9 February 2023

Trade in 2023 and beyond

Free to View
Economics - Global

Will weakness persist?
 While global trade looks set to be subdued in 2023…
 …longer-term questions are being asked about globalisation
 This could mean a worse growth-inflation trade-off

The global trade outlook for 2023 isn’t pretty. Weaker import demand from the US
and softer global goods demand are likely to weigh on trade data. It’s likely that
global trade growth in 2023 is below 1%, despite the likely rebound in global tourism
being supported by more travellers from mainland China.
But the worries may extend beyond this year, and to a world where global trade is nolonger a structural tailwind for the global economy and instead becomes a headwind.
Geopolitical tensions top the list of challenges, with a rise in protectionist measuresfrom governments, but global supply chains are likely to be shuffled in the years tocome, with reshoring, near-shoring and friend-shoring all likely to become much morewidespread as firms react to the vulnerabilities in their supply chains that the
pandemic has unearthed.

James Pomeroy
Economist
HSBC Bank plc
Harriet Smith
Economist
HSBC Bank plc

However, so far, the data suggest there’s little evidence of trade’s importanceshrinking in practice. Global trade’s share of GDP rose in 2021 and in 2022 it most
likely rose again, to the highest share since 2014. While firms may be talking more
openly about the need to ‘nearshore’ or ‘reshore’ in earnings calls and surveys, thedata suggest this process is yet to begin in earnest beyond some small moves fromsome manufacturers and some industries (such as semiconductors) seeing a more
focused push to improve supply chain resilience.
Going forward, these trends will need to be monitored. One of the big questions iswhether the previous era of globalisation evolves into one with less global trade, or
simply trade that involves different parties. Supply chains may end up being more
resilient as a result, but this may come at a cost of higher input prices for firms andadditional trade frictions. Much will depend on how new forms of production are
created, and essentially whether more digitisation can offset these challenges.
This is what creates concerns – that an era of more open borders that, by-and-large,
helped to improve efficiency, lift economic activity and keep a lid on prices could becoming to an end. This could well mean a deterioration in the growth-inflation tradeoff if this plays out. However, it’s worth adding that global trade data may be weighed
down by other factors such as a rotation to services trade (that is hard to capture) or
environmental concerns meaning changes to what is produced and shipped.
Automation of many processes may limit the supply side shock, too.
This is a Free to View version of a report with the same title published on 09-Feb-23. Pleasecontact your HSBC representative or email AskResearch@hsbc.com for more information.

Disclosures & Disclaimer
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.

Issuer of report: HSBC Bank plc
View HSBC Global Research at:https://www.research.hsbc.com

Free to View ● Economics - Global
9 February 2023

Trade in 2023


Weak consumer demand in the developed world will likely weigh on
trade in 2023



Easing supply chains and tourism may give some support…

…and some economies will likely see exports hit more than others

A tricky 2023
Global trade faces a challenging year. Weaker US demand and a consumer services-led
rebound in mainland China are likely to mean more subdued import demand from the world’s
largest economies this year. This may prove to be even worse for global trade as consumer
spending continues to rotate from goods back to services and more firms have now stockpiled
the inventory they need, having been able to replenish supplies in 2022 with shipping andlogistics disruptions from 2020 and 2021 now largely a thing of the past.
Up and then down?
Global trade volumes hit new highs in 2022. The latest set of data to November show a slightsoftening, but a world of much higher interest rates and soaring inflation didn’t weigh on end
demand as much as may have been originally feared. The risk is that 2023 is more challenging,particularly on the goods side of the global trading system. We’ve already seen this in some key
economies, such as Korea and mainland China showing a rapid slowdown in exports based ontimely national data at the end of 2022.
1. Global trade volumes edged down at theend of 2022 after a strong year

2. Reversals in shipping rates highlight theeasing of global supply chain issues

Index
240

Index
12000

220

220

10000

20000

200

200

8000

16000

180

180

6000

12000

160

160

4000

8000

140

140

2000

4000

120

120

100

100

Index
240

World trade v olumes (2000 = 100)

80
80
2000 2003 2006 2009 2012 2015 2018 2021 2024
Source: CPB

0
2019

Global shipping costs

Index
24000

0

2020
2021
2022
2023
Global freight cost (LHS)
East Asia to West Coast US (RHS)
East Asia to Northern Europe (RHS)

Source: Refinitiv Datastream

Some better news on the supply front…
Over the past couple of years, global trade data have performed incredibly well. That has been
despite huge supply challenges, with congestion at ports and lockdowns in various parts of theworld limiting how many goods could possibly flow across the world at any given time. Closed
borders greatly limited the flow of people, impacting services flows from business services totourism, no matter how much of this was able to be done virtually.

