Category Archives: Asia-Pacific

19/8/19: Import Zamescheniye: Replacing Imports with Imports in the Age of Trade Wars

Trump trade wars have led to increasing evidence of substitution by Chinese exporters to the U.S. with exports via third countries and supply chain outsourcing from China to other destinations. While direct evidence of these trends is yet to be provided (data lags are substantial for detailed flows of goods across borders) and is never to be treated as fully conclusive (due to differences in trade goods designations), here is some macro-level snapshot of latest data on U.S. imports shares for selective countries:

The chart above shows that based on trends, U.S. imports arrivals from China are down in 2017-2019, and they are up, significantly for Vietnam and Taiwan, with less pronounced evidence of imports substitution from other Asia-Pacific countries.

Given several caveats (listed below), the above chart is a 'messy' one:

  1. Supply chain substitution takes time and may not be fully reflected in the 2018 data, or to a lesser extent, in 2019 data to-date; and
  2. The above chart is based on monthly frequency data, which is volatilion (e to begin with.
With these caveats in mind, here is a chart based on annualized data:

Now, it is easier to spot the trends:
  • China exports to the U.S. are down, sharply, especially considering pre-Trade Wars averages against Trade Wars period 2019 averages;
  • Vietnam, Taiwan and Mexico are major channels for trade/import substitution (using Kremlin's term "import zamescheniye").
  • Japan and Thailand are smaller-scale winners.
  • Malaysia and Indonesia are basically static.
Now, historically, China has been beefing up its corporates' use of Vietnam, Thailand, and Mexico as platforms for supply chain diversification, which is consistent with the data responses to the Trade Wars. Indonesia and Malaysia are two surprises in this, although both experienced uptick in FDI from China in late 2018, so the data might not be showing these investments, yet.

2/8/15: Global Trade: Welcome to the Economic ICU

An interesting, if short, note on woeful state of global trade flows from Fitch (link here).

The key point is that:

  1. Subject to all the talk about the Global recovery gaining momentum; and
  2. Under the conditions of unprecedented past (and ongoing) monetary policy accommodation around the world'

global trade remains severely compressed from mid-2011 forward.

Most importantly, the rot is extremely broad - across all major regions, with no base support for trade flows.

One of the drivers - EMs lack of internal demand:

However, the EMs are just one part of the picture. Per Fitch, "Since 2012, global export volumes have consistently grown by less than 5%. Performance by value has been even worse due to the fall in global trade prices, again led lower by commodities. In April 2015, global export prices were down 16% year on year."

"There are several structural explanations for the continued weakness in global trade in addition to the GFC’s cyclical effects":

  • Shift toward domestic growth in China - previously thought to be a catalyst for growth in trade via stimulating demand for imports - has had an opposite effect: Chinese producers and consumers are now increasingly sourcing goods and services internally. This was not predicted by the analysts, though I have been warning that this will be a natural outcome of the continued maturing of the Chinese economy away from producing low value added goods toward producing higher value added output. Thus, reliance of Chinese economy on capital and investment goods and services imports from Advanced Economies has declined. And we are witnessing an ongoing emergence of higher value added consumer goods manufacturing in China, which will further compress imports demands by Chinese markets. More significantly, over time, this will lead to even more complex regionalisation of trade, with trade flows becoming increasingly locked within the Asia-Pacific region, leaving more and more producers in the Advanced Economies facing an uncomfortable choice: shift production to the region or witness decline in imports demand. In line with this, there will be losses of jobs in the Advanced Economies and gains of activity in Asia-Pacific. 
  • Fitch points to a policy driver for global trade slowdown: "According to the World Trade Organisation, the use of trade restrictions has been rising since the crisis and trade liberalisation initiatives have slowed relative to the 1990s. Together, these developments may be contributing at the margin to the reduction in elasticity of trade with respect to GDP." Nothing new here, as well. The world is amidst continued debt deflation cycle, with debt-linked protectionism on the rise. This is not just about currency wars, but also about financial repression and structural decline in overall growth.
  • Fitch notes a third driver for trade decline: "There has been a change in the relative weights of domestic demand components, with investment falling compared with consumption and government spending… As investment spending is the most pro-cyclical and import-intensive component of domestic demand, a decline in investment tends to have a larger effect on trade." Again, I wrote before extensively on investment collapse in the Advanced Economies, and the fact that the main drivers for this are not a business cycle nor the Global Financial Crisis, but rather a structural decline in long-term growth (secular stagnation). You can read on this more here:

Fitch note, while highlighting a really big theme continuing to unfold across the global economy, misses the real long-term drivers for the collapse of trade: the world is undergoing deleveraging cycle in terms of Government and private debt, reinforced by the structurally weaker growth environment on both demand and supply sides of the growth equation. The result is going to be much more painful that Fitch (and majority of analysts around) can foresee.

