Global supply chains: New directions

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1 l Global Research l Special Report Global supply chains: New directions Highlights Global supply chains (GSCs) have transformed trade and the world economy in the last 3 years. We argue they will continue to expand, though more slowly than before, and could significantly boost productivity. But patterns will likely change. Robotics could challenge the low-wage model while 3D printing could bring a shift to customised products, made locally. Offsetting this, better communications such as mobile and the Internet of Things should boost GSCs in both manufacturing and services. Madhur Jha Economics Research Standard Chartered Bank Samantha Amerasinghe Economics Research Standard Chartered Bank John Calverley Economics Research Standard Chartered (Canada) Limited The centre of gravity of low-cost manufacturing looks set to trend west from coastal China, inland and to ASEAN, India and eventually Africa. Improving infrastructure and new trade pacts including the Trans-Pacific Partnership and China s initiatives may be key drivers. Services trade is likely to grow fast as digital technology advances. Also, horizontal supply chains trade between countries at the same wage level, based on firm-level excellence or consumer choice are likely to grow, and expand among emerging countries. Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 215 research.standardchartered.com

2 Contents Overview 3 Infographic: Three new directions for global supply chains 7 1. Global supply chains today 8 The role of global supply chains 9 Different ways to measure participation 13 Integration into GSCs 17 Conclusion Maximising GSC participation Drivers of change for GSCs 23 Developments in eight areas will shape trends Increasing incomes and growing EM labour forces Better communications technologies New automation technologies New trade pacts Geopolitical tensions 3 6. The costs of trade 3 7. Sustainability issues Relative wage costs 33 Conclusion: We expect supply chains to continue to grow Three future GSC trends China s changing role Services supply networks will likely grow 4 3. Horizontal trade is set to expand Trends in trade finance 51 Innovation, automation and SME needs 52 Three new trends 55 Appendix: Global supply chains by industry 57 Country code 62 Bibliography 63 Global Research Team May 215 2

3 Overview Overview As much as 8% of global trade is now reckoned to be part of global supply chains (GSCs), on one definition (see Part 1). Participation in GSCs has boosted growth and incomes in both developed and especially emerging markets (EM). World trade growth has been weak recently and the expansion of GSCs has lost momentum. Some of this slowdown is likely cyclical, but rising wages in China and new automation technologies are challenging the low-wage model, prompting companies to consider re-shoring, or bringing production home. Eight drivers of change We believe eight drivers will shape the evolution of supply chains (see Part 2): 1. Increasing incomes and growing labour forces in emerging markets will likely continue to support GSC growth. Rising GDP, more urbanisation, expanding middle classes and growing labour forces offering cheap labour should continue to support supply-chain expansion. The supply chain choices of the rising number of multinational companies headquartered in EM, particularly in Asia, should be increasingly important (Figure 1). 2. Better communications technologies should boost both manufacturing and services supply chains. Cheaper broadband, the cloud, smartphones, virtual reality systems, computer translation, the Internet of Things (IoT) and big data will support the growth of supply chains by making collaboration easier for manufacturing chains and enabling more services trade. 3. New automation technologies could be a constraint. Improving automation and robotics will likely compete with some low-skill tasks, making re-shoring easier and potentially unwinding some manufacturing chains. Meanwhile, 3D printing could lead to a big trend towards customised goods, printed locally. 4. New trade pacts could be a major boost. There is a good chance that the Trans-Pacific Partnership (TPP) and China s Regional Comprehensive Economic Partnership (RCEP) will be agreed this year, with the Transatlantic Trade and Investment Partnership (TTIP) following. These new trade agreements are going behind the border to address obstacles to supply chains, with a particular focus on facilitating services trade. Figure 1: Forces driving global supply chains Positive and negative More and longer GSCs Fewer and shorter GSCs Continuing growth and rising urbanisation Automation - robotics Better communications cheaper broadband, videoconferencing, virtual reality, IoT, etc New trade pacts Lower oil prices New efficient low-wage countries to replace China 3D printing - customisation Geopolitical tensions Higher oil prices Sustainability concerns become prominent More service supply chains More horizontal GSCs in EMs Source: Standard Chartered Research 27 May 215 3

4 Overview 5. Geopolitical tensions are a threat, though also are helping to encourage new trade pacts. Rivalries are likely one of the drivers of new trade agreements, but geopolitical tensions are also a potential threat to the growth of GSCs as firms fear that conflicts or sanctions could interrupt supplies. 6. Trade costs are falling, providing a significant boost. In our view improving infrastructure and streamlining customs procedures, as agreed in the recent Bali package, will lower costs significantly and boost GSCs. According to the OECD, every extra day needed to ready goods for export and import could reduce trade flows by up to 4%. The price of oil matters more for trade growth than sometimes realised. But even if oil prices return above USD 1/bbl next year (as we forecast), few now expect prices to march upwards for the foreseeable future, as was widely assumed until a year ago. 7. Sustainability issues are a potential constraint. Concerns about the impact of natural disasters such as Japan s earthquake or Thailand s floods have led some companies to think of shortening supply chains or even re-shoring. For most companies the response is to increase supply-chain resiliency by identifying potential risks, diversifying suppliers and holding higher inventories of key components. Longer-term, government and corporate policies around tackling climate change and resource scarcity could limit the growth of manufacturing supply chains, though we believe the impact will be modest. 8. Relative wage costs will likely be crucial. As China s wage costs rise, new low-cost centres are stepping up including among ASEAN countries, India and Bangladesh. The re-shoring trend in the US is partly driven by narrowing wage differentials, though higher oil prices and a new focus on the potential costs of separating design from manufacturing have also been factors. So far re-shoring has been fairly limited. But overseas wage costs will increasingly be compared with the price of automation and robotics. Figure 2: China is the largest player in GSCs Value of GSC participation USD bn, latest available data 1,2 1, CN DE US KR JP SG HK FR RU IT GB MX CA SA MY IN TH AU BR ID VN TR PH ZA NZ Source: IMF DOTS, OECD (213), Standard Chartered Research 27 May 215 4

5 Value-added Overview Three new directions for global supply chains In our view the balance of these eight factors means that global supply chains will continue to expand. But the rapid growth of vertical manufacturing supply chains seen in the two decades to 28 is unlikely to repeat. In those years world trade grew at about twice the pace of GDP as supply chains increased in length and complexity, taking advantage of the opening up of China and Eastern Europe. Recently world trade has grown only slightly faster than GDP. We expect trade growth to pick up gradually and return to nearer the long-term average of about 1.4 times GDP. We see three trends in supply chains that will help create this growth, but also take them in new directions: 1. A shift from China to lower-cost countries. This shift will likely be gradual as China still has lower-wage areas inland which, together with fast-growing productivity including the rapid adoption of automation and robotics could keep China competitive. Nevertheless, the centre of gravity for manufacturing will likely trend westward, towards ASEAN and India in particular. The ASEAN Economic Community, starting this year, will be an important support. Meanwhile, we expect China to cement its role as a megatrader by leading the expansion of supply chains through international programmes such as the new Silk Road initiative and the RCEP trade agreement covering ASEAN countries, Australia, India, Japan, Korea and New Zealand. 2. Increasing services in supply chains. Measured in value-added terms, services likely already constitute more than half of the value of trade even though direct services trade is only about 2%. New technologies as well as new trade agreements are likely to boost the role of services in goods supply chains as well as direct services trade. New business services such as information and communications technology (ICT), finance and business process outsourcing (BPO) are growing rapidly, though the services supply chain is often more a huband-spoke model than a chain. 3. Expanding horizontal trade. Horizontal trade, based on firm-level excellence rather than differing wage costs, is prevalent in developed countries and should get a boost from the TTIP and TPP. Firms in developed countries routinely Figure 3: Indian firms such as TCS are trying to move up the services GSC Upgrading in the Indian offshore services industry Packgd SW support R&D IC chip design Pkgd SW IS consult. Ntwk infra support Datamining Equity analysis Analytics Analysis Datamining/ catalog prep Contract prod. dev. Call centres Insur. Claim eval. Rev. enhanc. etc. Data entry/back office Finance Types of actvities Radiology Transcription Medical/health Travel GIS Doc digitisation App. dev. & main IT Programming Coding Body shopping Number of employees Source: Fernandez-Stark et.al (211), Standard Chartered Research 27 May 215 5

6 Overview source parts from suppliers in other countries, based on quality rather than lowcost production, while consumers choose products based on a range of factors, often blind to country of origin. Such trade is still much less common among emerging countries due to tariffs and other barriers. We believe it has enormous potential for expansion, with the help of new trade pacts and growing incomes. Trade finance: Regulation, innovation and automation The growth in global supply chains has led to a shift towards open account financing, where the importer pays the exporter on receipt of goods. But bankintermediated finance still plays a vital role in more than one-third of trade, in providing credit and liquidity as well as helping firms to manage risks. Bankintermediated trade finance is particularly important in Asia. New know-your-client regulations as well as capital requirements are a challenge for banks, though the Basel III rules have been relaxed for trade finance, compared with the initial proposals. Meanwhile there is a big shift towards automating processes and taking advantage of mobile technology. 27 May 215 6

7 Infographics Infographic: Three new directions for global supply chains 1 Low-cost manufacturing will likely head west China Inland Coastal India ASEAN Africa Business processes ITC Medical diagnostics Education Europe North America Asia Developed countries trade to expand further Africa EM trade to expand Latin America Source: Standard Chartered Research 27 May 215 7

8 1. Global supply chains today

9 Global supply chains today GSCs now account for nearly 8% of global trade The role of global supply chains Has their expansion slowed? The rapid growth of supply chains across borders has transformed global production and trade over the past 3 years. GSCs, coordinated by transnational companies, now account for nearly 8% of global trade, including trade in intermediate goods and services of about USD 12tn or about 6% of global trade (UNCTAD, 213). The expansion of vertical chains (where production is unbundled and simpler tasks are handled in low-wage countries) has contributed to rapid economic development in many emerging countries, particularly China, and taken the EM share of world exports to more than 5% (excluding intra-eu trade) (Figure 4). Meanwhile, horizontal chains (trade in similar goods between countries at similar wage levels) have increased enormously, particularly between developed countries, and especially within the EU (see Figure 6 for definitions). Both types of chains enable firms and countries to specialise in tasks they do best, lowering costs, increasing choice and furthering development. There are concerns now that the expansion of vertical supply chains may be over, or at least slowing, restraining overall world trade growth and, potentially, economic growth and development. World trade grew particularly strongly in the period, about twice as fast as GDP. Since 27 trade has risen by a compounded average of 1.1% annually, only just beating GDP growth of 1.% (Figure 5). Slowdown in trade/gdp growth is partly attributed to GSCs Some of this anaemic trade performance is likely cyclical but some is probably structural, related to changes in GSC trends (Constantinescu, 215). In this report, we look at how GSCs are evolving and their likely impact on global trade as well as how well countries are integrating into GSCs. We focus particularly on the role of China and the growth of services supply chains. Finally, we look at how trade finance is changing under the pressure of evolving GSCs and new banking regulations. Global supply chains The foundation of 21 st century trade The rapid growth of supply chains over the last 3 years reflects a variety of factors, including the establishment of the WTO, lower tariffs, the break-up of the Soviet Union and the opening of large emerging markets such as China and India. Figure 4: EM exports have surged since 199 Share of exports in global total (excluding intra-eu) % Source: IMF DOTS, Standard Chartered Research Developed markets excl intra-eu EM Figure 5: World trade growth has slowed , volumes, % y/y 9 Export growth 8 7 GDP growth Source: WTO, Standard Chartered Research 27 May 215 9

10 Global supply chains today Figure 6: What is a global supply chain? A global supply chain refers to the production and delivery of goods or services produced over several stages and in multiple countries. This involves specialisation in tasks in which imports and exports of intermediate goods and services are necessary to produce a final product, which may also be exported. Vertical and horizontal supply chains In a vertical chain, some basic production functions such as assembly are off-shored to a low-skill, low-wage developing economy, while the more skill-based functions such as research and development are retained in a more developed, high-skill and high-wage economy. A horizontal supply chain usually involves countries at similar wage levels, where firm-specific advantages and specialisation are the attraction, rather than differences in wages. At the moment, horizontal trade is mainly seen between developed countries. Source: Standard Chartered Research 27 May 215 1

11 Global supply chains today Transport costs came down with containerisation while the internet made it easier to coordinate complex production processes from a distance. Trade-led development on the back of GSC integration is helping EM reduce the income gap with the West GSCs have boosted growth and incomes The benefits from expanding GSCs over the last 3 years have been immense. By opening their economies, liberalising trade and integrating into GSCs, emerging economies have raised GDP growth and per capita income without having to build the entire infrastructure needed for a globally competitive domestic manufacturing or services sector. Countries have benefited from technology transfer, technical knowhow and managerial and organisational skills that have accompanied joining supply chains, especially where they received foreign direct investment (FDI) flows from advanced economies. Surging FDI played a huge role in the expansion of both GSCs as well as global trade over the last 3 years (Figures 7 and 8). Figure 7: Stock of inward FDI for individual countries As % of country s GDP, CL GB ES VN MY NZ TH GH ZA FR AU UG CA EG BR MX US NG SA AE RU ID DE IT TR KR TW PK PH IN CN KE BD JP Note: HK (523.6%) and SG (294.2%) are excluded from the chart; Source: UNCTAD, Standard Chartered Research Figure 8: World trade growth has been supported by rising FDI % of world GDP Exports/GDP 15 1 FDI stock/gdp Source: UNCTAD, Standard Chartered Research 27 May