2

Free to View ● Economics - Global
9 February 2023

But in 2022, these supply headwinds rapidly abated. Borders reopened through the year and inearly 2023, while congestion in global shipping eased very quickly in the second half of 2022.
This has proven to be a good thing for the flow of goods, but the challenge going forward is that
this easing has been driven by a drop in demand. With inventories restocked and consumer
spending on goods softening, production and shipment of many items may be weak.
…but challenges aheadThis recovery in stockpiles adds to the challenges for global trade in 2023. The headwinds are
best summed up by the latest set of PMI data that show the collapse in new export orders inrecent months. Demand for goods is weak and our global GDP forecasts suggest that it’sunlikely to get materially better, particularly in the coming months. For many manufacturingfirms, the outlook for international demand isn’t pretty – and our forecast for global trade growthin 2023 (just 0.9%) chimes with pessimistic tones from the WTO (who look for 1% growth in2023) and UNCTAD, who expect the slowdown in global trade to continue in 2023.
3. The outlook for global trade isn’t pretty
Index
60

Manufacturing PMIs: New export orders

Index
60
55

50

50

45

45

40

40

35

35

30

30

TaiwanBrazilCzech Republic
Austria
FranceGermanyUK
Korea
Eurozone
PolandRussiaMalaysia
Indonesia
Spain
Japan
South Africa
CanadaNetherlands
TurkeyIrelandUS
Thailand
Greece
Italy
Mainland China
Mexic oVietnam
India
Philippines

55

January 2023

December 2022

Source: S&P Global

Despite this gloom, there are some reasons for optimism – which are generally on the supply
side. The aforementioned improvements in logistics and lower shipping rates mean that more
sectors, such as autos, may continue to see shipments rebound as supply challenges fully
abate. UNCTAD also flag the positive impact of recently-signed trade agreements – such as theRegional Comprehensive Economic Partnership and the African Continental Free Trade Area,
which may play a role in supporting global trade in these regions, too.
By economy, too, some may fare better. Chart 4 shows our forecasts for export growth for 2023
across the world, with a few notable standouts in Asia. Some of these are heavily exposed totourism – Thailand, New Zealand and Spain, but for all the justified pessimism about global
trade in 2023, it’s worth noting that the gloom doesn’t spread everywhere.
4. Trade growth isn’t likely to be consistent across the world
Ex port grow th forecasts

% Yr
20

% Yr
20
15

10

10

5

5

0

0

-5

-5

-10

-10

-15

-15

New ZealandThailandAustralia
Philippines
Malaysia
PolandMexic oSingapore
BrazilSpain
Hong Kong
US
NorwayJapan
Argentina
South Africa
Indonesia
CanadaEurozone
Switzerland
Italy
Germany
FranceChile
UK
TaiwanSaudi Arabia
SwedenSouth Korea
Colombia
Mainland China
TurkeyIndia
Russia15

2023f

2013-19 average

Source: HSBC estimates, Refinitiv Datastream, Bloomberg.

3

Free to View ● Economics - Global
9 February 2023

But there are, of course, many economies where export growth is likely to be weak. India is astandout here, but much of this is payback from a very strong 2021 and 2022, with exports
expected to normalise as export levels normalise. The other economies expected to see weaker
export growth are generally industrial economies – Sweden, Korea and mainland China, where
the goods export mix being concentrated in durable or industrial goods is likely to fare worse.
Services could end up faring better – notably because of the continued recovery in tourism.
The re-opening of Chinese borders and more of the world getting back on planes could well lift
global tourism flows back close to pre-pandemic levels. Doing so would lift annual global trade(of goods and services in aggregate) by 5% compared to 2021 levels: but some of this will havealready happened in 2022.
5. As tourism restrictions are easing…
Share, alleconomies
100%

International trav el restrictions Share, alleconomies100%

6. …travel flows may pick up sharply
through 2023
millions
4.0

millions
4.0

Thailand Tourism arriv als

3.5

80%

3.0

3.0

60%

60%

2.5

2.5

40%

40%

2.0

2.0

20%

20%

1.5

1.5

0%

0%

1.0

1.0

0.5

0.5

Nov-21
Dec-21
Jan-22
Feb-22Mar-22
Apr-22
May-22Jun-22
Jul-22Aug-22
Sep-22Oct-22
Nov-22
Dec-22

3.5

80%

Ban all arrivals
Quarantine requirements
No measures

Source: Source: University of Oxford, HSBC

Ban some arriv als
Screening arriv als

0.0
Jan-180.0
Jan-19Jan-20Jan-21

Jan-22Mainland China

EuropeMalaysia

India

RoW

Source: Refinitiv Datastream

Rotation or decline?
In 2023 it will be important not just to look at the total amount of global trade, but how flows areadjusting across the world. In recent years we’ve seen geopolitics and the pandemic reshape
global supply chains and trade flows, something we discuss in more detail in the following
pages, and watching the data in 2023 will give us some clear signals as to whether there’s any
momentum in these dynamics for now.

4Free to View ● Economics - Global
9 February 2023

A new era for trade?


Deglobalisation fears are likely to grow further in 2023



But the hard data suggest global trade is still growing…

…despite more worries about supply chains needing to be rejigged

In 2023, as the near-term trade outlook starts to get weaker, we will likely hear more discussions
about this weakness being more structural in nature, rather than a period of cyclical weakness,driven in part by weaker demand for goods from the US.

