Article

The Future of Global Trading Regimes: Three Scenarios

As former export-led trading relationships decline, the interplay between the Chinese and US economies could shape the course of global trade in the coming decade. How should Singapore respond?

Date Posted

8 Jan 2010

Issue

Issue 8, 14 Aug 2010

It is unlikely that the global trading landscape in the next 10 years will resemble the one in the past decade. Before the financial crisis, the prevailing narrative in international trade had been one of emerging economies producing cheap exports to meet G3 demand. This is reflected in a sharp increase in the value of merchandise exports from non-G3 economies from 1999 to 2008.1 By the end of 2008, emerging economies were responsible for almost 40% of world merchandise exports, a significant increase from 20% a decade ago.

DRIVERS OF TRADE IN THE BOOM DECADE

The boom period in world trade (evident even after discounting the effect of increasing oil prices2) was driven by a few significant factors:

  • Cheap and abundant credit in the US after the US Central Bank cut federal rates sharply following the 2001 dotcom bust and kept them low for a long time. This fuelled a succession of asset bubbles — from equities to property to credit — which allowed US consumers to go on the biggest consumption binge in modern history by leveraging on increasingly overvalued assets.
  • Export-led growth in developing Asia, centred in China, as multinational corporations internationalised their supply chains to take advantage of the cheaper production costs in emerging Asia. To keep their exports competitive, Asian economies were unwilling to let their exchange rates appreciate and instead recycled their massive foreign exchange reserves back into dollar-based assets. This in turn ensured low interest rates for American consumers, further sustaining credit availability in the US.
  • A benign global trading architecture and low costs involved in trading across borders. Countries were mostly happy to work within the existing post-war Anglo-Saxon system of international organisations. Institutions such as the World Trade Organization, World Bank, and the International Monetary Fund succeeded in maintaining a relatively open global trading system. Environmental concerns, such as carbon pricing, remained backburner issues that had little impact on the cost of trading.

The trade interdependence between G3 and emerging Asia that resulted from these driving factors led to an unsustainable macroeconomic imbalance. This became apparent during the 2008/2009 recession. As traditional sources of global demand struggle out of recession, these factors are likely to change or decline in significance. The world may settle into a new way of doing business together.

GROWTH NOT JUST ABOUT CHINA

Although China has drawn the most attention in the trade story of the past decade (particularly with China surpassing Germany to become the world's largest exporter in 2009), the trend of a rising Asia extends beyond China. China's role as a lower value-add producer and final assembler in global production and supply chains means that only a small percentage of total exports are actually accrued to domestic value add. Indeed, the share of foreign content in China's exports has been estimated to be about 50%.3 Sectors that are labelled as relatively sophisticated (e.g. electronic devices) have even higher foreign content (about 80%). In fact, current global trade interdependence is between G3 and emerging Asia as a whole, with other emerging Asian economies also benefiting economically from the proliferation of global production and supply chains, set up to produce and feed the G3 demand. Nevertheless, China's development is expected to be a key driver in determining the future of trading regimes in the decade ahead.


Current global trade interdependence is between G3 and emerging Asia as a whole. The trend of a rising Asia extends beyond China.

POSSIBLE SCENARIOS

There are several broad uncertainties that could influence how the future of global trading regimes might evolve — such as climate change, global resource constraints (food, energy, water, etc.) and technological advances. In the immediate decade leading up to 2020, however, two factors are likely to be most pertinent: First, the ability of the US to fundamentally change its consumption behaviour and reinvent itself as an export powerhouse, and second, China's success in unlocking its domestic demand.