12 Global supply chains today This rapid growth has helped narrow the income gap between the rich north and the poor developing south of the global economy. Globalisation, urbanisation and rapid economic growth have helped to halve the number of people living in economic poverty from about 2.bn in 1981 to 1.1bn in 21, despite rapid global population growth. Access to cheaper and a greater variety of goods has raised DM living standards Developed markets (DM) have benefited from access to cheap and abundant labour supply, making a cheaper and wider range of products available. Western populations have enjoyed a higher standard of living, as a result, than would have been possible in the absence of a more integrated global economy. Lower import prices also helped keep inflation down, likely extending economic upswings. On the negative side, globalisation may be partly responsible for widening income inequality within developed countries, though other factors, especially technology, are likely the main cause (Special Report, 16 July 215, 'Taming the Gini: Inequality in perspective ). EM and DM gains are captured in increasingly complex and geographically distributed supply chains as can be seen from the Nutella supply-chain example below (Figure 9). Figure 9: The Nutella global supply chain Brantford, Canada USA (vanillin) Europe (vanillin and sugar) Villers-Ecalles, France Ferrero Group Alba, Italy Stadtallendorf, Germany Belsk, Poland Alba and Sant Angelo dei Lombardi, Italy Vladimir, Russia Manisa, Turkey Turkey (hazelnut) Headquarters Main international suppliers Factories Main sales offices Ecuador (cocoa) Brazil (palm oil) Poços de Caldas, Brazil Côte d Ivoire, Ghana and Nigeria (cocoa) Malaysia (palm oil) Papua New Guinea (palm oil) Lithgow, Australia Source: OECD (212), Standard Chartered Research 27 May

13 Trade openness 199 Global supply chains today Import content of exports is estimated at 4% for countries overall Different ways to measure participation One indicator of the extent of a country s GSC participation is degree of economic openness, defined as the ratio of exports plus imports to GDP (Figure 1). Usually when this is high, as for many Asian countries, a significant amount of the value of imports is being re-exported after processing. Another measure is the import content of exports, now estimated to be around 4% for countries overall, compared to only 2% in the 199s according to the WTO (WTO, 212). But both measures are limited in assessing countries GSC participation. The degree of openness is naturally higher for smaller economies, while the import content of exports measures GSC participation only backwards, not distinguishing whether the country s exports are final products or inputs to a further link in the supply chain. Figure 1: Almost every country has become more open since 199 as supply chains expanded Exports plus imports as % GDP, 199 and MY TW SA EG NG TH VN PH KR DE ID UK PK CA AU ZA MX KE CN TR US JP GH BR IN BD Trade openness 212 Note: HK and SG were excluded; Source: IMF DOTS, WEO, Standard Chartered Research Forward and backward participation Recently available detailed data on value-added in exports and imports has made it possible to measure participation in supply chains more precisely. The GSC participation index proposed by Koopman and now calculated by the OECD (Koopman 212 and OECD 213) has become the standard measure. This index adds together two components the share of foreign value-added embedded in a country s exports (backward participation) and the share of exports made of domestic value-added, which is then used in the importing country to produce their exports (forward participation). For example, if China imports a hard drive made in Taiwan and then, after assembly, exports a laptop to the final consumer in the US, the value-added of the hard drive in Taiwan is counted as China s backward participation. If, instead of exporting the laptop direct to the US, the Chinese company sends it first to Korea for fitting the screen, then the value-added in China (partial assembly) is counted as forward participation (see Figure 11 for a schematic representation). Note that this definition of GSCs actually understates their role in trade statistics because domestic valueadded in final assembly is not included. For example, in the first case (where China imports the hard-drive and fully assembles the laptop before exporting to the US), China s value-added in assembly is not counted (as it is not re-exported by the US). 27 May

14 Global supply chains today Figure 11: Participation in GSCs Schematic of forward and backward participation Backward Foreign value-added Domestic value-added Gross exports Exports absorbed by direct importer AND any foreign value-added passed through from other countries Domestic value-added included in exports which is processed again and exported to other countries Forward Source: Koopman 212, Standard Chartered Research China, Korea and India have increased their backward participation most since 1995 Backward participation is high in Asia, including China Figures show forward, backward and total participation rates for a range of countries in 29, compared with As might be expected, backward participation is high for many Asian countries deeply integrated into the manufacturing supply chain, led by Singapore, Korea, the Philippines, Malaysia, Vietnam and Thailand (Figure 12). These import raw materials and intermediate goods and then process them for exports. Backward participation is naturally low for commodity producers such as Saudi Arabia, Russia, Brazil, Australia and Indonesia. It also tends to be low for large countries, such as the US, EU and Japan, reflecting the extended supply chains within those countries that make imports less necessary and their status as final consumers. Although a large country, China still shows a relatively high reliance on imported raw materials and intermediates to create its exports, reflecting its key position in supply chains, including a large amount of assembly work. China, Korea and India have increased their share of foreign value-added in exports the most since Figure 12: GSC backward participation is high in Asia Share of gross exports and change in share since Change since 1995 SG KR PH MY VN TH CN MX HK DE FR IN TR ES IT CA NZ GB ZA JP ID AU EU US BR RU SA Source: OECD (213) 27 May

15 Global supply chains today Hong Kong, Malaysia and the Philippines show the biggest gains on forward participation Commodity producers and DM lead on forward participation Commodity exporters such as Russia, Saudi Arabia, Australia and Indonesia show a high forward participation (Figure 13), as do Japan, the US, Hong Kong, the UK, Korea and Germany, reflecting their key roles in supplying sophisticated components into supply chains. Mexico and China are less inclined to show forward participation, reflecting their central role in assembling and exporting final products. As noted above, this could also be considered part of overall supply-chain activity, and is what leads to the figure of 8% for the overall share of supply-chain trade. Again, most countries have increased their forward participation, with Hong Kong, Malaysia and the Philippines showing the biggest gains. Figure 13: GSC forward participation is high in commodity exporters and advanced countries Share of gross exports and change in share since Change since 1995 RU SA JP AU ID US PH MY HK BR GB KR DE IT FR ES SG IN TH EU ZA TR NZ CA VN CN MX Source: OECD (213) Philippines, Korea, India and Turkey have increased their participation rate the most since 1995 Smaller Asian countries lead the overall index Bringing the two GSC components together creates the overall index (Figure 14). Singapore, Philippines, Malaysia and Korea hold the top four positions. Approximately two-thirds of their exports are part of GSCs on this definition. Hong Kong has slipped to 5 th place. The lower end of the distribution features large countries and countries with a mix of commodity and manufacturing exports such as Canada and Brazil. Since 1995 almost all the countries in our data set have increased their participation, with the Philippines, Korea, India and Turkey up the most since South Africa is the only one of these countries for which participation has fallen, mostly due to decreased forward participation. Figure 14: Asian countries lead in total GSC participation % of gross exports forward Total participation in backward 1 SG PH MY KR HK TH RU VN DE JP SA CN FR AU ID GB IN MX IT US TR BR CA NZ ZA EU The index is calculated as a percentage of gross exports and has two components: the import content of exports and the exports of intermediate inputs (goods and services) used in third countries exports; Source: OECD (213) 27 May

16 Global supply chains today The value-added data also allows us to break the total index into services, manufacturing and primary products for each country (Figure 15). Developed countries are most involved in providing services to GSCs with Hong Kong showing the highest proportion of its exports. A few countries such as Malaysia and Canada are quite diversified, involved in primary products, manufacturing and services. Many others primarily undertake manufacturing tasks, including Korea, Japan and the Philippines. Figure 15: Hong Kong, Singapore and the UK lead services GSC participation % of gross exports, HK SG GB ES IN PH US KR FR MY EU DE TR AU TH NZ IT JP RU CA BR ZA VN CN ID MX SA Note: Utilities are included with agriculture and mining in the primary sector; Source: OECD-WTO TiVA Database China, Germany, the US and Korea have the largest participation in GSCs in absolute terms (Figure 16). The absolute size of China s global supply chain is USD 1.7tn, compared to the US at USD 646bn and India at USD 134bn. Figure 16: China is the largest GSC player Value of GSC participation USD bn, latest available data 1,2 1, CN DE US KR JP SG HK FR RU IT GB MX CA SA MY IN TH AU BR ID VN TR PH ZA NZ Source: IMF DOTS, OECD (213) 27 May

17 Global supply chains today In relation to their own GDP, Hong Kong and Singapore are the most dependent on GSCs, reflecting their role as business service centres. The value of their participation is more than 8% of GDP. Other Asian countries are also heavily involved, including Malaysia, Thailand, Vietnam and Korea (Figure 17). The data can also be broken down by industry. We present data for selected industries and countries in the Appendix. Figure 17: Asian countries are heavily dependent on GSCs GSC value as % of GDP SG HK MY VN TH KR SA DE PH RU MX CN IT CA FR ID ZA TR AU NZ JP GB IN US BR Source: IMF DOTS, OECD (213), Standard Chartered Research Integration into GSCs While we usually talk of global chains, many supply chains are primarily regional (Baldwin, 212). There are three main headquarter economies in manufacturing: the US, Japan and Germany. Japan s firms work mainly with Asian firms, Germany s mainly with European firms, including Eastern European countries for lower-wage tasks, while US companies work particularly with Mexico and Canada. Still, there are often global elements for specific parts. US and European chains often make use of suppliers and assembly services in Asia, especially China. At the end of the chain consumers used to be mainly in the US and Europe, but this is changing rapidly as Asian middle classes grow in importance. Other developed countries in Europe, including the UK, France and Italy, also headquarter supply chains; Korea is increasingly doing so too. As China s wages continue to rise, companies there may increasingly outsource tasks to lower-wage countries and China may become a headquarters economy. Particularly when inland wages converge to coastal wage levels, China s companies will face a choice between automating or finding low-cost options offshore (see below). Many less-developed countries are struggling with GSC participation Supply-chain growth has radically changed production and trade in East Asia. But many less-developed countries, including most Sub-Saharan African (SSA) countries and some countries in central Asia and Latin America, are still struggling with initial GSC integration. 27 May

18 Global supply chains today Five obstacles to GSC integration 1. Distance. Countries in SSA, for example, are relatively large distances from any of the three factory regions in Europe, Asia and North America, as well as a long distance from consumers in those regions. 2. Dutch disease. High revenues from commodity exports lift the exchange rate, often making wages high for a given skill level compared to a country with fewer natural resources. This makes it more difficult to join GSCs other than as rawmaterial exporters, though not impossible as the examples of Australia, Canada and Malaysia demonstrate. 3. Specific trade and investment barriers such as local content requirements or limitations on foreign labour. Political resistance, to protect domestic interests, may make these difficult to change. 4. High transport and logistics costs. See below. 5. A poor business environment. See below. High transport and logistics costs Poor infrastructure development is one of the most important obstacles in many countries, particularly low-income countries. But weak logistics more broadly, including government bureaucracy and delays in customs are also problems. One study found that every extra day needed to ready goods for export and import could reduce trade flows by up to 4% (OECD 214). Figure 18: Logistics performance index Lowest score Highest score No data Source: World Bank LPI, Standard Chartered Research 27 May

19 Global supply chains today The logistics gap between highand low-income countries remains wide The World Bank s Logistics Performance Index (LPI) measures the on-the-ground efficiency of trade supply chains or logistics performance across six components customs, infrastructure (roads, ports and airports), international shipment, logistics quality and competence, tracking and tracing, and timeliness. The LPI covers 16 countries using surveys of logistics professionals. Mostly high-income countries form the top quarter of the rankings, with Germany 1 st, the UK 4 th, Singapore 5 th and the US and Japan taking 9 th and 1 th place, respectively. The logistics gap between high- and low-income countries remains wide. China and Thailand score relatively well on this measure, ranking 28 th and 35 th respectively, on par with the Czech Republic and above Israel, both much higherincome economies. Several countries in Africa also place much better than might be expected based on their per-capita income, including Nigeria and Kenya. The business environment is improving: intellectual property has become a key issue Conducive business environment is crucial for GSC participation Participation in global value chains is more likely as the basic business environment improves. Many elements matter, including a stable macroeconomic environment, a flexible labour market, and good governance especially the rule of law. One simple indicator is the World Bank s ease of doing business measure. Newly industrialised Asian economies and developed economies do best on this measure (Figure 19). But over the last five years, the China, India, Brazil, Russia Nigeria, Ghana, Mexico the Philippines, Malaysia, Vietnam and Taiwan have made the most progress in improving performance. A key issue for many firms is lack of protection for intellectual property (IP) rights. This problem is widely cited in China and may be a barrier to growth, especially as China tries to climb up the value chain. IP is a central element in the proposed TPP and TTIP pacts as well as recent bilateral pacts. International agencies as well as many governments are prioritising improvements to the business environment, recognising the value of attracting international business and enabling local companies to participate in GSCs. While sometimes governments back-track in the face of political pressures, we expect the trend to continue towards greater liberalisation. Figure 19: Developed countries and Asian markets have the best business environments Ease of doing business A score of 1 represents best practice on all counts, SG NZ HK KR US GB AU DE CA MY TW AE TH JP FR ES MX ZA SA TR IT RU GH VN CN PH EG ID BR PK KE IN UG NG BD Source: World Bank Doing Business 215, Standard Chartered Research 27 May