A new era for global trade?
You’ve probably seen the series in chart 7 before. Global trade as a share of GDP has stagnated,
and this could go into reverse, creating a number of problems for the global economy. Whilst this is avalid concern, for reasons that we will come to shortly, it’s worth pausing to highlight that this chart
doesn’t show any concern, yet.
While trade’s share of nominal GDP has stagnated since the GFC, it’s not falling, unlike the share of
global GDP accounted for by consumption. Given the likely growth rates for global trade and GDP in
2022, it’s also likely that the series below edged up again when that data is ready (although this will
be partly a pricing story with higher commodity prices). That would make 2022 the most “open” yearthat the global economy has seen since 2014, hardly a clear sign of deglobalisation, at least for now.
In 2023, depending on what happens with tourism, this figure may well edge up again, too, given a
broadly weak global demand outlook.
7. Global trade has stagnated as a share of GDP
World

% GDP
65

% GDP
65

60

60

55

55

50

50

45

45

40

40

35

35

30
1980

30
1983 1986 1989 1992 1995
Household consumption as % GDP

19982001 2004 2007
Trade as % GDP

20102013 2016 2019 2022
2022e (Trade as % GDP)

Source: World Bank, HSBC estimates for 2022 based on GDP and trade forecasts

That doesn’t mean that trade levels will keep rising forever. There are numerous challenges for the
future of trade – ranging from geopolitics to changing consumer spending habits and technologicalchange that we will discuss in due course. But, it’s important to put these global figures in context: if
we take the US, the share of GDP that goods trade has accounted for has been remarkably steadysince the mid-2000s (despite some volatility), and this is a similar story to a global basis. On the other
hand, mainland China has seen that share drop in recent years as domestic consumption andinvestment has become a much bigger share of GDP. Essentially, instead of the economy producing
goods for the rest of the world, much more of this is consumed internally, pulling down the Chinese
economy’s openness as a result.

5Free to View ● Economics - Global
9 February 2023

8. The US economy hasn’t become any moreor less open in 20 years…
% of GDP
26

9. …while the Chinese economy has beenless reliant on overseas as it gets bigger% of GDP
26

US: Goods trade% of GDP80

Mainland China: Goods trade% of GDP
80

24

24

70

70

22

22

60

60

20

20

50

50

18

18

40

40

16

16

30

30

14

14

20

20

12

12

10

10

10
10
1990 1995 2000 2005 2010 2015 2020 2025

001990 1995 2000 2005 2010 2015 2020 2025

Source: IMF DOTS, Refinitiv Datastream. Note: Goods trade = imports + exports

Source: IMF DOTS, Refinitiv Datastream. Note: Goods trade = imports + exports

As a result, we need to look at what’s happening on a global basis – and we can see that for manysmaller, but still important, economies this ratio has been increasing steadily in recent years. In
Brazil, the ratio has surged since roughly 2017 thanks to more exports to mainland China, weaker
GDP growth affecting the denominator and higher commodity prices around the pandemic, while
Poland has become a more important component of global supply chains in recent years given its
position as a relatively cheap production centre in Europe.
10. Other economies are getting more open…
% of GDP
40
35

35

30

30

25

25

20

20

15

15

10

10

5

5

0
1995

2000

2005

2010

2015

11. …as global trade rotates% of GDP
40

Brazil: Goods trade2020% of GDP
120
100

100

80

80

60

60

40

40

20

20

0
2025

0
1995

Source: IMF DOTS, Refinitiv Datastream. Note: Goods trade = imports + exports% of GDP
120

Poland: Goods trade

2000

2005

2010

2015

2020

0
2025

Source: IMF DOTS, Refinitiv Datastream. Note: Goods trade = imports + exports

The same is true in Asia – with the likes of Vietnam showing that trade as a percentage of GDP has
risen from ~100% at the start of this century to nearly double that in the latest figures. Korea, Japan,
India, Australia and Thailand have all steadily become more open (time series are much shorter for
Malaysia and Indonesia so excluded from comparison). Even in Europe, we’ve seen the openness ofGermany and the UK grind higher, while Turkey and South Africa have become more open, too.
12. Many economies continue to get more open – the US and mainland China are the anomalies

India

Australia

Korea

Thailand

VietnamGermany

UK

PolandTurkeySouth
AfricaBrazilMexico____________ EMEA ______________ __ LatAm __Japan____________________Asia _____________________

MainlandChina

Q3 2001
Q3 2010
Q3 2022

US

US

Goods
trade as
% GDP

17
22
21

40
51
37

17
26
40

22
36
38

34
35
41

51
79
89

108
116
120

106
161
188

52
70
80

36
40
44

47
74
108

36
35
66

41
45
61

23
19
36

11
15
22

Source: IMF DOTS, HSBC

This is partly due to the slow rebalancing of global trade in recent years, with intra-EM trade growing
at a much faster pace than EM-DM trade and DM-DM trade. Back in the 1990s and even early
2000s, global trade was completely dominated by intra-DM trade, but that share has steadily been in
decline – now roughly 35% of the total of global trade. At the same time, intra-EM trade has risen
steadily from less than 10% of the total in the 1990s and early 2000s to being more than 20% in thelatest set of data through 2022.
6

