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The Macro Brief – Shifting supply chains
30 Plays1 year ago
Shanella Rajanayagam, Trade Economist, looks at how supply chains are reconfiguring globally and assesses the extent to which countries are moving production closer to home. Disclaimer: https://www.research.hsbc.com/R/101/FNpqB6N Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Introduction to Global Insights Podcast
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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And now onto today's show.
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This podcast was recorded for publication on the 21st of March 2024 by HSBC Global Research, or the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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And don't forget that you can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts.
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Just search for The Macrobrief.
Impact of Recent Trade Shocks and Globalization
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Hello, I'm P.S.
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Butler and welcome to the Macrobrief.
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Decades of globalization have resulted in greater trade integration.
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However, recent trade shocks have brought global supply chains firmly into focus, spurring businesses and governments to start relocating production closer to home and to alternative markets.
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But how fast is this change actually happening?
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and is there more to come in the future?
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To find out, let's speak to Shinela Rajanagam, trade economist, who published a major report on the subject this week.
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Shanella, welcome.
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Hi, Piers.
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Thanks for having me.
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Well, it wasn't that long that we were talking about the outlook for trade in 2024 and the impact of some of the short-term disruptions.
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But obviously, in this report, you've taken a look at the sort of longer-term trends.
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And I think it'd be helpful to our listeners to give them a sense of the sheer scale of trade growth in the last few years.
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So what you refer to as hyper-globalizations.
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Sure.
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So hyperglobalisation is really the era between 1992 and 2008 where trade grew notably faster than GDP during that period.
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And that really helped to improve income growth for emerging markets.
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And it was also coupled with a significant trade policy liberalisation.
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as well as advances in technology.
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And so as a result of this, productivity growth was lifted and now consumers around the world can access more goods more cheaply and businesses have been able to trade with a more diverse set of partners than they have been
De-risking Supply Chains: Reshoring and Nearshoring
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before.
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But now all the talk is about changing trade shifts.
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And there's a whole lexicon, in fact, associated with that.
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We talk a lot about reshoring, but there's also relocating, onshoring, nearshoring.
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Am I forgetting any other sorings that I should be aware of?
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There's also friendshoring if we want to add that to the list.
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But yes, there's been a significant push by businesses and governments to de-risk their supply chains, mainly from mainland China.
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And some of that involves relocating production to alternative markets.
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Now, this could either be to other markets within the region.
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It could be closer to home or, in fact, even back home.
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So we do have a number of these terms that have picked up and they're increasingly being discussed in earnings calls as well.
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Before we talk about some of these sort of recent initiatives, actually, is it fair to say that China has almost been a victim of its own success in a sense that its industrial growth has led to the cost of production in China being elevated?
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And that's almost by itself forced some relocation of trade?
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Yes, that's right.
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I think you could phrase it like that because China's rise in global trade has been quite significant.
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You know, back in 1950, it accounted for just 0.9% of world exports.
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And today it accounts for about 14%.
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So that's an incredible rise.
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It means that a lot more economies are reliant on China, not just for exports, but also for imports as well.
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We also found that it's currently involved in the top 14 of 25 trade corridors globally.
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So it clearly plays a very important role in world trade.
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But as you mentioned, its role has been evolving.
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You know, labour costs has been increasing there, especially when you compare it to the likes of Vietnam, Bangladesh, Sri Lanka.
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And that's led for China to actually move up into higher value added activities.
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And its role in more labour intensive exports has actually decreased over time.
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And China has actually also been taking the initiative in terms of rerouting and relocation.
Mexico's Nearshoring Advantage over China
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And one of the unintended consequences is that's been Mexico.
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That's right.
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So Mexico has been an early winner of these nearshoring and reshoring trends, you could say.
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You know, just last year, Mexico surpassed China to become the US's top import partner.
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And that's for the first time in more than two decades.
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But it is important to view these shifts within the broader context, because actually, China's exports to Mexico and Vietnam have actually increased by over 100% since 2016.
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So
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There's very clearly some degree of trade rerouting going in place, but also the relocation of some supply chain activities.
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China has increasingly been investing into Mexico and into ASEAN, mainly in the EV sector and autos more broadly in Mexico.
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And look at it from the perspective of countries that have been big importers from China.
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They've been taking some initiatives.
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Can you highlight, say, some in the US, European Union and India?
Industrial Policies and Onshoring Efforts
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Yes, sure.
