium term. This increase covers a significant share of the increase in intra-em trade discussed before. Carnegie forecasted that India s share in China s exports would quadruple during Vice versa, China s share in total exports of India will account for more than a quarter in For the US growth in exports, exports to Europe will grow the slowest, namely 8.4%. For Europe, exports to the US will increase 8% per year. On average, Japan s exports will increase the lowest during (especially for the US and Europe). This shows the decrease the intra-ae trade will have to the total share of world trade. Ernst & Young also forecasts that during China s trade surplus with the US will enlarge, as exports to the US will increase more than imports. Looking at the trade relation between the US and India, it is expected that imports from the US will grow faster than exports. This is also the case for Japan, which, besides the US, will also see its exports to Europe increase more than its imports.
6 % 20.00% 15.00% 10.00% 5.00% 0.00% Figure 5: Top 10 trading partners in the world (% share of world trade) W Europe - W Europe Adv Asia - Em Asia Em Asia - W Europe N America - W Europe CEE - W Europe Em Asia - N America Lat Am - N America Adv Asia - W Europe Adv Asia - N America N America - N America Em Asia - Em Asia Em Asia - Mid East Transatlantic trade Trade is expected to grow significantly in the next decades for the transatlantic economies For both Europe and the US, trade is expected to grow significantly towards 2050 in absolute terms, and at least until 2030 faster than European and US GDP growth. According to Citigroup Western European trade will quadruple in value from $12,6 trillion. in 2012 to $25.6 trillion. in 2030 and 48.8 trillion. in North American trade will rise over the same period from $4.8 trillion. in 2010 to 12.2 trillion in 2030 and $22.9 trillion in 2050, an almost fivefold increase. but the share in world trade of the transatlantic economies will decrease significantly Although European and American trade will grow, the share in world trade of the transatlantic economies will decline. As discussed under 3, the share of Western Europe in world trade will drop from 34% in 2010 to 17% in North American trade will decline from 13% in 2010 to 8% in Transatlantic trade will grow significantly Figure 6 shows that transatlantic trade (trade between the US and EU) will grow significantly over the next decade. US exports to the EU will grow from approximately $170 bln. in 2010 to $660 bln. by Vice versa, EU exports to the US will grow from $220 bln. in 2010 to approximately $910 bln. by Both ways this implies a quadrupling of trade. Since transatlantic trade growth surpasses EU and US GDP growth, the significance of transatlantic trade for the US and EU economy is expected to increase over the next decades.
7 7 1, Figure 6: Forecast transatlantic trade (billion $) US from EU US to EU US deficit, Carnegie, Ernst & Young 4 The share of transatlantic trade in world trade will fall Whilst transatlantic trade will grow, its share as a trading corridor in world trade will decline. As discussed under 4, according to Citigroup trade flows between the transatlantic economies accounted for 5.8% in 2010, but will decline to 3,1% in 2030 and will no longer be in the top 10 world trading partners by Carnegie reaches the same conclusion, indicating a decline in the share of transatlantic trade from 7.4% in 2006 to less than 4% by For the US, the share of Western Europe in total trade will fall but remain significant Looking first into the North American trade share with partner countries, Western-Europe s share is declining. In 2010, 27% North American trade was with Western-Europe, making it the largest trading partner. However, this share is expected to decline to 15% in 2050 according to Citigroup (figure 7). Carnegie reports a similar decline from 22% in 2006 to 11% in As expected, this loss in share of Europe is mostly taken over by Emerging Asia, particularly Asia. The share of Latin America is expected to be remarkably constant. 4 This forecast is based on a weighted average calculation of data provided by these three studies.