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9 February 2023

13. Global goods trade is slowly changing
World goods trade% Total70% Total
70

60

60

50

50

40

40

30

30

20

20

10

10

0
1982

0
1987
1992
EM to DM

1997
2002
DM to EM

20072012
EM to EM

2017
2022
DM to DM

Source: IMF DOTS

This is mostly because of the much faster pace of growth in trade between EM economies. DM to
DM trade is still much larger, but we can see in chart 14 that even up to 2019 (and the pandemic andinflation distortions) – intra-EM trade has grown very quickly, at more than 6% pa, compared to justover 4% for global goods trade as a whole. The past decade of trade’s share of GDP stagnating has
been much more due to very weak intra-DM trade and demand.
14. World trade is slowly shifting away from the developed world
World trade grow th (goods)

% Yr
7

% Yr
28

4

0

0

EM to World

2010-2019 (LHS)

DM to DM

8

1
DM to World

12

2

World

16

3

DM to EM20

4

EM to DM

24

5

EM to EM

6

Since 2019 (RHS)

Source: IMF DOTS, HSBC. Note: Uses nominal figures.

Of course, mainland China has played a central role in this, but if we look at the same data for EM
ex-mainland China, we can still see trade growth well in excess of the growth rates we’ve seen in thedeveloped world. The same figure, between 2010 and 2019 for intra-EM trade (excluding mainland
China) is for 5.3% growth per year. Since the pandemic began, trade is up sharply between EM
regions.

But is that changing?
These data show that over time, most parts of the world have become increasingly connected – andthis has spread beyond trade, to political and social ties, too. As observed by the KOF Swiss
Economic Institute (chart 15), this trend picked up in the 1990s following the end of the Cold War as
former communist states integrated with the global economy (the so-called peace dividend) andaccelerated after mainland China joined the WTO in 2001. The Global Financial Crisis later acted asa trigger slowing progression, and then in more recent years, the COVID-19 pandemic, supply chain
challenges and the Ukraine war have further changed the way in which economies interact. The data
the institute releases show the slowdown in globalisation in the past decade across a number ofdifferent forms, including global trade, but the data only run to 2020 as a result of availability ofunderlying indices.

7

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9 February 2023

15. Globalisation has been slowing…
Lev el70

World KOF Globalisation Index
Post Cold War

16. …partly due to trade
Change
1.5

Lev el

1.0

55

1.0

50

0.0

45

-1.0

60

Post GFC

50
40

0.5
0.0

World KOF Trade Globalisation Index

60

Change2.0

Post Cold War

40

-2.0
Post GFC

30
1970

-0.5
1980

1990
2000
2010
2020
Year-on-year change (RHS)
Level (LHS)

Source: KOF Swiss Economic Institute. Note: Calculated from sub-indices looking at trade,financial globalisation, interpersonal, informational, cultural and political globalisation. Only
goes to 2020.

35
1970

-3.0
1980

1990
2000
2010
2020
Year-on-year change (RHS)
Level (LHS)

Source: KOF Swiss Economic Institute. Note: Calculated from a range of trade indicators
including trade flows, tariffs and the number of agreements. Only goes to 2020.

Trade policy has played a key role. Chart 17 shows that the number of new trade interventions
enforced each year has been on the rise and that, overwhelmingly, the number of restrictive
measures enforced massively outweighs efforts for more open trade. Globally, increases each year
prior to 2020 were relatively gradual, but the pandemic coincided with an acceleration in trade policy
action. In 2020, 5,269 harmful new interventions were introduced worldwide, and although thenumber of new liberalising policies also jumped, to 908, efforts on this front remained in the shadows.
As of now, Brazil stands top as the nation with the highest number of liberalised trade policy
measures in force, while not surprisingly, the US and mainland China are leading the way as thebiggest contributors to restrictive trade policy. German trade flows suffer from the most exposure toharmful polices.
17. The pandemic saw a surge in trade
restrictive policy measures
Total
5500

Global: New trade interventions per year

18. Some economies are much more
exposed to, or involved in, tradeinterventions
Total
1000

Contribution to interventions
LiberalisingHarmful1

Brazil

US

2

India

Mainland China

3

Mainland China

Germany

4

RussiaItaly

5

Argentina

India

5000

925

4500

850

4000

775

3500

700

3000

625

2500

550

1

2000

475

2

US

Italy

3

Germany

France1500
400
2009 2011 2013 2015 2017 2019 2021
Harmful (LHS)
Liberalising (RHS)
Source: Global Trade Alert

Exposure to interventions
LiberalisingHarmful

Mainland China

Germany

4

UK

UK

5

Italy

Japan

Source: Global Trade Alert as of time of publication.

The good news is that for now, these increases in tensions haven’t led to a surge in one of themost quantifiable metrics for trade restrictions: tariffs. Even with the pickup in tariffs that cameabout during the US-mainland China trade war from 2018, tariffs across the world still have rates
below where we were back in the 1990s – and if anything, there is further scope for them to fallacross LatAm and Asia.