20 Global supply chains today Low-income countries in ASEAN are increasingly joining GSCs Despite the difficulties for low-income countries struggling to overcome these five barriers, there have been success stories. Some low-income countries such as Kenya and Tanzania have sufficiently improved their institutions and capabilities to reach GSC integration. Bangladesh is becoming a major player. And low-income countries in ASEAN, including Vietnam, Laos and Cambodia, are increasingly joining GSCs, helped by the development of the ASEAN Economic Community. Climbing up the smile curve to higher incomes The smile curve illustrates the value-added at each stage of production (Figure 2). Headquarters companies and countries tend to focus on upstream tasks such as R&D and design, together with downstream tasks such as marketing and distribution, leaving component manufacturing and final assembly to lower-wage countries. The tasks in the headquarters economy tend to require more expensive skills and therefore achieve higher wages and higher value-added. Smile curve has likely deepened since the 197s The smile curve has likely deepened since the 197s, reflecting the increased commoditisation of manufacturing, driven by the rise of China, competition between low-cost locations and increased automation. Getting established in GSCs at the trough of the smile can lift countries rapidly out of low-income status, as China has most recently demonstrated. But moving briskly through the middle-income stage and, especially to the high-income stage requires a move away from simple manufacturing towards more sophisticated products and manufacturing processes as well as moving up one or both sides of the smile curve towards more servicesoriented tasks such as R&D, design and marketing. Figure 2: Smile curve Value added is higher at both ends of supply chains Indicative value added Value 4 Present day 3 197s 2 1 R&D, design Manufacturing, assembly Marketing, distribution, aftersales services Source: WTO, Standard Chartered Research R&D, design and marketing are not absent in low- and middle-income countries. But as countries develop through the middle-income stage, more people are involved in these tasks and fewer in less-skilled factory work. This transition requires better education and the acquisition of skills and experience, which take time. These skills can also be imported, both through immigration, as most extensively seen in the development strategy of Dubai and Singapore, or through services imports, made much easier with internet communications. They can also sometimes be copied, a practice observed in all the countries that developed after Britain, from the US, Germany and Japan in the late 19 th century to China today. 27 May 215 2

21 Global supply chains today Figure 21: Value chains versus supply chains While business literature usually discusses supply chains, academic literature often refers to value chains. In practice both types of chain link the same network of companies and consumers but emphasise a different perspective. The supply chain describes the flow of goods and services from upstream suppliers through downstream assembly to the final product for customers. The focus is on better integration of production stages, reducing costs and waste and improving supply efficiency. The value-chain concept is based on value-added at each stage, whether R&D, parts manufacture, assembly, marketing or distribution. In a sense it looks back up the chain to see which tasks are being done where, and how value is being created (Feller, 26). In this publication we use the term supply chain. Comparing supply chains and value chains Schematic Product Value chain Customer requirements Strategic components Global assembly Finished products Successful customer Product requirements Supply chain Customer Source: Feller (26), Standard Chartered Research Nature of trade is shifting towards horizontal supply-chain integration Horizontal supply chains are gaining importance in EM Wage convergence tends to change the nature of trade between converging countries rather than trade itself, according to Baldwin (212). So, instead of vertical supply chains, where developing economies produce only low value-added goods, trade might shift to horizontal supply-chain integration, where economies trade parts and components of similar products with each other to give buyers more variety and efficiency. This shift can also be seen at final product level when countries at comparable levels of development trade similar final consumption goods. Horizontal trade is not a new phenomenon. They have been around for several decades now among developed markets. The most famous example is the exports of parts and components of automobile exports between the US and Canada or within Europe. As new trade agreements bring down trade barriers, we expect more horizontal supply chains to appear in emerging markets, reflecting mutual trade gains from greater economic specialisation and efficiency. 27 May

22 Global supply chains today Drawbacks of GSC participation GSC participation can bring participants significant benefits, but also drawbacks (WTO 214): 1. Vulnerability to global business cycles. Participation in GSCs can increase a country s vulnerability to global business cycles. With manufacturing increasingly located in emerging countries, these countries are often hardest hit in a global downturn, as orders and inventories are slashed, as in Relocation risks. Even a small increase in production or transaction costs in a country can lead firms to re-locate to an alternative low-wage country or reshore part of the production to the home country. Off-shoring lower-skill tasks may widen the distribution of income 3. Higher income inequality. When producers in developed countries send lowerskill tasks offshore, the wage gap between lower- and higher-skilled workers may widen. In the recipient country people taking the new jobs may enjoy much higher pay than many people in the agricultural or informal sectors. In both countries, therefore, off-shoring may worsen the distribution of income even though both countries see overall income gains. 4. Narrow learning. When the skills involved in the tasks performed in GSCs cannot easily be transferred to other activities or used to upgrade within the same value chain, an economy may become dependent on a few tasks, potentially limiting both economic growth and the opportunity for upgrading. Despite some drawbacks, GSCs overall have brought large gains to participating economies While these drawbacks cannot be denied, they often can be mitigated or overcome. The evidence suggests that GSC expansion has brought large gains to all participating economies and most people. Not surprisingly the one policy recommendation emphasised almost everywhere is improved education and training to prepare the work force for higher-skilled tasks and to retrain people displaced. Conclusion Maximising GSC participation GSC expansion is ultimately driven by firms choices. Increasingly, over the last few decades, the route for large companies to stay competitive has been outsourcing simple tasks (both manufacturing and services) to low-wage countries (vertical supply chains) or sourcing the best component or service from centre-of-excellence firms, sometimes rival companies (horizontal supply chains). Cuts in tariffs and reductions in other protectionist measures from the 196s onwards increasingly left firms with little choice but to follow this route or lose profits and markets. For emerging countries, participation in vertical supply chains has opened up a new route to economic development. Instead of developing their own broad supply industries, they can plug into the chain. It is only necessary to reach certain threshold levels of quality and efficiency on limited tasks to become attractive offshoring destinations. But a level of global competitiveness in the activity they perform is required. 27 May

23 2. Drivers of change for GSCs

24 Drivers of change for GSCs Developments in eight areas will shape trends The future of GSCs will broadly be shaped by developments in eight areas: 1. Increasing incomes and growing EM labour forces 2. Better communications technologies 3. New automation technologies 4. New trade pacts 5. Geopolitical tensions 6. The costs of trade 7. Sustainability issues 8. Relative wage costs EM growth is running at around twice the DM growth rate 1. Increasing incomes and growing EM labour forces We think the world will see positive economic growth in the next 15 years and that emerging countries will grow faster than developed countries. Even today, with several large emerging countries such as Brazil and Russia struggling, overall EM growth is running at around twice that of developed countries. At market exchange rates, EM accounted for about 2% of the world economy in 199, 4% in 21 and are on course to reach 6% around 23, including 39% in Asia excluding Japan. Figure 22: Forces driving global supply chains Positive and negative More and longer GSCs Fewer and shorter GSCs Continuing growth and rising urbanisation Automation - robotics Better communications cheaper broadband, videoconferencing, virtual reality, IoT, etc New trade pacts Lower oil prices New efficient low-wage countries to replace China 3D printing - customisation Geopolitical tensions Higher oil prices Sustainability concerns become prominent More service supply chains More horizontal GSCs in EMs Source: Standard Chartered Research Populations will grow fastest in south Asia and Africa, bringing another billion people into working age over the next 4 years. While many will likely be low-skilled, most emerging countries are making significant progress in education (Special Report, 18 September 213 Measuring sustainable development ). For trade patterns the urban population trend is probably more important, since EM rural populations often participate very little in GSCs, at least on the import side. Sub-Saharan Africa, China, India and other countries in Asia will account for most new urban citizens over the next 15 years (Figure 23). By 25, the urban population is expected to nearly double to an estimated 6.4 billion (UN, 28). Combined purchasing power of the global middle classes is expected to more than double by 23 The global middle class is expected to triple to 1.2bn in 23 from 4mn in 2 according to World Bank forecasts (Figure 24). A growing middle class should increase demand for consumer durables and for services including tourism, education and financial services. The OECD estimates that the combined purchasing 27 May

25 Drivers of change for GSCs power of the global middle classes will more than double by 23 to USD 56tn, with more than 8% of this demand coming from Asia. A growing number of major global companies are likely to be headquartered in emerging markets. By 225, according to McKinsey, EM companies will likely comprise more than 45% of the world s 5 largest companies (McKinsey Global Institute, 213). The extent to which they expand supply chains internationally, or whether they prefer to produce mainly at home, will be important. We expect that commercial considerations will increasingly encourage them to go global, as we are already seeing in many cases. These trends underline that while DM governments may continue to play a large role in trade policy and DM firms and consumers choices will probably still matter, the choices of EM governments, firms and consumers, particularly China and India, will be increasingly important. Figure 23: Most new urbanites will be in Asia and Africa Rise in urban population 21-3, % SS Africa 21% China 19% Asia ex-cij 19% India 16% MENA 9% Latam 8% US 4% ROW 2% EU-27 2% CIS 1% Japan % Source: UN, Standard Chartered Research Figure 24: Asian middle classes will dominate spending USD bn, PPP dollars 6, 5, 4, 3, 2, 1, 27% Source: OECD, Standard Chartered Research 53% SSA North America Europe MENA Latam Asia-Pacific, 65% Better communications technologies Digital technologies will likely affect supply chains in two opposing ways, depending on whether they improve communications or increase automation. Technologies that improve communications, including improved broadband speed and reliability, the spread of smartphones, video and virtual-reality conferencing, computer translation or the internet of things (IoT), make it easier to successfully operate longer and more complex supply chains. Those working in the supply chain will be able to communicate and collaborate with each other better than ever before. Videoconferencing allows people to feel they are in the same room, while virtual reality makes people feel they can move around in the room. Meanwhile, the falling cost of RFID (radio-frequency identification) technology, as well as other developments in the IoT space, make it cheap and easy to track and monitor components as they move through the supply chain. Supplier companies can be completely integrated in managing the supply chain. Instead of an ordering department sending orders to suppliers, everybody can be linked directly to inventory management systems. Many firms are doing this already, but systems will likely improve and costs fall so that it becomes a standard part of manufacturing for most companies. 27 May

26 Drivers of change for GSCs Another digital technology that could support the expansion of GSCs is big data, (though not exactly a communications technology). Big data allows the huge amount of data generated from sales, inventory and IoT machines to be understood and managed in real time (often automated), again making it easier to coordinate GSCs, finding production efficiencies and anticipating consumer needs across countries. New communications technologies such as broadband and smartphones could help GSCs expand further The rise of GSCs in the last 1-2 years has benefitted from the basic internet, but fast broadband and smartphone adoption is relatively new, particularly in EM (Figure 25). We believe that these new communications technologies will advance by leaps and bounds in the next few years, not just in technical capacity but in how widespread they become (Special Report, 19 January 215, Technology: Reshaping the global economy ). This should support the further growth of manufacturing supply chains and help with expanding services supply chains into new areas. However, digital technology is also bringing rapid advances in automation, particularly robotics but also 3D printing, which could have the opposite effect on supply chains. 3. New automation technologies Robotics could reduce the advantages of producing in low-labour-cost developing countries, potentially unravelling GSCs that have benefitted many emerging markets. Much will depend on costs. Robots are being developed for the assembly line that can be trained simply by moving their arms, showing them what to do, or even with verbal instructions, rather than requiring complex and detailed reprogramming every time a task changes. At first they will likely mainly be used for repetitive, unpleasant or awkward tasks, but their capability could grow. Already available for less than USD 2,, their costs will likely fall and they could work three shifts a day if necessary. Wages in low-income countries are often still less than USD 2 annually, so robots are still expensive now relative to their capabilities. Robots struggle with tasks requiring dexterity or where the process is not totally standardised. But in 1-2 years they could transform manufacturing. Firms in middle-income countries such as China are already experimenting with robots to replace people. The challenge for low-income countries wanting to join GSCs will be to find tasks that cannot be done more cheaply by machines. This is not to say that such tasks cannot be found. Production of small batches, or requiring more flexibility or greater pattern recognition Figure 25: Fixed broadband Internet subscriptions have risen over the last decade Per 1 population, 214 vs FR KR GB DE CA SE HK JP US SG AU TW RU CN TR MX AE BR MY TH SA VN EG ZA PH ID IN BD PK GH KE UG NG Source: WEF GCI 27 May

27 Drivers of change for GSCs will be done better by people for a long time yet. But at least some of the factory tasks done by Korea in the 198s and China in the 2s will probably be done by robots in the 22s. 3D printing could lead to customised products for the mass market 3D printing could lead to customised products 3D printing could change GSCs by taking customisation of products to the mass market. In developed countries some people often pay substantially extra for unusual or unique items (designer goods, craft products or small-batch items) while less welloff people rely more on mass-produced items. But if 3D printing brings the prices of customised items closer to standardised items, customisation could go to the mass market. Everybody may want unique items, either to their own design or from a selected design blueprint or with their own name. A GSC could still be involved; for example, the consumer could be in the US, the designer in India, the materials from Africa and the 3D printer manufactured in Korea. But, with the actual manufacturing all in one location, near the consumer, they would likely be shorter than typical supply chains based on mass production. 4. New trade pacts Anti-globalisation forces are present in most countries, resisting trade agreements or trying to limit their application with restrictions such as government procurement rules or product standards. Backing for this resistance comes from trade unions trying to protect jobs, companies trying to limit competition and environmental or other interest groups trying to maintain environmental or labour-market standards. Sometimes governments seek to restrict GSCs for strategic reasons related to particular industries or what they perceive as the country s interest. The growth of big box retailers in North America and increasingly in Europe was a driving factor for GSCs in manufacturing over the last 2 years. Firms such as Walmart sought the cheapest products possible and could buy on a huge scale, helping to shape supply chains. In some countries, for example India and Thailand, there is considerable political resistance to both foreign retailers and large retailers as they may entail the demise of small shops and smaller local chains. To the extent that emerging countries move more towards large shops and global retailers, rather than a myriad of small shops, GSCs may grow more. Governments can embrace GSCs by encouraging foreign companies to enter and supporting domestic companies in participating, or they may instead emphasise creating local champions and developing domestic suppliers. Large countries are more likely to follow the latter course, and in some cases this may make sense. But promoting local production that involves distortions or subsidies may not help economic growth and could slow the GSC expansion. GSCs encourage cooperation by countries on all fronts Baldwin, one of the leading academic experts on supply chains, argues that GSCs have changed the reason for co-operation on trade issues (Baldwin, 212). In the past, trade negotiation took place to prevent countries from free-riding on other countries liberalisation efforts, but with GSCs, where imports and exports are equally important, it is in a country s best interest to co-operate on all fronts, bringing down import barriers. Such agreements also help small countries and less-developed economies (LDCs) to integrate into the global economy. 27 May

