Guest Blog | Services trade should be a UK strategic priority

The release of UK balance of payments current account figures for 2014 was greeted by the usual shock horror headlines. The deficit in 2014 was close to £100bn, and reached the highest share of GDP recorded since 1948. Our current account deficit of 5.5% of GDP in 2014 exceeded the previous peaks of 4.4% in 1989 and 3.9% in 1974, after the first OPEC oil price shock.

These headline figures were a bit misleading, however. The underlying trade position for the UK has not deteriorated – for 2014 as a whole the deficit in goods and services was less than 2% of GDP and the figures were on an improving trend through the year. The current account figures reflect some unusually large net outflows of income which could turn out to be a temporary phase.

Digging down further into the trade figures we can find more good news. In 2014, the UK’s exports of services hit a new record – nearly £215bn. The value of UK exports of services is now very close to the total value of our manufactured exports (£225bn). In addition, we run a large trade surplus on services – totalling nearly £86bn last year, nearly 5% of GDP. This trade surplus on services more than offsets our deficit on trade in manufactures (£81bn). Both the level of services exports and the services trade surplus reached new highs in 2014.

Because services trade is less visible than goods trade, its importance tends to be underplayed. The UK is a remarkably successful exporter of services – second only behind the US in the world. Services exports account for around 12% of UK GDP, compared with around 8% in Germany and France, 4% in the US and 3% in Japan.

There are a number of myths about services trade which need to be dispelled. The first is that it is all about selling financial services, and therefore we are overly dependent on the City of London for our successful record of exporting services. In fact, the UK has a very diverse range of services exports. Banking, insurance and other financial services do contribute about a third of the total in the UK. But business and professional activities account for a quarter of our services exports. IT, travel and tourism, education and the creative industries – music, film, design, etc – also make a substantial contribution.

A second myth is that services trade does not add as much value to the economy as manufactures. In fact the reverse is true. Manufacturing industry is a big importer of components , energy and raw materials. So the value-added element of £1 of manufacturing exports is lower than the equivalent in the services industries. Work by the OECD suggests that UK services exports generate more value-added for the UK economy than manufacturing trade, not less.
A third myth is that we have exhausted the growth potential of our exporting services industries. Though services account for 70-80% of the output of major economies, their share of total world trade is just 20%. A concerted approach to breaking down barriers to trade in services – both within the European Union and more widely across the international economy – could support further rapid growth, as a recent report from the CityUK Independent Economists’ Group has argued. A PwC report in 2013 found that emerging market imports of services are now larger than the G7 economies – and were growing three times as fast.

Services trade is a big success story for the UK and services exports have significant growth potential. It is likely that within the next five years, UK services exports will exceed our overseas sales of manufactures. A strategic focus on breaking down barriers to trade in services, and maximising our export potential, should therefore be a priority for the next term of government – whichever party wins the forthcoming General Election.

 

 

Services trade should be a UK strategic priority | Guest Blog author | Andrew Sentance | Senior Economic Adviser PwC

Webcast 033 | Losing interest: why negative interest rates present a challenge to global growth

It has been a tough start to 2015: what will be the outcome of persistently low interest rates be? Rebecca Harding and Sarasin & Partners’ Subitha Subramaniam discuss the topic.

 

Webcast 033 Author  |  Rebecca Harding  |  CEO

Growth, currencies and interest rates

Four trade challenges to monetary policy  |  Short summary:

 

The Fed needs to be careful about the next monetary steps it takes because:

  1. The growth effects of Quantitative Easing (QE) in Europe are yet to be felt, if indeed they will be
  2. Neither China nor Korea’s trade surplus with the US is the Fed’s biggest concern in emerging Asia
  3. The weak yen is not boosting Japan’s exports to the US and is not responsible for its surplus
  4. Monetary policy is not the answer to trade and growth imbalances, but has unintended consequences

 

Context

In its bi-annual report to Congress, the US Department of the Treasury, International Affairs, assessed the macroeconomic policies of its major trading partners to see if inappropriate activities are being used to manipulate the balance of trade with the US. It urged the governments of Germany, China, South Korea and Japan to do everything in their power to eliminate global economic imbalances by focusing on reducing their trade surpluses with the US and halting practices of competitive devaluation against the US dollar. Against a backdrop of strong US growth and weaker growth elsewhere, the report argued that addressing these imbalances through structural reform, monetary and fiscal policy was the only way of ensuring that the G20 balanced global growth targets were met.