8

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9 February 2023

19. Tariff rates have been slashed since the mid-1990s
Most fav oured nation tariff rate (World, w eighted average)

%
30

%

30

25

25

20

20

15

15

10

10

5

5

0
1988

1991
1994
1997
East Asia & PacificMiddle East & North Africa
Sub-Saharan Africa

2000

2003
2006
2009
Europe & Central Asia
North America
World

2012

0
2015
2018
Latin America & Caribbean
South Asia

Source: WITS. Note: Weighted average

The bad news, however, is that non-tariff barriers are on the rise. Chart 20 indicates the breakdownof G20 commercial policy intervention implemented since the 2021 Rome summit. Overall in 2022,
much more trade was at risk from harmful G20 interventions as opposed to liberalising steps. In
terms of the measures in force, subsidies on imports had the largest disruptive impact, affecting
USD628bn worth of trade flows.
20. Global trade faces more harmful G20 trade policies than liberalising steps
USDbn
700

Exposure to trade distortions and trade reforms accounted to the G20 (2022)

USDbn
700

600

600

500

500

400
300

400
628

300

597

200
100
0

200
22

248

242

1

227

44

128 0

30 10

7

87

100
0

Subsidies (excl. Tariff measures
export subsidies)

Government Non-automatic Trade-related Export-releated Price-control
procurement licensing, quotas investment
measures (incl. measures (incl.
etc.
measuressubsidies)
taxes)
Harmful interventions
Liberalising interventions

Source: Global Trade Alert

There have been plenty of high profile trade restrictive actions, be it in terms of tariffs or otherwise,
too. President Trump’s ‘America First’ campaign stimulated the start of a tit-for-tat trade war between
the two nations that started in 2018. The number of restrictive trade measures enforced by eachnation on the other increased sharply, but since 2021, there has been a moderation in the number of
new policies enforced, particularly from mainland China. But flagship announcements such as the
US’ Inflation Reduction Act (IRA) may be seen as an example of a new wave of trade policy. The IRA
aims to, amongst many things, ensure that many critical products are produced in the US. By
including green subsidies, such as tax credits for American-made electric vehicles, EU members
believe that this discriminates against European firms and on 1 February announced the Green Deal
Industrial Plan, which includes tax relaxations to compete for green investment. We could continue to
see more governments want to look after their own economies by insisting that key industries need
to be protected locally, which could mean these trends are accelerated in the years to come.

Rejigged supply chains?
The past few years have clearly made firms think about their supply chain arrangements. The surge
in shipping costs, production disruptions in many parts of the world due to pandemic restrictions andfurther concerns about geopolitical tensions have focused minds in boardrooms as to how their
supply chains may need to evolve in the coming years. This has made many observers worry about
the future of global trade – particularly if businesses accelerate moving production towards where
end demand is or look to diversify their geography exposure.
9Free to View ● Economics - Global
9 February 2023

In an April 2022 piece, we wrote that the hard evidence of a substantial change in global trade
was limited in the trade data at that point in time. Whilst there may be plenty of rhetoric andnews flow on the idea of firms adjusting their supply chains, the evidence of actions hasremained relatively small. For example, Apple moving some of the manufacturing of its iPhone
14 to India from mainland China is a high profile example of ‘friend-shoring’, yet so far only
roughly 5% of production is estimated to have been moved1.
Noises are getting louder
But that doesn’t mean that changes aren’t afoot. The EU Chamber of Commerce in mainland
China’s annual Position Paper (from September 2022) showed that businesses aren’t leaving
mainland China entirely, they’re simply diverting some investments to other markets to mitigate
risks (such as those related to policy shifts or trade disputes). While the paper warned that
potential new entrants to the Chinese market may not take the plunge due to market obstacles,
the “China+1” strategy – businesses supplement their operations in mainland China withinvestments in other Asian economies such as Vietnam and Indonesia – is proving popular,
while some firms may diversify further.
According to research from Gartner owned company Capterra, the trend towards nearshoring supply
chains is happening faster than expected2. It found that many US-based corporate giants havealready found new suppliers closer to home and have made substantial investments in US
manufacturing, with General Motors and Boeing investing heavily in manufacturing plants in the US
and Mexico. It found that 88% of small and midsize supply chain professionals in the US have plansto switch at least some of their suppliers to ones closer to the US as it makes it easier to manage
critical situations as well as benefitting them financially given that Mexico, Canada, and the Central
American region offer competitive labour costs and quicker delivery.
This is echoed by what firms are saying on their earnings calls. Data compiled by Mark McDonald,
HSBC’s Head of Data Science and Analytics, counts the number of times executives mention terms
like ‘near-shoring’, ‘re-shoring’, or ‘on-shoring’ in earnings calls globally. Over the past three years,
there has been a notable jump, with 2022 hitting another record (Chart 21). And it’s not just US-listed
firms that are increasingly talking about supply chain restructuring: in Asia and Europe the trend has
accelerated similarly (Chart 22).