28 Drivers of change for GSCs Trade agreements more than tripled between 199 and 21 Hopes for new trade agreements The 28-9 global financial crisis led to an increase in protectionism but less than feared, and the number of new measures seems to be slowing. Meanwhile, there have been numerous bilateral Preferential Trade Agreements (PTAs) over the last 1 years or so, whose effect in many cases is still working through. According to the World Trade Organisation (WTO), the number of PTAs and Bilateral Investment Treaties (BITs) more than tripled between 199 and 21. Approximately 3 PTAs are currently in operation and many more under negotiation (World Trade Report, 213). The Bali package, which aims to reduce red tape and simplify customs procedures, promises to be the first global trade agreement since More than 16 members of the WTO could benefit from this package, which covers four broad issues trade facilitation, agriculture, cotton trade and less-developed country issues. Package implementation was delayed following a few hiccups, especially disagreement between the US and India on India s food-subsidy programme. In late November 214, however, an agreement between the two countries has allowed for a renewed push towards implementation. Benefits of reducing trade costs under the Bali package could touch USD 1tn The Trade Facilitation Agreement (TFA), the first part of the Bali package, needs to be ratified by two-thirds of the 16 countries to come into force and could be adopted by end-215, with 56 countries already having informed the WTO about which parts of the TFA they will immediately implement once the agreement comes into force. The WTO calculates the benefit of reducing trade costs by 1-15% under the Bali package to be between USD 4bn and USD 1tn. Meanwhile, the Transatlantic Trade and Investment Partnership (TTIP) and, in particular, the Trans-Pacific Partnership (TPP) are gaining traction. The TTIP is an agreement between the US and European Union countries (Figure 26). The TPP is an agreement between twelve countries: the US, Canada, Japan, Australia, New Zealand, Chile, Peru, Mexico, Brunei, Malaysia, Singapore and Vietnam. US President Obama is trying to fast-track these deals (especially TPP) in 215 and they are backed by the Republicans, who control Congress. While the President faces some resistance from within his own party, Republican support is expected to ensure that the President gets the powers to act quickly on the bill ahead of the US presidential elections next year 27 May

29 27 May Figure 26: New multi-party trade agreements under negotiation include the TPP, TTIP and RCEP Canada EU Trans-Pacific partnership (TPP) Transatlantic Trade and Investment Partnership (TTIP) Regional Comprehensive Economic Partnership (RCEP) USA Mexico Peru Chile China Japan South Korea India Myanmar Vietnam Laos Philippines Thailand Cambodia Malaysia Brunei Indonesia Singapore Australia New Zealand Source: Standard Chartered Research

30 Drivers of change for GSCs Further, the Japanese government, keen to implement its third arrow of structural reforms, has indicated willingness to relax tariffs on agricultural products. The Regional Comprehensive Economic Partnership (RCEP) agreement, between ASEAN economies and six others including India and China, may also be finalised in 215, confirming China s interest in liberalising trade. The focus now is on deep agreements With industrial tariffs mostly relatively low now, the focus is on so-called deep agreements, much of which is about facilitating supply-chain growth. These regulatory provisions address behind-the-border issues such as institutional quality, transparency, investment, intellectual property rights and contract enforcement, which underpin GSC trade. Trade and foreign investment rules are increasingly linked. Geopolitical tensions such as in the Middle East could slow GSC expansion 5. Geopolitical tensions Geopolitical tensions could slow the expansion of supply chains if firms fear conflict, consumer actions or sanctions. Tensions in the Asia-Pacific area are a particular concern. Current concerns in Eastern Europe or the Middle East are of less importance for supply chains. But it also seems likely that the current push for trade agreements such as the TPP, TTIP and China s RCEP are partly driven by strategic considerations. Countries are looking to consolidate and develop trade relations as part of creating closer ties as well as helping partners develop. Figure 27: Industrial tariffs mostly relatively low now Tariff rate applied, weighted mean, all products (%) Source: World Bank Panama and Suez Canal widening schemes could lower costs 6. The costs of trade The cost of moving goods around depends on logistical efficiency, including infrastructure. With the possible exception of China, emerging markets (and some developed countries) have infrastructure bottlenecks that raise the cost of extended supply chains. Many emerging markets are now focused on boosting infrastructure investment, which should help to extend GSCs, though congestion will likely remain as economies grow. Both the Panama and Suez Canals are undergoing expansions expected to be completed within the next couple of years, roughly doubling capacity and allowing larger ships through. This will likely lower costs and speed up delivery for some routes. 27 May 215 3

31 Drivers of change for GSCs Expectations are now for a lower path for oil prices, which should boost trade Oil price matters more than often realised The oil price also has a significant effect, with most transport still oil-powered. Until last summer, with oil prices ranging around USD 11/bbl, most forecasters projected that the price would tend to move up from there, towards USD 15/bbl over several years and perhaps towards USD 2/bbl on a 1-2 year horizon. The collapse in prices since last September has put these forecasts into question; some analysts now expect the range to be USD 5-1/bbl for the foreseeable future. Our forecast is for prices moving back to USD 1 and above. There is only limited excess capacity in oil supply today (a different situation to 1986) and current lower prices are reducing future capacity as investment is cut back in higher-cost fields. Time will tell, but the longer oil prices stay low, the more likely that location decisions will be based on a lower price than assumed before. Meanwhile, for some suppliers of bulky items by sea or heavy items by air lower oil prices are already opening up new opportunities. Calculations of the effects of oil prices on trade suggest the impact over the medium and long term is quite large, though estimates vary widely. For example models suggest an oil price of USD 6-8/bbl could be associated with 1-3% more world trade than an oil price of USD 11-13/bbl over the long-term and would particularly benefit trade between countries further apart, for obvious reasons (Vezina, 213; EIU, 28). The scale of this effect could help account for the relatively weak trend in trade this decade, compared with the previous decade, given the natural lags involved in trade adjustment. Services supply chains are much less affected by physical factors such as oil prices, logistics or transport infrastructure, which is why we expect specialisation in services and therefore GSCs in services to expand. Technology infrastructure and education do matter, however. The costs of broadband and digital technologies in general are likely to continue to head downwards. 7. Sustainability issues The sustainability of long global supply chains is potentially threatened by two related issues: the short-term sustainability of chains, threatened by disasters or sudden changes in government policy; and long-term sustainability issues around environmental policy in relation to resource use and climate change. Supply-chain disruptions A survey of supply-chain managers by the World Economic Forum found the threat of natural disasters to be the greatest single risk to supply chains (Figure 28). The size and frequency of supply-chain shocks has increased as GSCs have become more complex over time. Natural disasters such as Japan s earthquake created many problems for a number of large global companies. Companies were unable to distribute and ship goods due to power failures interrupting roads and railways. Many Japanese factories had to shut down as they were unable to source the parts they needed from suppliers. For example, Toyota s Japanese and US operations were severely hampered for at least six months following the disaster due to immediate shortages of more than 4 parts (EIU, 214). Natural disasters are not the only cause for concern An isolated incident such as a fire at a manufacturing plant of a single supplier can also have a severe impact, setting off a chain of negative outcomes called cascading failure. Other sources of supply-chain disruptions include terrorism, climate change effects, cyber-security issues and political risk. For example, geopolitical tensions 27 May

32 Drivers of change for GSCs between China and Japan in the East China Sea have heightened concerns about Japan s automotive and consumer electronic supply chains. Figure 28: Drivers of global-supply-chain risk % of respondents Natural disasters Conflict and political unrest Sudden demand shocks Export/import restrictions Terrorism Extreme weather Extreme volatility in commodity prices Information and communications disruptions Border delays Currency fluctuations Global energy shortages Corruption Ownership/investment restrictions Shortage of labour Illicit trade/organised crime Maritime primacy Nuclear/biological/chemical weapons Transport infrastructure failures Controllable Uncontrollable Influenceable Source: World Economic Forum (212) Sudden government decisions can also be disruptive and cause logistics problems. For instance, the threatened closure of the Strait of Hormuz in 212, through which 2% of the world s oil trade and 28% of liquefied natural gas exports travel, could have had adverse consequences for the global energy industry. Improving supply-chain resilience is a key focus To reduce costs, many firms have built small margins of error into their supply chains, which has further increased risk. Just-in-time deliveries, lean inventories and very little slack in GSCs mean that breakdowns in one part of the chain may quickly spread to other parts. The trend now is towards more flexible, resilient and robust supply chains to mitigate risks. This does not necessarily mean shorter chains or bringing production home. Sometimes it means sourcing strategies need to be more diversified or inventory levels of certain components need to be higher. In some cases firms may prefer to have parallel supply chains and emphasise the ability to quickly adapt production if necessary. The new communications technology trends discussed earlier is likely to help improve supply-chain resilience. Environmental factors Government policies on resource use and climate change as well as company policies chosen as a result of corporate social responsibility considerations could be important for the future of GSCs. Addressing climate change will likely involve pressure to consume less energy and raw material; scarce resources such as water could also become central. Government regulations on greenhouse gas emissions or carbon taxes could have a big impact on transport. If transport costs rise dramatically, manufacturing supply chains could shorten, encouraging local production as well as supporting the growth of 3D printing. These issues are a focus for many global companies, though so far government policies have comparatively little impact. The price of oil has mattered more. Services supply chains are much less impacted by environmental factors. 27 May

33 Drivers of change for GSCs Low wages were a key driver of China s surge in GSC participation in the early 2s 8. Relative wage costs Low wages were a key driver of China s surge in GSC participation in the 199s and early 2s. But China s wages are rising fast, up some eight times since 1995 and doubling since 29. This still leaves them well below US levels, though the gap has narrowed. US manufacturing wages have been lowered in many cases by moving away from high-cost unionised locations to southern-state US locations with a much lower cost of living, especially house prices. The re-shoring trend is limited so far Some now argue that outsourcing was simply a fad, with a herd mentality towards off-shoring (Fishman, 212). On this view companies were overly focused on low labour costs and did not always factor in intangible or hidden logistics costs such as poor quality control, taxes, country regulations, protection of intellectual property or time-to-market disadvantages. Some companies have found that by keeping R&D, design and manufacturing in the same place they can achieve more efficient processes and better products, (though we argue above that improving communications technologies could reduce the potential benefits here). According to this view there is now an in-sourcing trend driven by converging wages, lower domestic energy costs due to the US shale gas boom, and a belated recognition of the advantages of keeping manufacturing onshore. It is difficult to find reliable data, but our view is that the re-shoring trend is likely slowing the move out rather than reversing the flow. Some companies are relocating to Mexico ( near-shoring ) rather than the US. Some products such as toys, computer chips, electric motors and cheap clothing are likely to remain outsourced. Relocation to the US tends to suit companies with high-tech and complex manufacturing processes and products that require continuous innovation. Products that require less human labour and are produced in modest volumes, for example, construction equipment or household appliances, are most likely to shift to US production. Also, the trend may be more likely to affect new investment rather than a wholesale shift back, especially with companies increasingly looking to reduce their vulnerability by operating parallel supply chains. Finally, the rapid growth in Asian markets makes it attractive for global companies to produce there too. Wage costs in India and Vietnam are typically less than half of China s As China s wages rise, manufacturers may increasingly look to lower-income countries to take on some of the low-cost manufacturing tasks. Wage costs in India and Vietnam are typically less than half of China s (Figure 29). This continuous move towards lower-wage countries is known as the flying geese pattern of trade, where industrialisation in one country and resulting wage increases trigger further offshoring to other economies. 27 May

34 Drivers of change for GSCs Conclusion: We expect supply chains to continue to grow We are cautiously optimistic that the balance of the forces described here will allow GSCs to continue to expand in coming years, fostering global trade expansion. This should allow world trade growth to pick up a little relative to GDP growth, exceeding it by a wider margin than recently and probably returning to the long-term average of about 1.4 times GDP growth globally. The biggest risks to this view revolve around government policies. Geopolitical tensions could undermine GSCs, making companies reluctant to engage in crossborder production for fear of interruption. A failure to make significant progress on trade pacts could limit further supply-chain expansion. Currently there is good momentum both from past bilateral trade pacts and the Bali package, but also new initiatives including the TPP, TTIP, RCEP and ASEAN Economic Community. If progress stalls or implementation is inadequate, trade growth will be impacted. Finally, domestic policy approaches matter. Leaders and businesses tend to favour increased globalisation in most countries, but domestic vested interests are sometimes opposed. Nevertheless, global supply chains seem set to change. In the next section we look at three likely trends: the changing role of China and the emergence of big rivals ASEAN and India; the expected growth of services supply chains; and increasing horizontal supply chains within emerging countries. Figure 29: Wages are still very low in absolute terms in emerging markets USD (211) IN PH MX CN MY AR BR RU PL ZA TU KO ES IT GB DE US JP CA FR AU Average annual wages 1, 2, 3, 4, 5, 6, Source: ILO, IMF, PwC Analysis, Standard Chartered Research 27 May