 

Four trade reasons why monetary policy alone can’t create real growth:

 

1  |  The growth effects of QE in Europe are yet to be felt, if indeed they will be

The immediate effect of QE has been to push European equity markets to new highs and push down the value of the euro against the USD. It is unlikely to create real, export-led growth since the correlation of the euro with Europe’s trade is positive (i.e. an increase in the value increases trade). Where it does have an effect on boosting trade, it is likely to be felt most strongly in Germany. This will potentially exacerbate the problem of its trade surplus, particularly with the US (Figure 1).

 

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Figure 1  |  Monthly Value of German Exports to the US (USDm), June 2001 – December 2015 vs. EUR-USD, Last Price Monthly, June 2001 – March 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

The chart shows a positive correlation (0.67): in other words, as the value of the euro increases, so too do exports. This reflects the relative exchange rate inelasticity of trade between Germany and the US. Growth in exports from Germany to the US has been modest over the past two years and the sharp reduction in the value of the euro does not appear to be likely to make much difference to its trade balance with the US.

The weaker euro is unlikely to impact Europe’s or, more specifically, Germany’s trade surplus with the US. Indeed, it is also unlikely to lead to greater demand without an accompanying non-monetary policy in Europe, such as infrastructural spending and structural reform to boost both demand and competitiveness.

 

2  |  Neither China nor South Korea’s trade surplus with the US is the Fed’s biggest concern in emerging Asia

The yuan is kept within a 2% peg of the US dollar and, as such, has been increasing its value since the end of 2004 when the currency was first allowed to float. More recently, March 2015, the yuan has appreciated against the US dollar giving rise to speculation that the peg is about to be loosened or removed completely (Figure 2).

 

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Figure 2  |  Monthly Value of Chinese Exports to the US (USDbn) vs. USD-CNY Spot Price, Last Price Monthly, June 2001 – December 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

The impact of the appreciation of the yuan is to suggest that Chinese exports to the US may flatten slightly during 2015. This provides some cause for optimism around the size of its trade surplus with the US. Of greater concern from a US perspective may be Russia’s decision to price oil and gas deals with China in yuan. This suggests that the yuan’s role as a trade finance currency is growing and that there will be further strengthening of the currency. This is likely to be a result of both a loosening of the peg and the role of the yuan as a trade finance currency. The threat of a stronger yuan and the prospect of a future currency war may be more unpalatable than the trade surplus now.

The won is slightly different in that it is only very weakly correlated with South Korea’s exports to the US at -0.46. In other words, any devaluation by the Korean monetary authorities is unlikely to have much, if any, impact on its trade surplus with the US. Given the speed that the Kospi has picked up since QE in Europe has prompted greater liquidity, the US would do well to look at the consequences of capital outflows and rising dollar-denominated debt as Asia’s slowdown works through. Priced in local currencies, such as the won, the markets look buoyant; priced in dollars, the rises are less substantial and represent both a loss in earning and pose a threat when dollar-denominated debt has to be repaid.

 

3  |  The weak yen is not boosting Japan’s exports to the US and is not responsible for its surplus

Japan’s QE programme has resulted in a substantial devaluation of the yen against the US dollar. However, this has not had the desired impact of increasing all exports to the world or the US in particular (Figure 3). Export-led growth has not materialised despite substantial QE-induced devaluation since the onset of Abenomics.

 

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Figure 3  |  Monthly Value of Japanese Exports to the US vs. USD-JPY Spot, Last Price Monthly, June 2001 – December 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

In fact, if anything, exports to the US from Japan have been falling ever since the start of the most recent phase of QE in Japan. Alongside this, Japan’s imports from the US have been increasing and could grow by nearly 5% in 2015 as a result of Japan’s greater external energy dependency after Fukushima.

 

4  |  Monetary policy is not the answer to trade and growth imbalances, but has unintended consequences

The US Fed is now in a bind: its challenge is not the monetary policy of its trading partners, it is the unforeseen consequences of its next monetary moves. The US dollar is strong and while some of this is because the US economy itself is doing well compared with other economies, its strength is more than partly due to the fact that markets are speculating on when the Fed will put up rates. Fuelled by both QE and uncertainty around the announcement of a rise in rates, it is likely that the USD and the euro will reach parity imminently, if not by the end of April then during May. Similarly, the yen is hitting new lows against the USD.

The euro and the yen’s values are already distorted by the effects of QE. Alongside this, any increase in interest rates will exacerbate the dollar’s strength against the currencies of all its major trade partners except China. While currencies weaken, equity markets including the Dax, Nikkei, the HSI and the Kospi continue bull runs that are the direct result of large amounts of liquidity made cheaper, not just by low interest rates, but also by weaker currencies. The result will undoubtedly be aggravated by a rise in US rates: a strong US dollar is not necessarily the best for the US in the long run if corporate earnings, confidence and exports falter.