An exploration of these two key uncertainties in combination yields three possible scenarios to consider: Chimerica Reborn (where both US and China succeed), China's World (US stumbles; China succeeds) and Bloc-ed World (both US and China stumble).4

Scenario 1: Chimerica Reborn

The USA returns to strength after successfully emerging from recession. Heavy investments in its traditional strengths of entrepreneurship and innovation pay off, re-establishing the US as a high-quality manufacturing and export powerhouse in new growth areas such as green tech, digital media, advanced pharmaceuticals and energy products. In exchange, China supplies a broad spectrum of consumer and capital goods. Chinese consumption of goods and services increases significantly, driven by a burgeoning urban middle class. Global imbalances gradually decline as world trade enters a long and stable boom. Although the US no longer holds hegemony, the symbiotic relationship between the two giants dominates global affairs, displacing other international platforms in relevance; G2 replaces the G20 as the premier economic forum. The US and China compete intensely for the lion's share of the world's resources and talent, leaving the non-G2 world subject to price and supply volatility, tariffs and resource export bans.

In this bi-polar world, Singapore's friendship with the two giants requires a delicate balancing act. Resource grabs creates real threats of resource scarcity and periodic price shocks for Singapore. Squeezed out of the Chimerican dynamic at both ends of the value chain, Singapore finds renewed importance in the European Union and Japan as export destinations. Nevertheless, Singapore becomes a safe and neutral ground for the constant stream of new ideas from both Asia and the West to meet and meld.

Scenario 2: China's World

In this scenario, China is the centre of global demand in a uni-polar world, as US efforts to restart its export economy falter. The US economic recovery is hampered by stricter immigration laws, massive public debt and the inherent risk of new industries; the US consumer is forced to cut back on spending. However, the Chinese leadership manages to enact reforms which stimulate China's domestic private consumption and unlock the country's large "savings surplus",5 further stimulating domestic demand to make up for the decline in US consumption. China's growing urban middle class drives demand for quality-of-life products such as urban planning expertise, clean technologies, wealth management and other premium goods and services.

As a result, China dominates global demand; trading partners re-orientate towards China in order to participate in this growth. China-centric trading and financial platforms emerge, in parallel to existing international frameworks which are now unable to accommodate China's growing demands. A China-Japan-Korea trade core forms, at the expense of Southeast Asia. Likewise, global talent and resources are sucked into China's relentless rise; it soon has the intellectual wherewithal to project thought leadership and determine global discourse.


By attracting its share of talent and thought leadership, Singapore could become a "horizon scanning base", sniffing out emerging pockets of growth opportunities dispersed around the world.

In this uni-polar world where the centre of gravity has shifted north to East Asia, Singapore's geopolitical and economic space is greatly curtailed. Its value as a hub is likely to diminish; its success depends crucially on its ability to play by the new China-centric rules, and to continue to be attractive — counting on its urban planning, education and public governance expertise — to the Chinese elite and other affluent regional players.

Scenario 3: Bloc-ed World

Bloc-ed World is a multi-polar scenario where both China and the US stumble. In a prolonged global slowdown, China's domestic demand fails to step up as a viable alternative to lacklustre world markets; instead, China's property and equity asset bubble bursts, stalling the real economy. China enters a period of economic slowdown, leading to unemployment, social tension and political crisis. With both China and the US in recession, there are no strong global leaders that can move on complex global issues; with no global watchdog, protectionism escalates and it becomes increasingly difficult to maintain a viable, open and consistent global trading system. International organisations become diffused and ineffective and trade becomes politicised. The cost of trading escalates, causing trade to retreat behind regional blocs. Growth becomes sporadic and scattered, as economic activities restructure along geographical lines to reduce costs. The flow of resources and talent are restricted and often limited to regional blocs or a hub-and-spoke system of distribution. Ideas still travel; in a multi-polar, volatile scenario, a large variety of think-tanks and other sources of intellectual capital flourish in a diverse marketplace of ideas.

In this environment, Singapore finds shelter in ASEAN, producing higher-end goods and services for regional elites. Repatriated income and profits from investments abroad overtake trade as a critical income source for Singapore. By attracting its share of talent and thought leadership, Singapore could become a "horizon scanning base", sniffing out emerging pockets of growth opportunities dispersed around the world.