Number7

Earnings call mentions(per 100k sentences)

22. The rise is relatively consistent acrossgeographies

Number
7
6

5

5

4

4

3

3

2

2

1

1

0

0

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023*

6

Onshoring

Reshore/reshoring

Nearshore/nearshoring

Source: HSBC, Bloomberg. Note: *2023 is based off a much smaller set of firms

Earnings call mentions(per 100k sentences)

Number
9
8
7
6
5
4
3
2
1
0

Number
9
8
7
6
5
4
3
2
1
0

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

21. More firms are discussing moving
production

Asia

EuropeNorth America

Source: HSBC, Bloomberg. Note: 2023 data has too few companies for all regions to becomparable.

By sector, however, there is a notable difference. Materials, IT and communications firms appear to
discuss the phenomenon much more widely than consumer goods sectors, such as consumer
discretionary and consumer staples firms.

101Apple explores moving some iPad production to India, sources say, CNBC, 5 December 2022

2

Nearshoring is happening faster than expected, Strategic Risk, 5 January 2023

Free to View ● Economics - Global
9 February 2023

23. Some sectors may see more trade rotation than others

2021

Consumer
Discretionary

Health Care

Financials

EnergyUtilities
2020

Number
16
14
12
10
8
6
4
2
0

2022

Consumer Staples

2018

Real Estate

Industrials

Materials

Information
Technology

2017

Communication
Services

Earnings call mentions (per 100k sentences)

Number
16
14
12
10
8
6
4
2
0

Source: Bloomberg, HSBC

Rotations, not declines?
But firms discussing it and doing it are quite different things, and we’ll have to monitor some of thedata in the coming years to see how things evolve. But as Frederic Neumann, Chief Asia
Economist, alludes to in the aforementioned report, Asia’s role in global trade is so large that it may
be hard to move all production from the region entirely, particularly if there is any hysteresis inglobal supply chains.
24. Mainland China’s role in global trade has increased across the board
Share of goods imports from mainland China

Vietnam
Chile
Indonesia
Australia
ThailandRussiaJapan
Colombia
New Zealand
Malaysia
Philippines
Korea
BrazilArgentina
South Africa
Saudi Arabia
Mexic oUS
India
UK
Singapore
CanadaNorwayTurkeyPolandSpain
Italy
Germany
SwedenFranceSwitzerland

%
40
35
30
25
20
15
10
5
0

2021

%
40
35
30
25
20
15
10
5
0

2011

Source: IMF DOTS

And even so, the data suggest, at least for now, that it’s a story of ‘trade diversion’, rather than ‘tradedestruction’ – with mainland China seeing its share in US imports fade as imports from Vietnam,
Thailand, Korea and India take prominence alongside Canada (although Canada’s data may besupported by energy prices). During this time, US import demand has proven to be robust – growing
very strongly during the pandemic, despite a recent sign of slowdown.
25. A rotation in import partners is what we’ve seen in recent years%
1.5

Change in share of US goods imports (2019-2022)

%
1.5

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0

-2.0

VietnamCanadaThailand
Korea
India
Indonesia
Saudi Arabia
TurkeySouth Africa
Malaysia
Chile
Switzerland
Spain
SwedenPolandAustralia
Argentina
Colombia
New ZealandPhilippines
BrazilHong Kong
NorwaySingapore
Italy
Mexic oRussiaFranceUK
GermanyJapan
Mainland China

1.0

Source: Refinitiv Datastream, HSBC. Note: 2022 is YTD to November.

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Free to View ● Economics - Global
9 February 2023

And there’s a sense of this rotation in global trade coming through in some key economies, too.
Mexico, it stands to reason, is a key beneficiary of US firms wanting their production to be closer tohome, and FDI has started to pick up substantially in 2022. Through the first three quarters, data arerunning at an annual pace that would make it the second biggest year for FDI flows this century anda big leap from the pandemic period. While some of this may be a pandemic-related bounce, we
believe that nearshoring is a key opportunity for Mexico given its large manufacturing sector andopenness to the US.
26. Mexico is seeing an FDI surge
Mex ico: FDI by ty pe of inv estment (*2022 is annualised based on Q1-Q3 data)

USDbn
50

USDbn
50

New investment

Reinvestment

2021

2022*

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

0

2008

0

2007

10

2006

10

2005

20

2004

20

2003

30

2002

30

2001

40

2000

40

Intercompany accounts

Source: Ministry of Economy, Refinitiv Datastream

In Asia, we’re seeing a similar trend, with Chinese FDI into ASEAN rising quickly as intra-regional
supply chains are rejigged, too – with production costs in ASEAN still a fraction of that in mainland
China (wages in Vietnam or the Philippines are roughly 40% of those in mainland China).
Overall, it appears that, at least for now, global trade is yet to go into reverse. 2023 may bechallenging on a cyclical basis, and there are many challenges ahead on the geopolitical front. But
the changing shape of global trade may not necessarily push down overall levels of global trade – itmay be that there are simply different winners and losers.
Regional shifts?
However, regional trade agreements persist as a force for free trade. European countries
participate in the largest number, followed by countries in East Asia and South America (chart 27).
However, in Europe, when ignoring the post-Brexit spike, over the last decade, growth in thenumber of new agreements has faded. In East Asia, momentum has held-up, which will aid further
trade growth in this region.
27. Regional trade agreements are popular
Number of RTAs in force, participation by region
0
20
40
60
80