35 3. Three future GSC trends 27 May

36 Three future GSC trends ASEAN, India and even Africa have the capacity to take over from China 1. China s changing role China is the largest player in global supply chains. There are concerns now that the expansion of China-led chains is waning as firms think twice about expanding chains generally and China looks to expand its own domestic production and consumption base. We believe Asia and particularly China will continue to play a central role in expanding GSCs over the coming decade, but China s role will change and other countries will be increasingly important: 1. China s involvement is far from exhausted. China still has a supply of cheap labour in the west and inland, yet to be integrated, while automation and robotics could increasingly be used to complement it. 2. China is likely to assume more of a megatrader role, leading the expansion of global supply chains through programmes such as One belt, One Road (OBOR) and trade agreements such as the RCEP. 3. Many emerging markets are just beginning to be involved in GSCs. ASEAN and India have the capacity to take over from China in low-cost manufacturing over the coming years, with Bangladesh also playing a key role and Africa likely to eventually become more integrated. China GSC participation still has some way to go China s status as the world s workshop is strongly related to its demographic developments a huge labour supply keen to migrate from agriculture to manufacturing and services and willing to work for low wages. Wages have risen significantly on the coast over time, but China still has several regions with low wages that can increasingly participate in global supply chains. China is also emphasising rapid productivity growth (partly offsetting rising labour costs) by investing in capital equipment and especially automation. Our survey shows that manufacturers still want to expand production within China Our recent survey of 29 manufacturers in the Pearl River Delta (PRD) region, the heart of China s export manufacturing, finds a greater willingness to move inland in China (away from the coastal regions) than to move out of China completely (Figure 3; Special Report, 5 May 215, PRD s pain, China and ASEAN s gain). Within China, the outer parts of Guangdong province, Hunan and Guangxi all relatively close to the PRD are preferred destinations (Figure 31). This suggests that geographical familiarity and proximity to existing suppliers are key considerations, in Figure 3: How do you respond to labour shortages? % of respondents Figure 31: If you plan to move capacity elsewhere in China, to where? (% of respondents) Invest more in automation/ streamlining processes Invest more in capital equipment Move capacity inland Yunnan, Guizhou Shaanxi, Gansu, Qinghai, Ningxia Henan, Hubei Chongqing, Sichuan Liaoning, Jilin, Heilongjiang Anhui, Fujian, Jiangxi Jiangsu, Zhejiang, Shandong Move capacity out of China Hunan, Guangxi Outer Guangdong % 2% 4% 6% 8% Source: Standard Chartered Research Source: Standard Chartered Research 27 May

37 Three future GSC trends addition to lower wages. The availability of infrastructure and skilled labour is also important. Given China s size and the disparity among regions, the transition away from cheap-labour tasks is likely to take longer than in Korea and Taiwan. China is increasingly assuming its megatrader role Recent initiatives from China s government suggest that it is looking to strengthen trade and investment ties not only with its immediate neighbours but also globally. China s role as a major GSC player as well as its need to import energy and raw materials make it very interested in trade and investment, in addition to geopolitical or strategic considerations. New silk road should help connect China with Asia and Europe, possibly even Africa The most striking of these initiatives is the One Belt, One Road (OBOR) or the new silk road plans that were announced by China s leadership in late 213 and which are expected to be implemented in earnest in 216 (Figure 32). The OBOR is based on the traditional silk trade route between China and the rest of the world. It encompasses two new routes. First a land-based route (the New Silk Road Economic Belt), which will link China with Europe through Central and Western Asia, and a sea-based route (the 21st Century Maritime Silk Road), which will connect China with Southeast Asia, the Middle East, Europe and possibly Africa. The OBOR is primarily a programme aimed at building infrastructure such as ports, roads, railway lines and oil pipelines in the poorer western parts of China and in countries along the Silk Road. This will benefit not just China but also countries across Asia starting with Pakistan, which has already been promised investment of USD 46bn over the next 15 years. This would also help lower the infrastructure gap that exists in Asia. The Asian Development Bank (ADB) estimated that the infrastructure deficit in the Asia-Pacific region would require investment of USD 8bn-USD 1.3tn per annum between 21 and 22. But the plans have taken on broader dimensions, with China aiming to promote greater financial integration and Figure 32: China is laying the foundations to be a megatrader Proposed One Belt, One Road routes GERMANY POLAND BELGIUM Duisburg UKRAINE FRANCE ITALY Venice GREECE Silk Road Economic Belt Maritime Silk Road initiative Istanbul TURKEY Moscow Tehran IRAN UZBEKISTAN Samarkand KAZAKHSTAN Gwadar Bishkek PAKISTAN INDIA RUSSIA Urumqi KYRGYZSTAN Dushanbe Kolkata Xi an CHINA Fuzhou Guangzhou VIETNAM Hanoi DJIBOUTI KENYA Lamu Colombo Hambantota SRI LANKA Kuala Lumpur MALAYSIA INDONESIA Source: Standard Chartered Research 27 May

38 Three future GSC trends the use of the Renminbi by countries along the route. This would require strengthening of communication and information technology infrastructure along the route, resulting in an Information Silk Road (Kennedy, 215). The establishment of the Asia Infrastructure Investment Bank (AIIB) and the New Silk Road Fund (NSRF) are expected to help this process. OBOR could boost FDI flows that historically link positively with trade While the OBOR is not a free trade agreement, the expansion of infrastructure, finance and IT links across countries is likely to facilitate trade further. For example, according to a CNN report, an existing Trans-Eurasia railroad that connects the city of Chongqing in southwestern China to the German city of Duisburg has greatly reduced trade delivery times between the two countries. While the export of a European car to China would take about two months by sea, it takes only 25 days with this railroad. Similar benefits also accrue to China in its exports of goods to Europe, with lower travel times across land than over sea. It is also well documented that trade is positively correlated with greater FDI. Not only is China investing a lot more abroad, it has also increasingly diversified its investment destinations (Figure 33). The OBOR is set to result in even greater diversification, especially as China has indicated repeatedly that the route is not fixed yet, and all countries including India, Japan and Russia are welcome to join the Silk Road plans. Figure 33: China s outward foreign investment is more diversified now % of total Oceania Africa North America Europe Latin America Asia * Note: * excluding Other Financial Centres; Source: UNCTAD, Standard Chartered Research Figure 34: China s trade with Africa has grown rapidly Index, 25 = 1 7 Imports 6 5 Exports Figure 35: Industry distribution of China s outward FDI in Africa, % of total Mining Finance Construction Manufacturing Other 1 Leasing and business services Source: IMF DOTS, Standard Chartered Research Source: WRI, Standard Chartered Research 27 May

39 Three future GSC trends At the same time, there are also ideas to expand the OBOR to cover countries in Africa. China is already the biggest trade partner for Sub-Saharan Africa (SSA). Commodities play a big role, but China has ramped up investment in SSA not only in mining but also across a broad range of sectors (Figure 35). The OBOR expansion to include Africa would help expand global supply chains to include many countries that now have low integration in GSCs. China s leadership is prioritising the transfer of labour-intensive industries to Africa India s make in India initiative together with favourable demographics could boost its role in international trade Building up Africa s infrastructure would be mutually beneficial, with Africa receiving the foreign investment needed for its growth and development and China being able to tap the low wages and huge population in Africa. China s President Xi Jinping in 213 and Premier Li Keqiang in 214 have emphasised that the transfer of labourintensive industries to Africa will be a top priority for China over the coming years (Suominen, 215). This drive would support expectations of an expansion of supply chains and networks centred on China but include a wider range of countries than at present. This general focus on infrastructure seems to be confirmed by the signing of a MoU agreement between China and the African Union on January 27, 215. India and ASEAN will increasingly rival China in low-cost manufactures Over the next fifteen years, India is set to overtake China as the most populous country in the world and also may grow faster, potentially playing a vastly greater role in both manufacturing and services GSCs. Favourable demographics, still-low per capita income levels and limited GSC integration so far would make India an ideal candidate as the next country to gain importance in the global trade network. A successful implementation of the new Indian government initiative Make in India and greater focus on building infrastructure, would also support greater integration of the South Asian giant into GSCs. We see ASEAN as the next PRD in Asia ASEAN is first choice for many firms At present however, our research suggests that manufacturers are looking more favourably at ASEAN as a possible substitute for China s PRD. In our survey of China s companies, Vietnam and Cambodia are the top two choices for those considering moving capacity overseas to cut costs, followed by Indonesia (Figure 36). Meanwhile Japan and Korea as well as the US and Europe are also looking to ASEAN, often to diversify supply chains away from over-reliance on China. Vietnam and Cambodia are the favoured overseas destinations Figure 36: If you plan to move capacity out of China, to where? Number of respondents Vietnam Cambodia Indonesia Bangladesh Sri Lanka Thailand India Philippines Source: Standard Chartered Research 27 May

40 Three future GSC trends In our view, ASEAN is poised to become Asia s next PRD, benefiting from low wage costs and abundant labour supply over the next 2 years. The region s high growth and rising middle class mean that manufacturers moving production to ASEAN from the PRD could also capture a share of a large and growing consumer market in a population of around 7mn by 22. Vietnam, ASEAN s emerging manufacturing powerhouse, is the prime example of how these fundamental advantages are converging to attract investment and drive growth. The ASEAN Economic Community, getting underway this year, should help to bring down barriers and improve infrastructure across the region. When fully implemented, the ASEAN Economic Community guarantees free movement of goods, services, capital and skilled labour across the region (Special Report, 5 November 214, ASEAN Growth in the fast lane ). Figure 37: ASEAN has cost advantages Monthly manufacturing wages, USD CN MY TH PH ID VN LA KH MM Source: JETRO, Standard Chartered Research Services accounts for a larger proportion of global output than manufacturing 2. Services supply networks will likely grow The incredible vanishing manufacturing sector Another big driver of supply chains over the coming decades is likely to be the services sector. So far, the rise of GSCs in trade has been driven by an expansion primarily of manufacturing chains. Trade in services, as measured by conventional methods, accounted for less than 2% of total trade in 212. But this contrasts with the growing role of services in world output, now over 7% of world GDP, up from 57% in 199 according to the World Development Indicators. The low share of services in trade compared to GDP is due to several factors. Historically, services such as hairdressers, restaurants and education were largely non-tradable and oriented towards the domestic economy, requiring direct contact between the consumer and the service provider. In addition, most of the trade liberalisation measures since WW2 related to goods, particularly tariff reductions. Restrictions on services trade are often complex and specific and have not been in focus until recently. There is also a question of measurement. Goods are plainly visible at borders and are relatively easy to measure. But services can come over a wire or be embodied in people moving about and are sometimes not measured at all. 27 May 215 4

41 Three future GSC trends The future may be a manuservices economy Services are also embodied in goods; indeed, the distinction between manufacturing and services is becoming blurred, leaving us with an increasingly manuservices global economy. The tasks involved in producing any good are often primarily services activity, including research, design, marketing, distribution and even accounting and human resources management. As manufacturing firms increasingly buy in these services from other companies (facilitated by improved communications technologies), the measured size of the manufacturing sector may shrink while that of the services sector rises. But at the border the value of the goods themselves is measured. Falling digital costs are helping make services more tradable Falling digital costs are now helping make services more tradable. Technological developments have led to the establishment of and growing trade in modern services such as ICT, finance and professional business services. India and Philippines, for example, are big players in the Business Process Outsourcing (BPO) market. African and MENA countries are increasingly pulling their weight as well, with Morocco, Kenya, South Africa and Tunisia all supplying services to Europe. In addition to travel, education and medical tourism have picked up Services trade has already eclipsed manufacturing trade According to Subramanian and Kessler (213), the dematerialisation of trade, will lead to trade in services eclipsing trade in goods. Falling digital costs allow countries to trade modern services such as programming and web design, and to more easily trade traditional services such as education, tourism and health. Developed countries still dominate banking, educational and tourism exports. Medical tourism favours emerging countries because costs can be so much lower compared to developed countries. Countries such as Mexico and Thailand lead in this field, but Brazil, Costa Rica, India, Malaysia and the Philippines are also seeing a strong rise in the number of medical tourists. A rise in services-based exports is helping countries alter their trade patterns. Even Australia, known as a commodity exporting country, earned more from services in 214 than from iron ore exports, which had been its single largest source of export earnings in the past decade. On a value-added basis, the share of services exports is already much higher than manufacturing exports The Trade in Value Added (TiVA) statistics which we used for the GSC participation indices above reveals the true importance of services in trade. On a value-added basis, the share of services exports to total exports jumps for most countries, and on average it is estimated that services exports now account for nearly double the conventional estimate of less than 2% of total exports (Figure 38). And this share has been rising for a large number of countries over time (Figure 39). In fact, the data 27 May

42 Three future GSC trends Added value AU CA CL FR DE JP KR MX PL TR GB US AR BR CN HK IN ID MY PH RU SG ZA TH VN EU AU CA CL FR DE JP KR MX PL TR GB US AR BR CN HK IN ID MY PH RU SG ZA TH VN EU Figure 38: Services exports higher user TiVA measure % of total exports, 29 Figure 39: Share of services value-added rising over time Services VA in total exports as % of total exports TIVA Conventional Source: World Bank, TiVA, Standard Chartered Research Source: TiVA, Standard Chartered Research Figure 4: In value-added, services plays the biggest role already % of gross exports, 29 7 Manufacturing Services 2 1 Primary Conventional TiVA Source: Fung Global Institute (213), Standard Chartered Research Figure 41: Services smile curve: An example of a smile curve for a cable TV service provider Innovation Brand R&D Marketing Design Value creation Network installations and Logistics Home installations Customer service Value-added process Source: Standard Chartered Research 27 May