FURTHER IMPLICATIONS FOR SINGAPORE

It is useful to note that while current global developments seem to point towards a China-dominant future, this scenario affords Singapore the least political and economic space to carve out a niche for itself, despite the substantial resources it has invested into being "China-Ready". Although Singapore has prospered in the context of globalisation and under the leadership of a single dominant global power (the US) historically, the same conditions under the leadership of a Chinese superpower may not be the most advantageous to Singapore's trading position in 2020.

Nevertheless, the three scenarios present different challenges for Singapore. For the present, there is a delicate balancing act to be maintained, for instance in terms of diplomatic positioning relative to the dominant powers. However, some general measures will stand it in good stead as the different possibilities play out:

STAY RELEVANT: Singapore must continue to cement its reputation as a secure, reliable and high-quality service hub and port even if its customer base may shift. Likewise, Singapore's reputation and expertise in urban planning, premier education, public governance and similar capabilities are likely to find markets in the future, either in a China-led core or alternatively in the Southeast Asian region. It can further develop its indigenous, bespoke capabilities in these areas in order to nimbly and effectively serve a fast-urbanising Asia.

DIVERSIFY DEMAND AND SUPPLY: Singapore should cultivate non-G2 trading opportunities and maintain its economic relevance in ASEAN, particularly as a Southeast Asian middle class elite emerges (in Indonesia and elsewhere). A robust alternative supply of reliable and affordable resources, particularly food and energy, would also help hedge against potential resource scarcity and price volatility.

ATTRACT TALENT AND IDEAS: Singapore must continue to draw and anchor its share of global talent, who will continue to be a key differentiating factor in all scenarios. It should also seek to cultivate a positive, substantial and enduring mindshare among the international elite who live, work and play here. To keep Singapore plugged into the global traffic in ideas, think tanks, top universities and other leaders of intellectual capital could be encouraged to set up offices in Singapore as part of their international network of activities.


ABOUT THE AUTHOR

Lee Chor Pharn is a strategist at the Futures Group in the Ministry of Trade and Industry (MTI), a unit tasked to imagine the economy of the future. Yap Zhi Jia is an economist with the Ministry's Foreign Economic Policy Division.

This article was adapted from research commissioned by MTI Trade Division to consider what the global trading regime might look like in the near future, with a focus on the key uncertainties regarded as most pertinent to global trade. The views expressed in this paper are the authors', and do not necessarily reflect those of MTI or the Government of Singapore.


NOTES

  1. Over the last decade alone, the value of global merchandise export has tripled, reaching a peak of US$16 trillion in 2008.
  2. There is currently no world trade data that breaks down the exported goods into intermediate versus final goods.
  3. Koopman R., Wang Z. and Wei S. J., "How Much of Chinese Exports is Really Made in China? Assessing Domestic Value-Added When Processing Trade is Pervasive", National Bureau of Economic Research Working Paper, Number 14109, June 2008.
  4. The combination of a successful US and a weak China is not discussed because it most resembles pre-WTO China.
  5. While the conventional wisdom is Chinese households "are saving too much and unbalancing the economy", or that China's industrial sector "are making all the money and keeping the money and unbalancing the economy", another analysis shows that Chinese government savings is an unnamed part of the problem. The government coffers have profited immensely from China's economic boom. In the period from 2005 to 2007, government revenues have grown faster than nominal GDP. In 2007 alone, the government's total income rose to 35% of GDP. Proposed solutions to unlock domestic demand would have to answer all three: households, industrial sector and government surplus savings. Adapted from: Green, Stephen, "The imbalance that dares not speak its name", Standard Chartered Global Research, December 2009.

FURTHER READING

  1. Aw A., Lee C. P. and Wee S. L., "The End of the World as We Know It", ETHOS Issue 6 (Singapore: Civil Service College, July 2009), pp48-53.

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