100

120

140

160

0

100

120

140

160

EuropeEast Asia
South America
North America
AfricaCommonwealt h of Independent States
Middle East
OceaniaWest Asia
Caribbean
20

40

60

Source: WTO. Note: RTAs involving countries/territories in two (or more) regions are counted more than once

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There has been a notable leap in regional policy cooperation, too. The stand out global trade deals inrecent years – the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive
and Progressive Agreement for TransPacific Partnership (CPTPP)3 – are regional in nature, andwe’ve seen closer cooperation within the EU in recent years as well as the signing of the African
Continental Free Trade Area Agreement, which came into effect in 2019. This may well mean thatwhile intra-regional became relatively less important as globalisation trends dominated in the 1990s
and 2000s, the recent trend of regional trade deals means regionalisation may once again become
more dominant in the coming years.
28. In many regions, trade has got more global – this could change going forward
Share of total, %
80
70
60
50
40
30
20
10
0
Exports
Imports
Asia and Oceania

Intra-regional trade

Exports

Imports

Europe2002

Exports

Imports

Exports

Imports

LatAm and Caribbean Middle East and Africa
2012

Exports

Share of total, %
80
70
60
50
40
30
20
10
0
Imports

North America

2022

Source: IMF DOTS

What could this mean?
Globalisation and the opening up of the global economy is credited with boosting productivity andeconomic growth, reducing prices and helping to lift millions out of poverty. Despite the additional
logistical and transportation costs involved in diversifying and/or shifting operations to new territories,
emerging economies helped lower the cost of labour and other inputs for firms and increased profits,
although this came at a cost for many workers in the west. On the whole, globalisation has been
seen as lifting growth and helping to lower inflation.
Moreover, it goes without saying that the events of recent years emphasise the advantages ofglobalisation beyond its impacts on global growth. The challenges of COVID-19 and climate change,
not exclusively, highlight the continuing benefits of global collaboration and interconnectivity.
Consequently, a move in the opposite direction, to a less globalised world, makes many worry about
whether this will lead to a reverse of some of the positive impacts that globalisation brought about inthe first place, such as:

We could see an increase in inequalities between countries if foreign companies weregenerating fewer jobs, which in particular could be deepened by the dominance of advanced
technologies. There is little financial incentive for more technologically developed nations tophysically venture into emerging economies to share enhanced capabilities. This could slow theconvergence between EM and DM economies and come at a cost of jobs growth in theemerging world. This may also mean less technology sharing, less specialisation and lessresilient supply chains, which could prove to be a gradual inflationary force.

In the opposite way to how outsourcing production helped push down prices, relocating
could see an increase in operating costs for firms as costs of production from wages as well
as fresh capital investment lift costs. One of the major reasons behind continually falling
goods prices may be disappearing. This may, in theory, put a closer link between domestic
wages and inflation. However, if manufacturing is returned to developed economies, it islikely that automated processes will play a key role, and break at least some of that link.

3

RCEP comprises the ASEAN economies, plus mainland China, Korea, Japan, Australia, and New Zealand. The CPTPP
includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam
13

Free to View ● Economics - Global
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If there is less trade, domestic monopolies (or larger firms) may be able to exert more market
power, reducing competition and lifting inflation as these firms may find it easier to exert theirpricing power, especially if supported by policy which favours domestic production.



There could be a labour supply shock in western economies seeing (or soon to see) shrinking
working age populations, higher wage bargaining power for workers and higher prices of lessskilled labour could lift production costs in the coming years. The caveat, of course, is the roleof automation – be it on the lower skill end or the higher end of the skill spectrum.



If inflation is therefore higher for any given growth rate, interest rates may sit at a higher
level: a constraint to growth. While on the other hand, if firms are unable to pass on higher
prices, profit margins would be hit, which may hinder growth through a likely fall ininvestment spending and lower employment.

29. Globalisation has been credited with playing a key role in falling goods prices
CPI: Durable goods (1990 = 100)

Index
120

Index
120

110

110

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30
1960

30
1965

1970

1975

1980
1985
UK

1990

1995

2000

2005
2010
US

2015

2020

Source: Refinitiv Datastream

However, there are two sides of every coin, and it’s not all likely to be bad news. Shifting production
closer to end consumers reduces the risk of supply chain disruptions. Indeed, the challenging
consequences of global supply chain bottlenecks were felt first hand during the pandemic. Without
having to rely on as many international trade flows, firms could manage more consistent inventory
levels, which may see fewer price spikes arising from demand and supply imbalances. Furthermore,with suppliers closer to home, critical situations would be easier and cheaper to respond to. And,
finally, positive climate implications stem from a reduction in international trade levels.
It’s also worth considering the micro decisions being made by firms. Whilst the initial shock (supply
chain concerns or geopolitics) may create concerns or lift costs, from here any movements in a
supply chain will be for their benefit – either in terms of costs or reliability – and so may not have as
strong an upside impact on inflation as we might think. Reshored or relocated production processes
may carry an initial cost, but are much more likely to use more automated systems, limiting further
cost increases, rather than being exposed to rising wages in fast-growing economies, such as
mainland China.

