Global trade is showing resilience despite rising barriers

Trade globalization has been a major point of contention in western economies in recent years, amid concerns about  the loss of manufacturing jobs and control over critical supply chains. But despite a rise in trade barriers, there are few signs that manufacturing deglobalization is underway, according to Goldman Sachs Research.

“Our research shows Asia has continued to gain market share, both in terms of world manufacturing and world manufacturing exports,” says Patrick Creuset, the senior analyst for European transport, infrastructure, and construction sectors in Goldman Sachs Research. His group’s work analyzing trade data shows both growing volume and increasing complexity in the shipment of goods around the planet. That combination of growth and rising trade friction is creating opportunities for logistics and shipping companies, he says. 

We talked to Creuset about the outlook for shipping and what his data and research reveal about trends in global trade and deglobalization.

What does your research show about global trade patterns?

The wave of China-driven trade globalization that we saw in the decades leading up to the Great Financial Crisis peaked in 2008. You can see since then the ratio of global trade to GDP stalling, and the trade multiplier — the rate of growth in trade relative to growth in GDP — trending down. It’s fair to say that globalization has stalled since that pivot point about 2008. But it’s not really gone into reverse. 

And the period we’re more interested in is basically between 2016-2018 and today, from the beginning of the US-China trade tensions during the Trump presidency, which is six or seven years of data. We wanted to know: To what extent in that period have supply chains shortened? Has there been nearshoring? Has the world been deglobalizing?

And we found, perhaps surprisingly, that the Asia-centric trade globalization trend that we saw before that period has certainly not gone into reverse. Actually, our research shows Asia has continued to gain market share, both in terms of world manufacturing and world manufacturing exports.

Why has the center of gravity of global trade in goods remained in Asia?

We’ve been mapping in recent years the fastest-growing and fastest-declining trade lanes. Out of the 10 fastest-growing routes for trade in goods, all originate in Asia. And the majority actually originate in China. A Europe-centric map doesn’t work. You naturally have China and Asia in the center, with outgoing arrows, and you start to see patterns.

What we see falls into three buckets for these fast-growing trades. One is friend-shoring, the realignment of trade along geopolitical fault lines, such as increasing China-Russia trade. Another is what I categorize as rerouting of Chinese exports, with Chinese goods flowing into, for example, Southeast Asia, Vietnam, and Mexico, for re-export from there into the US. In these cases, at least the intermediate goods still originate in China or Asia.

The third bucket, too often overlooked, is trade between Asia, especially China, and the Global South, the developing world outside of Asia, in Africa and Latin America. That trade seems to have followed capital exports under China’s Belt and Road network. That initiative is not necessarily the single cause of it, but we’ve seen strong, dynamic trade there, outside of the traditional east-west trade between Asia and Europe and the US.

And trade routes to and from Europe aren’t growing?

That’s right. When you look at the trade routes that have been declining in real volume terms, many of them originate in Europe. You also have some China inbound, which may reflect the weakness in Chinese consumption that we’ve seen. Essentially this amounts to a bit of market share loss in world manufacturing and exports for Europe.

You can see this also in a ranking of the world’s largest container shipping gateways that we have in our report. If you map that out, the vast majority are in Asia. If you compare it to 15 or 20 years ago, the big ports that have fallen out of the ranking are all European ports. The biggest US port, Los Angeles-Long Beach, is basically a gateway for Asian imports and has continued to grow.

Why haven’t changes in supply chains or deglobalization had a bigger effect?

It’s surprising, right? There’s so much inertia in the current system. Despite the tariffs that have been put in place and higher trade barriers, the nature of the system hasn’t changed.

One thing we would highlight is that the Chinese manufacturing labor force comprises 140 million people. If you wanted, for example, to nearshore 10% of that to Europe or North America, you would have to recreate the equivalent of 1.5 times Mexico’s or Germany’s current manufacturing labor force. That’s not impossible, but it would take quite a bit of time just given the numbers involved.

There’s also the labor cost differential between developed and emerging economies. While a typical US manufacturing wage will be close to $6,000 a month, and Germany’s similar, in China a typical manufacturing wage is still around $1,000 a month. And elsewhere in Southeast Asia, it might be half that. 

We would also make a point around infrastructure, which is pretty topical in the US these days. The port and logistics infrastructure required to handle these volumes is basically all in Asia. And also the productivity of top-performing Asian ports is double the best North American port.

What are the implications of this for the logistics and shipping companies you cover?

This is perhaps surprising too. If you accept the deglobalization or nearshoring thesis, you expect that the global logistics and shipping industry would make less money, because there’s less trade. Actually, as we have shown, trade has kept growing, albeit moderately. And the complexity of those trade volumes has gone up significantly.

The increased complexity is important. Where you have multi-sourcing strategies for supply chain resilience, you have more customs paperwork and have to clear more borders. To the extent you have higher tariff and non-tariff trade barriers, again that can create more paperwork and complexity. Geopolitical friction, meanwhile, can create barriers to trade, such as the closure of Russian or Ukrainian airspace or the need to route around the Suez Canal because of attacks in the Red Sea. You can add environmental factors such as low water levels in the Panama Canal, which last year restricted capacity there. All of these different barriers create more volatility and complexity.

We think of the logistics and shipping industry on two axes, basically, that are drivers of total addressable market. One is trade growth, and the distance the trade travels. The other dimension is complexity. When you have supply chains that are still essentially global but much more complex, the profit potential for logistics and shipping increases.

 

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