43 Value-added Three future GSC trends would suggest that trade in services (or at least attributable to services) now already eclipses trade in manufactured goods (Figure 4). Continuing improvements in trade statistics as well as more research on the services sector are likely to further emphasise the growing importance of services in trade. Smile curve is becoming operational in services trade too We expect a faster proliferation of services-based GSCs as services are now being broken down into tasks and off-shored. The smile curve is becoming operational in services GSCs as well (Figure 41). For a cable TV service provider, home installations as well as customer payment enquiry calls would indicate low value addition and low-pay work, but services such as R&D and sales would be higher-pay, higher-value-added work. Developed countries that lead in services exports have already started to off-shore lower-value-added services such as data processing, and business back-office operations, while focusing on the higher-value-added tasks such as innovation, R&D, marketing and brand development. Indian IT services company TCS is now trying to move up the supply chain A good example of this move up the value chain comes from the Indian IT services, consulting and business solutions organisation, TCS (Tata Consultancy Services). TCS was started in 1968 with the provision of software services to clients largely in India. In the 198s, however, TCS was the pioneer in the international software services from India through the remote management of software projects, especially application programming, in the US. These were seen as low-value-added services. Over time, however, TCS has moved up the value chain by expanding the range of services available to its international customers to include not only IT but also Business Process Outsourcing and Knowledge Process Outsourcing (KPO) services. These include engineering, systems design and business consulting services among others. In 25, it became the first Indian IT services company to enter the bioinformatics markets (KPO). Currently TCS is one of the 1 largest IT service companies in the world, having operations in over 46 countries with over 3, employees. Figure 42: Indian firms such as TCS are trying to move up the service GSC Upgrading in the Indian off-shore services industry Packgd SW support R&D IC chip design Pkgd SW IS consult. Ntwk infra support Datamining Equity analysis Analytics Analysis Datamining/ catalog prep Contract prod. dev. Call centres Insur. Claim eval. Rev. enhanc. etc. Data entry/back office Finance Types of actvities Radiology Transcription Medical/health Travel GIS Doc digitisation App. dev. & main IT Programming Coding Body shopping Number of employees Source: Fernandez-Stark et al. (211), Standard Chartered Research 27 May

44 Three future GSC trends We expect a proliferation of services supply networks with a hub-and-spoke model Services trade is driven by supply networks rather than chains We expect the growing role of services to change patterns in world trade, simply because the costs of moving anything digital around is essentially zero. We expect a proliferation of supply networks, often with a hub-and-spoke model, rather than the more familiar linear model. One example is the production of this publication. Before the internet was opened to public use (1991), producing a research publication including research, editing and printing was usually completed in one location. Today it is easily possible for researchers in different locations to collaborate on the same publication and for editing and formatting to be done in yet another. As Figure 43 suggests, the whole process of creating and publishing a report has turned into a supply network with specialised tasks performed at several locations, aided by the use of computers and communication networks that also allows a wider audience to be reached. Services network trade is harder to measure than manufacturing supply chain trade Movements of digital services across borders are not all measured as trade, nor are they as likely to involve trade finance as movements of goods in a manufacturing supply chain. Nevertheless, measured properly on a value-added basis, there is trade occurring, and some cross-border payments involved as well. For firms, operating across borders is more efficient than trying to do everything in one place. Meanwhile countries that can make themselves attractive as members of global services supply networks could benefit considerably in terms of jobs, growth and economic development. The importance of the hub-and-spoke model can be seen in the current set-up of many global service providers. The International Hospitals Group (IHG), for example, was founded in 1978 with its headquarters in the UK and completed its first healthcare project of establishing a National Health Service in Abu Dhabi in The project involved IHG providing 7 health-care experts who resided in Abu Dhabi for eight years to complete the project. Since then, IHG has completed nearly 45 similar health-care contracts and has operations not only in the UK and Abu Dhabi but in 49 countries spanning Europe, Middle East and Asia. Figure 43: Research report production supply chain Movements across the wires Direction & oversight Singapore Toronto DTP/publishing London NY Singapore Clients Research and writing London Toronto Editing and compliance London NY Singapore Country inputs China Singapore Source: Standard Chartered Research 27 May

45 Three future GSC trends Similarly, Mace is an international construction and consultancy company offering a whole suite of services including programme, project, and cost and facilities management in addition to full construction delivery service. It was founded in 199 in the UK primarily as a construction services company but now operates in more than 7 different countries across the globe with five strategic hubs in Europe, MENA, Americas, Asia Pacific and Sub-Saharan Africa. Its projects include not only icons such as the BA London Eye and the Shard but also other projects such as managing the corporate real estate portfolio for Standard Chartered Bank in the US, UAE and Africa. Services trade would benefit from a reduction in non-tariff-related barriers to trade as well as improved skills and infrastructure Hurdles for services trade One challenge is higher skill intensity in services jobs compared to manufacturing jobs, which implies that a lot more emphasis has to be placed on the human capital aspect of a country s development. In addition, while transport infrastructure is less important than for goods trade, services trade does require a certain level of ICT and related infrastructure in place, which is often lacking in emerging countries, especially in rural areas. We expect improving communications and lower costs to overcome these limitations in time. The biggest challenges revolve around domestic and international restrictions. WTO has identified four modes of supply for services Liberalising the four services trade modes The WTO has identified four modes of supply for services (Figure 44). The first, crossborder movement via telecoms or postal services, is straightforward conceptually, though as already noted, it may not be easy for statisticians to capture if it is not subject to reporting and/or tax. This lack of transparency has sometimes been a benefit in allowing trade to grow outside of potentially damaging regulation or tax. But domestic regulation of services may increase as governments react to new technologies. The point of new trade agreements covering services and investment regulations is to remove restrictions and create a level playing field. The second, consumption by travellers abroad, was traditionally mainly tourism and business-related travel, but now study abroad and medical tourism are growing rapidly. The third, commercial presence, is also very important. If an international chain of hotels sells a room for a night, much of that service is produced locally (construction, house-keeping, etc.) but partly may qualify as international services, including booking systems, staff training, branding, etc. The fourth, the temporary movement of people on projects or contracts, or as part of commercial presence should also be considered services. Figure 44: Examples of the four modes of supply (from the perspective of an importing country) Mode 1: Cross-border Mode 2: Consumption abroad Mode 3: Commercial presence Mode 4: Movement of natural persons A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, e-books, music or film downloads, medical advice, distance training or architectural drawings. Nationals of A have moved abroad as tourists, students or patients to consume services. The service is provided within A by a locally established affiliate, subsidiary or representative office of a foreign-owned and controlled company (bank, hotel group, construction company etc.) A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g., hospital, construction company). Source: WTO, Standard Chartered Research 27 May

46 Three future GSC trends The liberalisation of development of just one mode is unlikely to help countries integrate into the services supply chain and usually at least modes 1 and 3 (crossborder trade and commercial presence) would have to be open for a country to become a bigger player in services supply chains. But unlike trade in goods, which has benefitted from a reduction in customs and trade tariffs, trade in services is often constrained by the regulatory framework. New trade deals are increasingly aimed at lowering non-tariff barriers to trade through reducing regulatory barriers, simplifying procedures for greater uniformity, greater transparency in public procurement, and promoting e-commerce. These nontariff barriers often have a big impact on services trade, so their reduction will serve to promote the greater integration of services into global supply chains and networks both directly and indirectly. Services sectors that involve the movement of people still face high trade restrictiveness Measuring services trade restrictiveness The World Bank services trade restrictiveness index is a measure of policy restrictions on services trade. The data measures policy restrictiveness in five sectors including transportation, retail distribution, professional services (accounting and legal), telecommunications and financial services (banking and insurance). The index looks at rules on the various modes of delivery discussed above. Mode 3 is uniformly covered for all five sectors but mode 1 is covered for financial, transportation and professional services, while mode 4 is covered for professional services. Developed countries such as the UK and Germany have less restrictive policies for services overall, while countries in Asia such as India are still quite restrictive in terms of trade. For example, India has limits on foreign ownership in the banking sector. It also limits how many branches a foreign bank can set up during a year and requires that at least 5% of the Board of Directors should be Indian nationals. But for certain sectors that involve the movement of people such as professional services or transport services, restrictiveness is high even for developed markets compared to other sectors. In the US for example, foreign nationals cannot own or control a local audit or accounting firm in most US states (restrictions on mode 3). At the same time, foreign licensed professionals can practice in the US but are required to meet certain conditions including residency, training or work experience or may be required to pass a US exam. A similar situation is seen in the UK, where foreign professionals must meet visa rules and pass a local examination as foreign education is not recognised and professionals may be asked to have at least two years of training in the UK before they can practice. This restrictiveness, especially for emerging markets, will have to be addressed for emerging markets to be able to fully capitalise on the growing tradability of services supply. 27 May

47 GB PE DE US BR TR GH AU CL JP NG KE ZA SA MY ID EG MX KR RU CN VN TH PH IN GB PE DE US GH AU BR KR TR RU KE MX CL JP NG ZA CN SA MY TH VN ID EG PH IN CL PE AU VN RU NG MX GH GB US JP BR DE ZA KR CN SA KE MY TH ID PH EG IN TR PE GH US BR AU RU JP CL CN KR GB NG DE TR KE VN SA ZA PH TH EG MY MX IN ID GB PE DE US GH AU BR KR CL JP TR RU NG KE MX ZA CN VN SA MY TH ID EG PH IN GB DE JP KR TR MX ZA US CL ID KE GH NG CN BR AU VN PE EG MY PH SA RU IN TH Three future GSC trends Figure 45: Asian economies have more restrictions on services trade (index, 212) Figure 46: Financial services restrictiveness is lowest in the UK (index, 212) Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research Figure 47: Professional services are restricted everywhere (index, 212) Figure 48: Transport also faces restrictions Index, Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research Figure 49: Telecommunications restrictions are high in developing Asia (index, 212) Figure 5: Retail restrictions are highest in India Index, Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research 27 May

48 27 May Figure 51: Boeing s horizontal supply chain Supply chain for the Boeing 787 Wing tips KAL-ASD, Korea Fixed trailing edge Kawasaki, Japan Moveable trailing edge Boeing, Australia Flap support fairings KAL-ASD, Korea Wing Mitsubishi, Japan Nacelles Goodrich, US Centre fuselage Alenia, Italy Mid forward fueslage Kawasaki, Japan Forward fuselage Spirit, US Tail fin Boeing, US Passenger entry doors Latécoère, France Wing/body fairing Landing gear doors Boeing, Canada Cargo access doors Saab, Sweden Tail cone Boeing, US Aft fuselage Boeing, US Aft fuselage KAL-ASD, Korea Horizontal stabiliser Alenia, Italy Main landing gear wheel well Kawasaki, Japan Centre wing box Fuji, Japan Engines GE, US; Rolls-Royce, UK Landing gear Messier-Dowty, UK Fixed and moveable leading edge Spirit, US Source: Boeing 212, Standard Chartered Research

49 Three future GSC trends Services trade is associated with lower volatility, higher productivity and greater poverty reduction Services trade is good for development For emerging countries, joining services chains or networks may be particularly beneficial, while for developed economies services will likely continue to play a vital role. Higher services trade is associated with a larger reduction in poverty than generally achieved through goods trade, as it tends to be more labour intensive (World Bank, 212). Also trade in modern business services such as marketing, design and management support tends to have much higher productivity levels and wages than goods trade. Services trade also may avoid the volatility caused by global inventory corrections as we saw in 28-9; services trade fell less sharply than goods trade during the global financial crisis and recovered more quickly (UNCTAD, 213). Finally, as services require less physical investment than manufacturing, they can be very useful in integrating a country s small and medium enterprises (SMEs) into the global supply chain. 3. Horizontal trade is set to expand Most literature on supply chains focuses on the boost to vertical chains as a result of the breakdown of trade barriers and the integration of EM giants such as China into the world trade economy. However, world trade and supply chains have also been supported by a rapid expansion of horizontal trade between countries at similar levels of income. Horizontal supply chains have driven north-north trade While emerging markets have increasingly been integrated in vertical supply chains, developed countries are active in horizontal supply chains of more complex products such as electrical machinery, automobiles, and aircraft and spacecraft. The Boeing illustration in Figure 51 is a classic example of a horizontal supply chain, with parts manufactured in UK, France, Sweden, Japan, Canada and elsewhere before being assembled in the US. Horizontal supply-chain trade expansion has been boosted by large multi-party trade agreements. Intra-EU trade rose sharply in 1993 with the Maastricht Treaty, resulting in the formation of a single market and the formal establishment of the European Union (Figure 52). This has allowed the EU to become the biggest trading bloc in the world not only as trade between Western Europe and Eastern European countries such as Slovakia and Poland has risen (vertical trade) but also as trade between western European countries has flourished. For example, nearly 55% of UK s exports go to the European Union, with Germany being its largest trade partner. Figure 52: Intra-EU trade expanded rapidly since the EU was formally established in 1993 Export index 1993= Source: IMF DOTS, Standard Chartered Research Germany- France Intra-EU Figure 53: Trade between US and Canada has risen since NAFTA Index 1994= 1 3 Exports Imports Source: IMF DOTS, Standard Chartered Research 27 May

50 Three future GSC trends The North American Free Trade Agreement (NAFTA) signed by the US, Canada and Mexico came into force in January Trade grew sharply between US and Mexico, with the set-up of vertical supply chains, but there was also an expansion of trade between the US and Canada (following an earlier agreement covering the auto sector; Figure 53). Canada is the largest goods export destination for the US, with the top exports including vehicles, machinery and mineral fuels and plastic. These same product groups form the top US imports from Canada, reflecting the existence of widespread horizontal supply chains. TPP and TTIP cover more than 6% of world output and over 15% of the population Horizontal supply chains are likely to receive a further boost from the multilateral deep trade agreements currently being negotiated. The big deals such as TPP and TTIP that cover more than 6% of world output and over 15% of the population are likely to strengthen trade ties between the developed countries such as the US, EU and Japan not only in goods but also in services (Figure 54). New trade agreements such as the TPP and the RCEP will likely boost horizontal trade for EM too Trade theory suggests that as countries become larger, they tend to trade more with each other. As a result, we expect horizontal supply chains to start playing a bigger role in developing countries trade. Though horizontal supply chains do not exploit wage differences, they allow for economies of scale for producers. At the same time, they provide greater consumer choice for a growing middle class looking for more variety. Horizontal supply chains between emerging markets are also likely to get a boost from the new trade agreements. For example, we expect to see greater horizontal trade between Mexico, Peru and Chile (TPP) over the coming years. Similarly, the RCEP should support the establishment of more bilateral and supply chain trade between countries such as India and the Philippines or China and Malaysia, which have roughly similar wage levels. Figure 54: New regional trade agreements cover over 6% of world output Trade pact Countries % of total world GDP % of total world population Trans-Pacific Partnership (TPP) Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, US, Vietnam 36.8% 11.4% Transatlantic Trade and Investment Partnership (TTIP) EU and US 46.% 9.2% Regional Comprehensive Economic Partnership (RCEP) ASEAN (Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam), Australia, China, India, Japan, South Korea and New Zealand 28.8% 48.7% Source: IMF WEO, Standard Chartered Research. 27 May 215 5