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So a lot of these initiatives have been supported by industrial policy.
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And it seems as though the dam has almost been lifted when it comes to industrial subsidies.
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The US is notable in this space with its Inflation Reduction Act and its CHIPS Act.
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incentives to essentially onshore some of that autos production and chips production.
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When we look at US manufacturing construction spending in the electronics sector, that's actually increased 16 fold since January 2021.
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largely on the back of these chips incentives although most of that is still yet to be rolled out and then it's a similar story in India as well they've announced a raft of subsidies to onshore some chips production as well as in South Korea, Japan, Taiwan as well and you have the likes of Intel, TSMC, Micron looking to take advantage of these initiatives.
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You mentioned a few company names.
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And in fact, in your report, you have some interesting results from business surveys as to what companies are planning to do.
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Can you give us some highlights there?
Investment Trends: China, Southeast Asia, and Mexico
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Yes, sure.
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So the business surveys give us another indication of what some companies might be thinking about when it comes to relocation.
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Interestingly, most Western companies that still operate in China are looking to be committed still to their investments there, but they are increasingly aware of the geopolitical risks, particularly with the US-China trade tensions.
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And in terms of looking at alternative markets to relocate some of their Chinese investment to, they are mainly looking at Southeast Asia and also looking to bring some of their production a bit closer to home.
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So the likes of Mexico, Canada for American companies and also to Eastern Europe for European companies.
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In your report, you have some great charts that show for particular trade flows how they've evolved over time.
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And I think one of the sort of takeaways for me is that trade shifts take years to sort of occur.
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So we should be a bit careful about not over extrapolating in some of the initiatives that are making the headlines.
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Yes, absolutely.
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So supply chains still remain incredibly globalised and it will take some time for these production shifts to actually materialise.
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As we flagged in the report, the decision to actually relocate production will depend on many factors.
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For example, labour costs, labour availability, access to raw materials, whether there's a preferential trade deal in effect or not.
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and much much more so for now we are starting to see the beginning of some of these shifts and I think it will take a bit more time to bear out and it will mainly be concentrated in a few critical sectors mainly like EVs and semiconductors.
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Before we finish, can we come back to the shorter term?
Trade Continuity Amid Disruptions
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Where are we in terms of these disruptions in the Gulf?
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What sort of impact?
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When we last talked about it, you said, well, we have to wait and see how long they last.
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They're obviously still ongoing.
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Are we starting to see some impacts there?
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Yes, sure.
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So our view is very much still a wait and see.
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Container freight rates still remain relatively elevated, still more than double what they were in early December, but down about 70% compared to their pandemic peak.
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And trade is still moving.
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There are reports of delays, but clearly shipping companies have bedded in this longer route.
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And so most trade is still flowing.
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But I think a lot will depend on how long the crisis persists.
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It's very clear that disruptions will last at least into the second quarter of this year and certainly a risk that it will spill over into the second half of the year as well.
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Janela, thank you very much for joining us.
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Thank you.
Economic Outlook: Central Banks and Commodity Prices
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Before we end, here's a few highlights from the global research team.
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There's been a raft of central bank decisions across the globe this week.
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It's the end of an era in Japan where the central bank implemented its first rate hike in 17 years.
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Although the move ended negative interest rates, we think the policy rate will stay at its current level between 0% and 0.1% until at least the end of 2025.
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The Federal Reserve kept rates on hold in the US.
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We continue to expect the first cut in June, with 75 basis points of cumulative rate reductions this year.
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And here in the UK, the Bank of England also kept their policy on hold.
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Our economics team expect a rate cut in August.
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Commodity prices remain elevated, with demand holding up well and supply remaining generally tight.
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So is the super squeeze over?
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We don't think so.
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That's according to Paul Bloxham, chief economist for Australia, New Zealand and commodities research.
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Paul says that geopolitical factors are likely to keep prices elevated and drive increased volatility.
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The report gives a detailed outlook for a wide range of commodities, from oil and gas to metals to grains and finer foods.
Upcoming Hong Kong Summit Highlights
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And finally, the first HSBC Global Investment Summit is less than three weeks away now.
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More than 2,000 delegates will come together in Hong Kong this April to hear insights into global trends from a stellar lineup of experts, political leaders and decision makers.
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For more details on that, or anything that we've talked about on today's podcast, please email askresearch at hsbc.com.
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So that's a wrap.
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Thanks very much for listening to The Macrobrief.
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We'll be back again next week.