Other impacts on trade flows and data could be notable
While much of the outlook for global trade focuses on geopolitical tensions, deglobalisation and reshoring of production – it’s quite likely that other structural forces also weigh on global trade flows.
Something we flagged in September 2020 was how a much more digitised economy may be one withmuch less goods trade. As more physical items become digital products – think CDs to downloads – and3D technology continues to improve, we could well see that goods trade flows face a natural headwind.
The problem is that services trade data are hard to capture – both accurately and in a timely manner,something we flagged in a report back in 2016. The World Bank even flags these data collection
issues in the notes to its Trade in Services Database4.

It says: “As a word of caution it should be added that the quality of trade data in services is still far away from being
comparable to trade data for merchandise goods. Due to the long tradition of tariff revenues, trade data for goods havebeen collected with quite high quality and accuracy. Due to intangibility and non-storability of services, at-the-border-duties
cannot be applied to services, thus having resulted in much weaker compilation practices with considerably less accuracy.
Thus, services statistics has ample space for improvement in terms of measurement. In particular, with respect to modes 3
and 4, measurement is up to date difficult and incomplete. Ongoing revisions and refinements of the BOP classification
4

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As a result, we need to treat services trade data with a certain degree of scepticism. UNCTAD datasuggest that the share of services in global trade had edged up between 2011 and 2019, from c20%
to c25%, only to decline in 2020/21, largely due to the sharp drop in tourism flows. But the size of
global services trade may be getting harder to pick up. More of our consumption is being done via
apps and digital services, while services exports spreading to economies such as India, rather thanthe more “traditional” hotbeds such as the US, the UK and Sweden may mean that statisticalcollection also has to catch up, too. With more of the world becoming connected, services trade will
likely continue to get structurally bigger in the coming years.
30. Global trade’s share that is services has
been remarkably stable%
30

Share of global trade that is serv ices

%
30

25

25

20

20

15

15

10

10

5

5

31. A more circular economy may lower
global trade
The ‘Linear’ Economy
Raw
Material

Manufactured
Good

Consumed

Waste

The ‘Circular’ Economy
Manufactured
Good

0
2005

Raw
Material

02008

Source: UNCTAD

2011

2014

2017

Consumed/
Used

Less
Waste

Waste

Waste re-used/recycled as raw
materials

2020
Source: HSBC

A greener economy, too, will impact trade flows. This is likely to lift demand for environmentally
sustainable products, but reduce demand for goods with high carbon content and for fossil fuels energy.
An example of this could be within a more circular economy, where a greater role for sharing, reusing
and recycling of products may mean a drop in production and trade volumes, artificially lowering bothindustrial production and global (goods) trade figures. Additionally, if more economies shift towards
generating electricity from renewable (local) sources, be it via solar, wind or hydroelectric power, this may
chip away at trade in fossil fuels, particularly if electric vehicles continue to build market share.
As a result, global trade may be entering a phase where mismeasurement becomes an even bigger
challenge. Firstly, some things may not be traded that previously were, and secondly the rotation fromgoods to services may make trade data much harder to capture, particularly in a timely manner. Global
trade faces many structural headwinds, but the data may make things look worse than they actually are.

Conclusion
The landscape for global trade is clearly changing. Political tensions and trade barriers are rising, andfirms, concerned by this and shocked by supply chain issues in recent years, may be starting toreact. But for now, the evidence is more of a reshuffling of global supply chains rather than an
outright deglobalisation story.
But even that may bring challenges. The world may be losing one of the big supports of recent years
and this may usher in a period where growth is weaker and inflation is higher. For now, it’s worth
tracking the data – what firms are doing with their supply chains, what’s happening with trade policy
and what’s happening in the trade data – something we showcase over the coming pages tohighlight how global trade is evolving.
This is a Free to View version of a report with the same title published on 09-Feb-23. The full reportcontains a further look at the current state of trade. Please contact your HSBC representative or
email AskResearch@hsbc.com for more information.

work towards solving these issues. As such, the Trade in Services Database should be seen in this light as the best
currently available approximation to a comprehensive picture of global trade flows in services.”
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Disclosure appendix
The following analyst(s), who is(are) primarily responsible for this document, certifies(y) that the opinion(s), views or forecasts
expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or
indirectly related to the specific recommendation(s) or views contained in this research report: James Pomeroy and Harriet Smith
This document has been issued by the Research Department of HSBC.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt(including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or
liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking,sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company
available at www.hsbcnet.com/research.
Additional disclosures
1

This report is dated as at 09 February 2023.

2

All market data included in this report are dated as at close 07 February 2023, unless a different date and/or a specifictime of day is indicated in the report.

3

HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
Research operate and have a management reporting line independent of HSBC's Investment Banking business.
Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses
to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4

You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest
payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining theprice at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,
and/or (iii) measuring the performance of a financial instrument or of an investment fund.

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