Global Merchandise Trade Scenarios Scenario narrativesDeveloped in October 2013

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1© The Economist Intelligence Unit Limited 2014

Global Merchandise Trade Scenarios Scenario narratives

Contents

Baseline scenario 2

Downside scenario 4

Upside scenario 6

2 © The Economist Intelligence Unit Limited 2014

Global Merchandise Trade Scenarios Scenario narratives

Baseline scenario A

In The Economist Intelligence Unit’s central scenario, global merchandise trade continues to grow at a moderate pace. The Doha Round is unsuccessful and no other multilateral agreement is signed; however, the major regional trade agreements currently under negotiation—the Trans-Pacifi c Partnership (TPP), the EU–US Free Trade Agreement (EU-US) and the Regional Comprehensive Economic Partnership (RCEP)—are successful, despite the exclusion of a number of provisions (most notably intellectual property rights). As a consequence, trade from Africa and Latin America does not reach full potential, while North Atlantic and North and South Pacifi c trade intensifi es in relative terms.

Diversifi cation of the energy mix drives modest trade growth

Natural and shale gas become more widely used, driving a diversifi cation of the energy mix. With global demand being partly met by other energy sources and increasing use of gas in transport, oil prices start to decline. This increases personal disposable income, which in turn fuels private consumption and drives merchandise trade. Centralised industrial policies continue to facilitate the expansion of emerging-market multinationals, which also benefi t from sustained

investment in research and development (R&D). These companies continue to achieve scale thanks to their capacity to leapfrog and an overall favourable trade environment. Nevertheless, Western multinationals retain technological hegemony. In particular, advancements in automation and the increasing uptake of 3D printing generate incentives for reshoring, creating the conditions for a moderate rebirth of Western manufacturing. This process puts pressure on emerging market multinationals to move up the value chain but does not signifi cantly affect their prospects, as their cost-competitiveness remains strong. Technological innovation and the uptake of cloud services continue to drive trade in services. The lack of an overarching IPR legislation system slows down this process, but the relative share of trade in services keeps growing.

Asia remains the world’s engine

The global economic geography continues to evolve on trend, with Asia continuing to act as the world’s growth engine, albeit moving at a slower pace. Africa partly diversifi es away from resources, but developments in global trade legislation decrease its capacity to expand its international presence; nonetheless, an

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Global Merchandise Trade Scenarios Scenario narratives

emerging middle class continues to drive businesses to Africa, also favoured by an improvement in overall political stability. Europe emerges from stagnation and returns to slow growth, despite continuing constraints on public fi nances.

Urbanisation continues at a steady pace

The urbanisation process continues, with cities acting as a growth engine for the developing world. City dwellers account for 60% of the global population by 2030 and approximately 80% of them are in emerging economies. Of the 20 largest cities, 17 are in the emerging world, one-half in Asia alone. Human capital movement continues to increase, but barriers remain, owing to the persistence of restrictive immigration policies. Rapidly improving conditions in the emerging world relax westbound fl ows, with an increase in intra-regional mobility.

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Global Merchandise Trade Scenarios Scenario narratives

Downside scenarioB

In The Economist Intelligence Unit’s downside scenario the global economy fails to gain steam and global merchandise trade is severely affected. On the back of sluggish growth fi gures, the European Central Bank (ECB), the Bank of Japan (BOJ) and the Federal Reserve (Fed, the US central bank) enact further rounds of quantitative easing, in an attempt to fuel domestic consumption and investment. This drives countries in other parts of the world to adopt similar measures and currency wars become genuine, with devaluations becoming a preferred measure to restore competitiveness. Beggar-thy-neighbour policies become commonplace, with protectionism severely hurting merchandise trade.

High energy prices drive down demand

The energy landscape is characterised by scarcity. Shale gas is found to be polluting and conducive to earthquakes, which signifi cantly hinders its uptake globally. On the back of energy independence aspirations, China begins exploiting its reserves of shale gas but this does not have a tangible impact on energy prices worldwide. Similarly, extraction of other resources becomes more diffi cult and expensive, owing to increased resource nationalism and

higher levels of political risk. Extreme weather events further exacerbate this trend, causing occasional disruptions and making a case for stockpiling. As a result, oil prices continue to trend upwards, with tensions in the Middle East further aggravating the situation. High energy prices drive up production costs, slowing down countries’ economic performance and denting personal disposable income, which in turn drives down demand.