51 4. Trends in trade finance 27 May

52 Trends in trade finance Around 8-9% of all merchandise trade flows are supported by some form of trade finance Innovation, automation and SME needs Around 8-9% of all merchandise trade flows are supported by some form of trade finance, with about a third bank-intermediated. Bank trade finance is especially important for the Asia-Pacific region, which accounts for about half of the global bank-intermediated trade finance flows (BIS, 214). Trade finance can be of several types: Cash-in-advance arrangement: The importer pays ahead of taking delivery. Importer bears the risk of non-delivery and provides working capital to the exporter. Bank-intermediated trade finance allows the exporter to receive payment ahead of the importer making the payment. This can take various forms such as letters of credit, guarantees, collections etc. Part of the delivery and payment risks is borne by the banks. Open-account financing: Importers pay exporters after receipt of goods. Here the exporter has to arrange its own working capital and take the risk of nonpayment. This is the most commonly used form of trade finance globally and the fastest-growing (Figure 55). Supply-chain growth has encouraged a shift towards more open account financing. In the context of a supply chain, traditional bank-intermediated finance is often no longer considered necessary. Suppliers are locked into ongoing repeat contracts and honouring them is part of the overall supply-chain management process. In some cases the companies trading are subsidiaries or affiliates. Companies trading involve banks if they want liquidity or credit, or if they want to pass along risk, or move it off the balance sheet. Banks can provide various factoring services, allowing receivables to arrive earlier and reducing risk. Sometimes suppliers want to reduce the size of their open account exposure to a particular name, so they use banks for part of the receivables. Many companies want their balance sheets to be clean of credit risk; again, banks can help. Figure 55: Open account finance is the most common form of trade finance Trade finance arrangements Market share of financing arrangements Open account Cash in advance Bank trade finance 38-45% USD trillion 19-22% USD trillion 35-4% USD trillion Export credit agency guaranteed USD trillion Arm s-length non-guaranteed Intra-firm USD 15.9 trillion in global merchandise trade (28 IMF estimate) Source: IMF working paper 211, Standard Chartered Research 27 May

53 Trends in trade finance After a sharp drop in 28, trade finance has recovered but there remain concerns about gaps Gaps in trade finance Bank-intermediated trade finance became hard to get for a short time during the global financial crisis in 28-9 (GFC). Estimates vary but this may have accounted for about 2% of the collapse in trade at that time according to the Bank for International Settlements (BIS, 214). But most of the drop in trade and trade finance was probably due to the massive manufacturing inventory correction. Trade finance has recovered since then (Figures 56 and 57), though concerns about a possible trade credit squeeze have persisted on tighter regulations governing bank lending as well as the withdrawal of European banks from EM finance following the euro-area crisis. After the crisis banks have faced greater restrictions on their lending, potentially making it more difficult to reach out to smaller firms or firms in higher-risk countries due to new capital and risk requirements. Some reports suggest that exporting firms that had alternative sources of finance besides bank credit (such as credit given by suppliers themselves) were better able to face the GFC (Coulibaby, 212). This experience might increase the preference of exporting firms for non-bank-related credit, such as open account financing that cuts out intermediaries between the buyer and the seller despite the recovery in bank-related trade finance. Based on a survey conducted in 213, the ADB calculated a massive trade finance gap of USD 1.6tn, with a gap of USD.4tn in developing Asia, the region with the highest demand for trade finance (ADB, 213). However, a BIS study (214) suggested that this estimate overstates the gap. A recent ICC Survey suggests that while trade finance availability has risen, there is still a shortage for SMEs Particular concerns about SME finance The latest Global Trade and Finance Survey (214) from the International Chamber of Commerce (ICC) suggests that while trade finance availability has risen recently, there is still a shortage of finance availability especially for small and mediumenterprises (SMEs). A lack of finance for SMEs could be a key constraint for their integration into GSCs. In addition, credit-constrained firms could find themselves stuck in the low-value-added stages of a supply chain and not be able to move up the smile curve. This becomes increasingly relevant in an environment where GSCs are evolving to include an expanding universe of emerging markets with underdeveloped financial systems. Figure 56: Trade finance recovered after the GFC USD bn 1, Trade finance 9 Trade (RHS) Q1-27 Q1-28 Q1-29 Q1-21 Q1-211 Q1-212 Q1-213 Source: BIS, Standard Chartered Research 5, 4,5 4, 3,5 3, 2,5 Figure 57: Falling demand for trade finance recently 5=neutral, above 5=improving Source: IIF EM Bank Lending Conditions Survey, Standard Chartered Research Asia TF supply 45 Asia TF demand 4 Q4-29 Q4-21 Q4-211 Q4-212 Q4-213 Q May

54 Trends in trade finance Still, it is difficult for commercial banks to meet all the needs of SMEs. Transaction and total business sizes are often small, making it less economical to complete all the risk assessments and paperwork required. Often company information is less available or less reliable and in some cases data may not go back very far. Factoring receivables due to SMEs from big name anchor companies is much more straightforward. Bank-intermediated trade finance has declined Increased regulations may constrain trade finance The decline in the share of bank intermediation of trade is not new; the trend had begun ahead of the crisis. But the decline has renewed as a result of both ongoing and expected changes in regulation that followed the GFC. Nearly 45% of respondents to the latest ICC survey suggested that the new AML/KYC requirements were a major impediment to their access to trade finance (Figure 58). Little evidence yet of a decline in trade finance on the back of Basel III and new national rules There are fears that the evolving regulatory regime is likely to result in more onerous bank loan charges as well as documentation procedures that will hamper greater trade finance activity. But some reports argue that there is little evidence of any decline in trade finance on the back of Basel III and new national rules (Auboin, 214). Trade finance, particularly short-term trade finance (such as self-liquidating letters of credit) has received favourable treatment regarding capital adequacy and liquidity requirements under Basel III. The decision by the Basel Committee to lower the 1% capital charge requirement on non-leveraged activities such as letters of credit will also help improve the attractiveness of these forms of trade finance. The ICC survey also suggests that clients remain enthusiastic about export financing (EF) products despite these changes even though banks have become more selective in clients they choose to work with (Figure 59). Innovation and automation are the new hallmarks of trade finance Banks are responding to these regulatory changes in various ways. The ICC survey clearly shows that banks are becoming more innovative in their supply of trade finance solutions. Many banks that have been losing ground to open account financing methods are now attempting to re-establish themselves as intermediaries by getting increasingly involved in overall supply-chain financing (Figure 6) and by moving up the value chain through a suite of structured products, though these typically involve more risk. Figure 58: Impediments to trade finance Very significant constraint; % of respondents AML/KYC requirements Issuing bank's low credit ratings Prev. dispute/ unsatisf. perform. of issuing banks Other Insufficient collateral from the company Low country credit ratings Low company/obligator credit rating Constraints on your bank's capital Basel regulatory requirements High transaction costs or low fee income Lack of dollar liquidity Source: ICC Survey (214), Standard Chartered Research 27 May

55 Trends in trade finance Multilateral agencies such as the ADB and export credit agencies are playing a growing role in trade finance Innovative solutions are being increasingly facilitated by the growing role of export credit agencies and other multilateral institutions such as the ADB, World Bank and the International Finance Corporation (IFC). They are emphasising improved financing for SMEs and are partnering with commercial banks as guarantors for trade finance activity, especially for the SME sector. The rise of these institutions as guarantors of trade finance has been a significant development that is expected to push SME trade financing higher over the coming decades. Three new trends Trade finance is moving towards a more electronics-based/automated system. Increasing innovation helped by falling communications and IT costs are allowing clients as well as finance providers more cost-effective, error-free and speedy ways of accessing and disbursing finance. The move away from document-driven trade finance is evident from three other innovations: Mobile technology, third-party players and BPOs are all changing the shape of trade finance 1. Mobile payment technology, is helping to integrate suppliers to both their large buyers and also banks, making it easier to provide financing to them. This is increasingly being used in Africa and Southeast Asia. 2. Companies running large global supply chains are increasingly using innovations such as platform-based e-invoicing, run by third-parties. Almost all banks have differentiated (albeit similar) systems for providing trade finance. This implies more work for clients with large extensive supply chains requiring finance to be integrated with different systems. The third-party platforms act as an adaptor hub that can plug into different bank systems so that the client does not have to link to individual bank systems. This makes the process less cumbersome for clients, potentially accelerating settlement capabilities. It is particularly important for large supply chains. The anchor company can place all its supply relationships on the platform and banks can bid for participation. 3. Bank payment obligations (BPO) are a new product making use of digital technology. A BPO is an irrevocable undertaking made by one bank (usually the buyer s bank) to another (usually the seller s bank) to make a specified payment on an agreed date once there has been a successful electronic matching of data Figure 59: Effect of Basel III on banking operations % of respondents that agree Decreased client enthusiasm for the EF product Increased client confidence in our bank Made us significantly cut our involvement in the sector Increased our competitiveness Slowed down our process Decreased our competitiveness Increased the pricing we are charging to customers Made us become more innovative Increased cost of doing export finance Made us more selective Source: ICC Survey (214), Standard Chartered Research 27 May

56 Trends in trade finance (under industry-wide rules set by the ICC). Take-up of BPOs has been disappointing so far, though it is at an early stage of development. Widespread adoption will require more infrastructure and investment from banks to become more important for trade finance. Trade finance is evolving significantly. GSC changes are being driven by continued innovation, falling costs of communication and technology, the growing integration of services and the rise of south-south trade. The changes to trade finance reflect these forces. Increased automation, the focus on emerging markets, especially Asia, the use of new technology to link SMEs where traditional infrastructure is not yet developed and a more holistic approach to supply-chain finance are all hallmarks of this evolution. Figure 6: Financing is required at various stages of the supply chain Schematic Supply-chain finance program Flows are either Cross-border or Domestic Sub-suppliers Suppliers (spoke) Corporate (anchor) Buyers (spoke) Customers Supplier finance Buyer finance Supplier finance Supplier finance is the financing of the procurement of the anchor Buyer finance Buyer finance is the financing of the sales (downstream business) of the anchor Source: Standard Chartered Research 27 May

57 Appendix: Global supply chains by industry Figure 61: GSC participation in textiles % of gross exports VN TR CN TH ID IN KR NZ PH FR MY MX BR GB JP DE US AU CA ZA SG RU SA HK Source: OECD (213) Figure 62: GSC participation in chemical industries % of gross exports SG KR DE FR MY US ID GB RU JP TH CN SA TR IN CA BR HK NZ MX ZA AU VN PH Source: OECD (213) Figure 63: GSC participation in electrical equipment % of gross exports PH TH KR MY SG CN MX JP US DE HK ID IN GB FR VN CA TR NZ BR RU ZA AU SA Source: OECD (213) 27 May

58 Figure 64: GSC participation in machinery equipment % of gross exports MY DE CN SG FR KR JP ID TR GB US RU CA MX TH AU IN BR VN NZ PH HK SA ZA Source: OECD (213) Figure 65: GSC participation in transport equipment % of gross exports KR DE FR MX JP CA TR GB US ZA TH SG CN BR PH IN ID MY NZ AU VN RU HK SA Source: OECD (213) Figure 66: GSC participation in financial intermediation and business services % of gross exports HK GB US IN SG DE FR AU JP KR PH MY NZ BR CA RU TR ZA CN MX VN ID SA TH Source: OECD (213) 27 May

59 Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Figure 67: China GSC participation by industry, 29 % of gross exports Backward participation Forward participation Source: OECD (213) Figure 68: India GSC participation by industry, 29 % of gross exports Backward participation Forward participation Source: OECD (213) Figure 69: Indonesia GSC participation by industry, 29 % of gross exports Backward participation Forward participation Source: OECD (213) 27 May

60 Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Agriculture Mining Food products Textiles & apparel Wood & paper Chemicals & minerals Basic metals Machinery Electrical equipment Transport equipment Other manufactures Utilities Construction Wholesale & retail Transport & telecoms Finance & insurance Business services Figure 7: Korea GSC participation by industry, 29 % of gross exports Backward participation Forward participation 5 Source: OECD (213) Figure 71: Japan GSC participation by industry, 29 % of gross exports Backward participation Forward participation Source: OECD (213) Figure 72: US GSC participation by industry, 29 % of gross exports Backward participation Forward participation 2 1 Source: OECD (213) 27 May 215 6

61 LPI score 214 Supply chain score 214 Figure 73: Supply-chain risk score vs GDP per capita GDP per capita (USD) 1. DE 9. JP CA HK NZ SG US 8. AU AE 7. ES GB MY TW SA 6. KR TR 5. ZA TH IT MX 4. CN IN ID BR 3. GH PH KE VN 2. EG NG BD RU 1.. 1, 2, 3, 4, 5, 6, 7, GDP per capita 214 Source: Oxford Metrica Global Resilience Index, IMF WEO Figure 74: Logistics performance and GDP per capita GDP per capita (USD) CN ZA TH TR MY TW ES KR IT JP HK DE GB NZ AE CA US SG AU VN IN ID PH KE GH BD EG NG MX BR RU SA 2. 1, 2, 3, 4, 5, 6, 7, GDP per capita 214 Source: Oxford Metrica Global Resilience Index, IMF WEO 27 May