17/5/15: Two Asias and the U.S. European Incentives

If you want to see the context to the ongoing geopolitical re-distribution of power that is threatening the world order, do not look at the margins of the European realm, like Ukraine. Look at Asia.

Here is an excellent discourse that supports the thesis of the emergence of two Asia:

  • Asia dominated (already) economically by China; and
  • Asia dominated (for now) military-wise and geopolitically by the U.S.

Europe has already decoupled with the U.S. on the issue of Chinese-led Asian Infrastructure Investment Bank, while BRICS have decoupled from the U.S. on a vast range of initiatives. But European signals of willingness to engage with the new Asia are going to continue being half-hearted, principally because of the second bullet point above - economic cooperation will not resolve the growing tension on geopolitical stage. Sooner or later, the U.S. dominance in Asia Pacific will be weakened to the point of the Western block playing a second (albeit not insignificant, by any means) role.

There are two levers for retaining direct and active links to the Asia Pacific centre of power that are currently available to Europe: India and Russia. Alas, both are lost to Europeans for now, one for the reason of perpetual neglect and the other for the reason of perpetual antagonisation.

Oh, and one last piece of 'food for thought' breakfast: as the U.S. is being squeezed in Asia Pacific, is it more or less likely that the U.S. will need to amplify cohesion of its allies around the Atlantic? And if you think the answer to this question is 'more likely' (as I do), what other means can the U.S. find to doing so other than by playing centuries old angsts across EU's Eastern borders? 

18/4/15: Escaping the Middle Income Trap: Historical Evidence and China’s Chances

A very interesting paper from the Asian Development Bank Institute on the topic of the middle income trap (see below) and the debate as to whether China can escape one.

Full paper is available here:

In basic terms, when the economy starts at lower income levels, this usually involves increasing productivity in agriculture - often a dominant sector in a lower income economy - which frees surplus labour and makes it available to industrial activities and services. As manufacturing and industrialisation rise, the economy moves into middle income category.

When surplus labour from agriculture moves into manufacturing, its productivity is low, so naturally, the emerging middle income economies are focused on low wage, low productivity and low value-added manufacturing. As income rises toward middle-income levels, wages also rise. In order to continue growing, the economy requires either to increase quantity of inputs (capital and labour) - a pattern of development known as extensive margin, or it needs to increase quality of its economy activity, raise the value added by workers and capital used - a pattern of development known as the intensive margin.

The problem is that for an economy with relatively fixed (in the short run) workforce, attempting to continue growing on the extensive margin is simply impossible. Instead, the economy needs to switch - at some point - toward producing better quality and higher value-added output.

As the authors remind us, this "requires a shift in the types of products that it makes (shirts to computers), in the value or sophistication of those goods (low quality shoes to designer shoes), and/or in the value-added contribution to end products (electronics assembly to chip manufacturing)… These shifts require increases in the sophistication of technology, an educated workforce, and changes in work organization and motivation."

The authors thus investigate "the situation of middle-income economies around the world. Since 1965, only 18 economies with a population of more than 3 million and not dependent on oil exports have made the transition to being high income. Many more have not been able to move beyond the middle-income stage." In simple terms, the authors confirm existence of a significant middle income trap.

By testing "differences between two groups of economies across a range of growth and development variables", the authors find that "middle-income economies are particularly weak in the following areas: governance, infrastructure, savings and investment, inequality, and quality — but not quantity — of education." In other words, to shift from extensive margin growth to intensive margin growth you need serious institutional, communications and social capital.

With this in mind, the authors then turn to China. "While the size of its economy is large, the PRC is still a developing country with a modest per capita income. Only in the late 1990s did it graduate from low- to middle-income status. As it continues to expand, increasing attention is now focused on whether it will become a high-income country like several of its neighbors in Northeast Asia or, instead, whether it will suffer the fate of Latin America and
Southeast Asia by remaining at the middle-income level of development for decades."

Interestingly, the authors find that China "…already has many of the characteristics of a high income country, the key exceptions being governance and possibly inequality." The best way to look at the paper results relating to China is presented in Table 23, where the authors "developed a ranking system based on the medians" for all the drivers that were found to be significant in helping countries escape the middle income trap. "For each
variable, the economy received three points for being above the median, two points for
being below the median but above the median of the median, and one point for being
below the median of the median. The results were summed and divided by the number
of variables for which there were data for each economy."

The result is below (partial table)

The core conclusion is that China does indeed appear to rank well in terms of key drivers necessary for escaping the middle income trap. Should it continue gaining in the near future in terms of all these factors at the same rate as it has been gaining in the past, China will join the club of the rich nations, not only because of the scale of its economy and population, but also because of the average or median per capita incomes.