Countries start looking inward on the back of rising protectionism

The global economy experiences a generalised slowdown, particularly noticeable in emerging Asia. China’s exports suffer because of a relative appreciation of the Renminbi, on the back of a rising middle class and competitive devaluations by its trade partners. Enduring political tensions in the South China Sea do not lead to outright confl ict, but strain trade diplomacy in Asia and hinder regional integration. As a result, parties involved in the Trans-Pacifi c Partnership (TPP) negotiations, now including China, fail to reach an agreement. Similarly, the Doha Round is not successful and the launch of a new multilateral round is delayed. Tariffs are introduced on

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Global Merchandise Trade Scenarios Scenario narratives

occasion, and the non-discrimination clause of the World Trade Organisation (WTO) is challenged. Decreasing trade fl ows and strained trade relations increase the impact of reshoring, which becomes signifi cant thanks to technological innovation and growing automation. Despite decreasing trade levels, the US's large and affl uent domestic market partly sustains demand. Likewise, Europe looks inward. Currency wars call for an enhanced role for the ECB and institutional integration gains steam. European economies increase intra-regional trade, operating as a more cohesive bloc.

Lower levels of talent mobility strain labour markets

The urbanisation process sees physical clustering happening at a greater pace, with cities enhancing their role as national engines of growth. Reshoring drives the development of shorter supply chains, with overall diversifi cation of production prevailing over specialisation. Labour markets become more strained, owing to an unmet need to attract talent globally.

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Global Merchandise Trade Scenarios Scenario narratives

Upside scenarioC

In The Economist Intelligence Unit’s upside scenario, global merchandise trade continues to grow on the back of a favourable trade environment and a positive GDP profi le. The major regional trade agreements currently under negotiation—the Trans-Pacifi c Partnership (TPP), the EU–US Free Trade Agreement (EU-US) and the Regional Comprehensive Economic Partnership (RCEP)—are successful and encompassing. Progress in the TTP, EU-US and RCEP draws attention away from the Doha round, which comes to an unsuccessful conclusion. However, facing the risk of a trade shift towards Asia and the North Atlantic, countries in Latin America and Africa push for a new global multilateral agreement; the shifting balance of economic power forces them to make generous concessions around agricultural trade liberalisation and a new agreement is signed. This further relaxes tariffs and drives effi ciencies in global production allocation.

Diversifi cation of the energy mix boosts consumption

In this scenario unconventional energy sources such as shale and methane gas become widely used, leading to greater diversifi cation of the energy mix. Shale in particular becomes a particularly exploited source of energy. Oil prices

decrease signifi cantly and a new overarching framework allows for a simplifi cation of energy regulation. Gas prices are delinked from oil prices and trade in gas becomes based on spot markets rather than long-term agreements. In this environment characterised by plenty, manufacturing production costs decrease, keeping consumer prices down. This has implications on the reshoring process, which remains a marginal phenomenon thanks to highly competitive prices of goods manufactured in the emerging world. Higher levels of personal disposable income drive consumer demand globally.

Trade integration gains momentum

Asia benefi ts signifi cantly from this scenario and continues to grow rapidly. Low energy prices allow for large-scale investment in infrastructure projects and help to keep production costs down. Increasingly liberalised markets worldwide and the signing of the TPP and the RCEP agreements fuel merchandise trade and contribute to keeping the regional GDP growth profi le above average. Europe experiences a moderate upward trend, driven by high levels of economic activity in the US and Asia. This changing environment also benefi ts the US, which achieves energy

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Global Merchandise Trade Scenarios Scenario narratives

independence. Geopolitics change accordingly, resulting in the diminished strategic importance of the Middle-East and a progressive western disengagement from the region. Africa benefi ts from greater capital fl ows, but partly suffers from the downward trend in energy prices and aggressive trade liberalisation.

Movement of people and goods increases

Technological innovation continues at a steady pace. Self-driving vehicles marginally decrease transport cost and drive global supply chains. Countries pursue economic specialisation and an increasing number of innovation clusters requires talent to be sourced globally. This drives a relaxation of migration restrictions in order to allow more effi cient workforce movements, which is partly compensated by advancements in remote-working technology. Cybercrime is tightly controlled and trade in services proliferates.

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