62 Country code Country Angola Argentina Australia Austria Bangladesh Belgium Brazil Canada Chile China Colombia Cyprus Czech Republic Egypt Finland France Germany Ghana Greece Hong Kong India Indonesia Italy Japan Kenya Korea, Republic of (South Korea) Malaysia Mexico Netherlands New Zealand Nigeria Pakistan Peru Philippines Poland Portugal Russian Federation Saudi Arabia Singapore Slovakia South Africa Spain Sri Lanka Sweden Switzerland Taiwan, Province of China Thailand Turkey Uganda United Arab Emirates United Kingdom United States of America Venezuela Vietnam Country code AO AR AU AT BD BE BR CA CL CN CO CY CZ EG FI FR DE GH GR HK IN ID IT JP KE KR MY MX NL NZ NG PK PE PH PL PT RU SA SG SK ZA ES LK SE CH TW TH TR UG AE GB US VE VN 27 May

63 Bibliography AfDB, OECD and UNDP, How ready is Africa for global value chains: A sector perspective, African Economic Outlook, 214. Antras P and Thibault Fally et. al, Measuring the Upstreamness of Production and Trade Flows, NBER Working Paper Series, Working Paper 17819, February 212. Auboin M and Isabella Blengini, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio, World Trade Organisation, 214. Baldwin R, Global supply chains: why they emerged, why they matter, and where they are going, Fung Global Institute Working paper, July 212. Baldwin R and Javier Lopez-Gonzalez, Supply-chain trade: A portrait of global patterns and several testable hypotheses, incomplete draft, December 212. Bamber P, Connecting Local Producers in Developing Countries to Regional and Global Value Chains; Update, OECD Trade Policy Papers, No. 16, OECD, 214. Bank for International Settlements, Trade finance: developments and issues, CGFS Papers No. 5, January 214. Blyde J and Graziano A et al, Economic Integration agreements and the location of vertical FDI, VOX CEPR s Policy Portal, 13 May 214. Bruhn D, Global Value Chains and Deep Preferential Trade Agreements, Promoting Trade at the Cost of Domestic Policy Autonomy?, German Development Institute Discussion Paper, August 214. Constantinescu C and Aaditya Mattoo et.al, The Global Trade Slowdown; Cyclical or Structural?, IMF Working Paper, January 215. Coulibaby B and Horacio Sapriza et. al, Financial Frictions, Trade Credit, and the 28-9 global Financial Crisis, Board of Governors of the Federal Reserve System, July 212. Kennedy S and David A Parker, Building China s One Belt, One Road, CSIS, April 215. De Backer K and Sebastien Miroudot, Mapping Global Value Chains, OECD paper prepared for the Final WIOD Conference: Causes and Consequences of Globalisation, April 212. Drake-Brockman J and Sherry Stephenson, Implications for 21 st Century Trade and Development of the Emergence of Services Value Chains, 212. Economic Intelligence Unit, Fuelling global trade, An Economist Intelligence Unit briefing paper commissioned by DHL Asia- Pacific, 28. Economic Intelligence Unit, The Future of Business: Supply Chains, 214. Feller A and Dr. Dan Shuck et al. Value chains versus supply chains, BP Trends, March 26. Fernandez-Stark K and Penny Bamber et al., Skills for Upgrading: Workforce Development and Global Value Chains in Developing Countries, Duke Centre on Globalisation, Governance & Competitiveness, November May

64 Ferrantino M and Daria Taglioni, Global Value Chains in the Current Trade Slowdown, The World Bank Poverty Reduction and Economic Management Network, March 214. Fishman C, The Insourcing Boom, The Atlantic Business, December 212. Gereffi G and Timothy Sturgeon, Global value chain-oriented industrial policy: the role of emerging economies, Global value chains in a changing world, WTO, Fung Global Institute, Eds. Elms D and Patrick Low, 214. ICC Global Trade and Finance Survey, 214. Kommerskollegium National Board of Trade, Global Value Chains and the Transatlantic Trade and Investment Partnership, 213. Koopman R and William Powers et. al, Give Credit Where Credit is Due: Tracing Value Added in Global Production Chains, NBER Working Paper Series, Cambridge MA, September 21. McKinsey and Company, McKinsey on Supply Chain: Select Publications, January 211. OECD, Interconnected Economies: Benefiting from Global Value Chains, Synthesis Report, OECD 213. OECD, WTO and World Bank Group, Global Value Chains: Challenges, Opportunities and Implications for Policy, Report prepared for submission to the G2 Trade Ministers Meeting, Sydney, Australia, 19 July 214. OECD, Trade Policy Implications of Global Value Chains, May 213. Page J, The East Asian Miracle: Four Lessons for Development Policy, The World Bank, January Park A and Gaurav Nayyar et. al, Supply Chain Perspectives and Issues, A Literature Review, WTO and Fung Global Institute, 213. Serieux J, Productive Integration of LDCs into Regional Supply Chains: The Case of South Asia, UNCTAD and Commonwealth Secretariat, June 212. Subramaniam A and M Kessler, The Hyperglobalisation of Trade and its Future, Working Paper Series 13-6, Peterson Institute for International Economics, July 213. Suominen K and Jessica Lee, Bridging Trade Finance Gaps, Brookings Institution, January 215. SWIFT Educational report, Observations on the Evolution of Trade Finance and Introduction to the Bank Payment Obligation, 213 The World Bank, Exporting services: A Developing Country Perspective, 212. The World Bank, Trade Logistics in the Global Economy, Connecting to Compete 214. The World Bank, What Lies Behind the Global Trade Slowdown?, Global Economic Prospects, Chapter 4, January 215. United Nations, World Urbanisation Prospects: The 27 Revision Highlights, 28. UNCTAD, World Investment Report, Global Value Chains: Investment and Trade for Development, May

65 Vezina P and David von Below, The Trade Consequences of Pricey Oil, OxCarre Research Paper 115, University of Oxford, June 213. World Economic Forum, Enabling Trade Valuing Growth Opportunities, 213. World Economic Forum, New models for addressing supply chain and transport risk, 212. WTO, World Trade Report 213, Factors shaping the future of world trade, 213. WTO, World Trade Report 214, The rise of global value chains, 214. WTO and IDE-JETRO, Trade patterns and global value chains in East Asia: from trade in goods to trade in tasks, May

66 Global Research Team Management Team Dave Murray, CFA Head, Global Research Standard Chartered Bank, Singapore Branch Marios Maratheftis Chief Economist Standard Chartered Bank Will Oswald Head, FICC Research Standard Chartered Bank, Singapore Branch Thematic Research John Calverley Head, Global Thematic Research Standard Chartered Bank (Canada) Limited Madhur Jha Senior Economist, Thematic Research Standard Chartered Bank Samantha Amerasinghe Economist, Thematic Research Standard Chartered Bank Global Macro Strategy Eric Robertsen Head, Global Macro Strategy Standard Chartered Bank, Singapore Branch Mayank Mishra Macro Strategist Standard Chartered Bank, Singapore Branch Economic Research Africa Razia Khan Chief Economist, Africa Standard Chartered Bank Victor Lopes Senior Economist, Africa Standard Chartered Bank Sarah Baynton-Glen Economist, Africa Standard Chartered Bank The Americas Mike Moran Head, Economic Research, The Americas Standard Chartered Bank NY Branch Thomas Costerg Senior Economist, US Standard Chartered Bank NY Branch Italo Lombardi Senior Economist, Latam Standard Chartered Bank NY Branch Europe Sarah Hewin Chief Economist, Europe Standard Chartered Bank Achilleas Chrysostomou Economist, Europe Standard Chartered Bank Asia David Mann Chief Economist, Asia Standard Chartered Bank, Singapore Branch Southeast Asia Edward Lee Wee Kok Head, ASEAN Economic Research Standard Chartered Bank, Singapore Branch Jeff Ng Economist, SEA Standard Chartered Bank, Singapore Branch Eric Sugandi Senior Economist, Indonesia Standard Chartered Bank, Indonesia Branch Usara Wilaipich Senior Economist, Thailand Standard Chartered Bank (Thai) Public Company Limited South Asia Samiran Chakraborty Head, South Asia Economic Research Standard Chartered Bank, India Anubhuti Sahay Senior Economist, India Standard Chartered Bank, India Saurav Anand Economist, South Asia Standard Chartered Bank, India Middle East and North Africa Shady Shaher Senior Economist, MENA Standard Chartered Bank Carla Slim Economist, MENA Standard Chartered Bank Greater China Shuang Ding Head, Greater China Economic Research Standard Chartered Bank (HK) Limited Kelvin Lau Senior Economist, HK Standard Chartered Bank (HK) Limited Betty Rui Wang Economist, NEA Standard Chartered Bank (HK) Limited Chidu Narayanan Economist, Asia Standard Chartered Bank (HK) Limited Lan Shen Economist, China Standard Chartered Bank (China) Limited Tony Phoo Senior Economist, NEA Standard Chartered Bank (Taiwan) Limited Korea Chong Hoon Park Head, Korea Economic Research Standard Chartered Bank Korea Limited Kathleen B. Oh Economist, Korea Standard Chartered Bank Korea Limited Philippe Dauba-Pantanacce Senior Economist, Turkey & MENA Standard Chartered Bank 27 May

67 FICC Research Rates Research Credit Research FX Research Kaushik Rudra Head, Rates & Credit Research Standard Chartered Bank, Singapore Branch Nagaraj Kulkarni Senior Asia Rates Strategist Standard Chartered Bank, Singapore Branch Arup Ghosh Senior Rates Strategist Standard Chartered Bank, Singapore Branch Lawrence Lai Asia Rates Strategist Standard Chartered Bank, Singapore Branch Hee Eun Lee Asia Rates Strategist Standard Chartered Bank, Singapore Branch Becky Liu Senior Asia Rates Strategist Standard Chartered Bank (HK) Limited John Davies US Rates Strategist Standard Chartered Bank Samir Gadio Head, Africa Strategy Standard Chartered Bank Eva Murigu Africa Strategist Standard Chartered Investment Services Kenya Limited Flows Research Michael Trounce Senior Strategist, Flows Research Standard Chartered Bank Kaushik Rudra Head, Rates & Credit Research Standard Chartered Bank, Singapore Branch Sandeep Tharian Head, Macro Credit Strategy Standard Chartered Bank Shankar Narayanaswamy Head, Single-Name Credit Strategy & Financials Standard Chartered Bank, Singapore Branch Bharat Shettigar Head, IG/Sovereign Credit Research Standard Chartered Bank, Singapore Branch Jaiparan Khurana Credit Analyst, IG/Sovereign Standard Chartered Bank, Singapore Branch Simrin Sandhu Senior Credit Analyst, Financials & ME Corporates Standard Chartered Bank, Singapore Branch Nikolai Jenkins, CFA Credit Analyst, Financials Standard Chartered Bank, Singapore Branch Zhi Wei Feng Head, HY Credit Research Standard Chartered Bank, Singapore Branch Chun Keong Tan, CFA Credit Analyst, HY Standard Chartered Bank, Singapore Branch Jiacheng Chen Credit Analyst, HY Standard Chartered Bank, Singapore Branch Melinda Kohar Credit Strategist Standard Chartered Bank, Singapore Branch Callum Henderson Head, FX Research Standard Chartered Bank, Singapore Branch Robert Minikin Head, Asian FX Strategy Standard Chartered Bank Eimear Daly G1 FX Strategist Standard Chartered Bank Nick Verdi Senior FX Strategist Standard Chartered Bank NY Branch Devesh Divya Asia FX Strategist Standard Chartered Bank, Singapore Branch Eddie Cheung Asia FX Strategist Standard Chartered Bank (HK) Limited Commodities Research Paul Horsnell Head, Commodities Research Standard Chartered Bank Nicholas Snowdon Metals Analyst Standard Chartered Bank Yuhan Xia Commodities Analyst Standard Chartered Bank Priya Balchandani Energy Analyst Standard Chartered Bank, Singapore Branch Serene Shang Yi Lim Energy Analyst Standard Chartered Bank, Singapore Branch Judy Zhu Metals Analyst Standard Chartered Bank, Singapore Branch 27 May

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It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Law of Japan (FIEL), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEL or any Specified Deposits, etc. as defined by the Banking Law of Japan. Kenya: Standard Chartered Bank Kenya Limited is regulated by the Central Bank of Kenya. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. Macau: This document is being distributed in Macau Special Administrative Region of the Peoples' Republic of China, and is attributable to, Standard Chartered Bank (Macau Branch) which is regulated by Macau Monetary Authority. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. New Zealand: New Zealand Investors should note that this document was prepared for wholesale clients only within the meaning of section 5C of the Financial Advisers Act 28. This document is not directed at persons who are retail clients as defined in the Financial Advisers Act 28. This document does not form part of any offer to the public in New Zealand. NOTE THAT SCB IS NOT A REGISTERED BANK IN NEW ZEALAND UNDER THE RESERVE BANK OF NEW ZEALAND ACT Philippines: This document may be distributed in the Philippines by, and is attributable to, Standard Chartered Bank (Philippines) which is regulated by the Bangko Sentral ng Pilipinas. This document is for information purposes only and does not offer, sell, offer to sell or distribute securities in the Philippines that are not registered with the Securities and Exchange Commission unless such offer or sale qualifies as an exempt transaction under Section 1 of the Securities Regulation Code. Singapore: This document is being distributed in Singapore by SCB Singapore branch, only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact SCB Singapore branch in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 22. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 25 under registration number NCRCP4. Thailand: This document is intended to circulate only general information and prepare exclusively for the benefit of Institutional Investors with the conditions and as defined in the Notifications of the Office of the Securities and Exchange Commission relating to the exemption of investment advisory service, as amended and supplemented from time to time. It is not intended to provide for the public. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Exchange Act of All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 195 Avenue of the Americas, New York, N.Y. 136, US, tel WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. Copyright 215 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written permission of Standard Chartered Bank. Document approved by David Mann Chief Economist, Asia Document is released at 15:4 GMT 27 May May

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