8 8 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 7: N-America's trade share with partner countries Rest Africa Adv Asia Lat Am Em Asia W Europe The share of the US in Europe s trade will also decline Europe s trade share with partner countries experiences similar shifts. Carnegie and Citigroup both concluded that North America s share in Europe s trade will decline from 19% to 13% in the coming decades. In addition, Citigroup expects that the shift for Europe s overall trade will happen during , thereafter, the share of Europe s partner countries will stay the same. Citigroup expects Emerging Asia s share will increase the most (from 21% in 2010 to 36% in 2030). According to Carnegie, this rise is mostly done by China, which share will increase from 6% to 22% in Furthermore, it also expects that trade with other industrialized countries will drop enormously from 21% in 2006 to 5% in 2050, whereas both the MENA region and Eastern Europe and Central Asia will gain in importance % Figure 8: Europe's top 5 export partners (excluding intra-eu) 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% China Other industrialized MENA E Europe and C Asia US 0.00% Source: Carnegie 6. The future of world trade: no zero sum game This paper sketches expected changes in the geography of world trade, and its implications for the transatlantic economy. The paper leads to the following conclusions:
9 9 The paper documents the rise of Emerging Asia in world trade, both in absolute terms and in market share. The core of this development lies in the establishment of a vibrant new trading block within Emerging Asia itself, and of these countries with more established Asian trading partners. Although the rise in market share of Emerging Asia goes hand in hand with a decline in the share of the US and particularly Europe, the rise is not to the detriment of Europe and the US as such, but brings up a new dynamic trading pole in the world system, contributing to the more balanced and multipolar nature of the new geography of international trade. Whilst the share of transatlantic trade in world trade will decline, and also the share of the US and Europe in each other s imports and exports will diminish, this is a gradual process that already started over two decades ago. For the period up until 2025, this relative significance of the transatlantic economy is substantial. The transatlantic economy is strongly anchored in mutual foreign direct investment. Given the lack in forecasting studies that focus on FDI, this has not been included in the current study. In absolute terms, transatlantic trade is expected to grow significantly in the coming decades, mostly faster than GDP. By 2050, there will be more American and European families whose jobs and income depend on transatlantic trade than at this moment. References: Buiter, W and Rahbari, E. (2011), Citigroup: Trade transformed - the emerging new corridors of trade power. Dadush, U. and Ali, Shimelse (2010), The Transformation of World Trade, (http://carnegieendowment.org/files/transformation_of_world_trade.pdf). Ernst & Young, Trading places: the emergence of new patterns of international trade, Ernst & Young, Eurozone forecast Spring edition, March European Commission Research Area (2011), Global Europe 2050 (http://ec.europa.eu/research/social-sciences/pdf/global-europe-2050-summary-report_en.pdf). European Commission Trade (2010), Trade, Growth and World Affairs TRADE POLICY AS A CORE COMPONENT OF THE EU S 2020 STRATEGY (http://trade.ec.europa.eu/doclib/docs/2010/november/tradoc_ pdf). European Union Investigating in your future (http://www.et2050.eu/europe_2050/index.php/future-of-europe-and-the-world). IMF (2011), Changing patterns of global trade, (http://www.imf.org/external/np/pp/eng/2011/ pdf). Hamilton, Daniel S. and Volker, Kurt, Transatlantic 2020: A Tale of Four Futures, Washington, DC: Center for Transatlantic Relations, Hammond, R. (2011), The World In 2030 (http://www.speakers.co.uk/media/pdf/ray_hammond_-_the_world_in_2030_2011_edition.pdf). HSBC Global Research, The world in 2050: Quantifying the shift in the global economy, January HSBC Global Connections, Trade forecast update: Global, February Mold, A. Maddison s forecasts revisited: What will the world look like in 2030? (http://www.voxeu.org/index.php?q=node/5708). Nanto, D. K., Donnelly, J.M. (2011), US. International trade: trends and forecasts. Congressional Research Service. National Intelligence Council, Mapping the Global Future, December 2004, (http://www.dni.gov/nic/pdf_2025/2025_global_trends_final_report.pdf). National Intelligence Council (2008), Global scenarios to 2025, (http://www.foia.cia.gov/2020/2020.pdf). PwC, Future of world trade: Top 25 sea and air freight routes in 2030, March SAIS (2012), Transatlantic Energy Futures: Strategic Perspectives on Energy Security, Climate Change and New Technologies in Europe and the United States (http://transatlantic.saisjhu.edu/publications/books/transatlantic_energy_futures/transatlantic_energy_futures.pdf). Shell Scenarios
10 10 The World Bank (2012), China 2030: Building a modern, harmonious, and creative high-income society (http://www.worldbank.org/content/dam/worldbank/document/china-2030-complete.pdf). The world in 2030 Global trends 2030 (http://www.freeworldacademy.com/globalleader/trends.htm). World Trade: Possible Futures (2009). World Trade Week UK (http://www.bis.gov.uk/assets/foresight/docs/horizon-scanning-centre/world-trade-possiblefutures.pdf).