Webcast 030 | Lessons from QE in four charts

March 2015 marks the start of Quantitative Easing (QE) in Europe. Given broader uncertainty around the effectiveness of QE, what lessons can the ECB learn from QE in the US, Japan, and the UK?

 

 

Webcast 030 Author  |  Rebecca Harding  |  CEO

Lessons from QE in four charts

Why nothing should be taken for granted  |  March 2015 marks the start of Quantitative Easing (QE) in Europe. The much anticipated programme will inject €1.1tn into the eurozone’s coffers up to September 2016 at a rate of €60bn per month from next month. The European Central Bank will be purchasing national government bonds from member states and, in so doing, it will have become the “lender of last resort” in Europe at last ceding to demands that it provides a backstop to Europe’s fragile sovereign nations in the wake of the financial crisis.

While this has created an uneasy truce between markets and Europe, there is still a long way to go. With QE, systemic risk from sovereign default is avoided and the immediate impact has been to boost equity markets and weaken the value of the euro. Theoretically, this should boost confidence and exports. However, the volatility in markets at present is a product of the broader uncertainty around the effectiveness of QE. Markets need to be convinced that it was the right strategy in the first place, not least because of the broader uncertainties around European geopolitics at present, and are in a mood to test European policy makers in any way they can.

One of the principles of QE is that it reduces the value of the currency and thereby supports real economic growth through exports. Here are the lessons from that trade perspective in four charts:

 

Chart 1  |  US QE – market correction overdue

 

2015-02-23_lessonsFromQE_fig01

 

Figure 1  |  Monthly Value of US exports (USDbn) versus S&P 500, last price monthly
Source  |  DeltaMetrics 2015, Bloomberg

 

The chart shows the close correlation between monthly movements in trade and the S&P 500 at 0.715. Each horizontal line shows the start of a QE programme: December 2008, November 2010 and latterly September 2012. US exports during that time have grown modestly, while the S&P 500 has increased in value substantially faster than its pre-crisis rates, particularly since QE3 in 2012. It appears that one effect of QE has been to worsen the disconnect between asset values and the real economy up to the start of this year.

 

Chart 2  |  Abenomics and the paradox of the yen

 

2015-02-23_lessonsFromQE_fig02

 

Figure 2  |  Monthly value of Japanese exports versus JPY per USD spot price, Last Price Monthly, June 2001-Dec 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

Japan’s relationship with QE has been a long one and has produced a bizarre result: except for the period between October 2004 and May 2007, the relationship between the strength of the yen and exports has been the reverse of what would be expected. As the value of the yen strengthened between June 2001 and October 2004, exports increased. Similarly, as the value of the yen decreased shortly before the implementation of Abenomics in 2012 through to Shinzo Abe’s final asset purchases in October 2014, export trade actually fell. This is a lesson for the developed world economies: exports are currency inelastic and therefore depreciation is unlikely to have much impact on export-led growth.

 

Chart 3  |  UK QE and the export mystery

 

The purpose of UK QE was arguably to protect against systemic risk and loosen up the supply of credit in the banking system to enable bank-to-bank lending. It did not have as its primary focus either exports or real growth. However, as the rest of the world started to pull out of the downturn in the wake of the financial crisis, the question of why sterling had depreciated so much without any impact on exports took on renewed importance. The Conservatives, elected in 2010, set export-led growth as its target and set a goal to double UK exports between 2010 and 2020 to a value of £1 trillion.

 

2015-02-23_lessonsFromQE_fig03

 

Figure 3  |  Monthly value of UK exports (USDbn) vs EURGBP spot (value of 1 euro in sterling), June 2001-Dec 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

UK QE started in September 2009 and was boosted further in October and November 2009. In October 2011 an additional £75bn in QE was announced followed by £50bn each in February and July 2012. Rather than causing the value of sterling to drop, the immediate market reaction was for it to strengthen. Interestingly, the terms of trade are negatively correlated with the value of sterling at -0.754. In other words, exports will grow in value in relation to imports as the value of the currency depreciates. This is exactly as it should be. Yet the facts demonstrate a very weak correlation (0.466) between the value of sterling and exports. QE has strengthened rather than weakened sterling, as in the US, especially against the euro but even so, sterling has not returned to its levels against the euro of 2001 and has therefore depreciated over the whole period, as have exports.

 

Chart 4  |  QE in Europe – a combination of both?

 

Previous trade views have expressed scepticism at the impact on trade of any reduction in the value of the euro. Like Japan, the eurozone’s trade is highly currency inelastic and, as a result, the depreciation of the euro is unlikely substantially to increase exports and therefore provide a much-needed boost to growth.

 

2015-02-23_lessonsFromQE_fig04

 

Figure 4  |  Monthly value of eurozone exports (USDbn) vs Dax Index, Last Price Monthly, June 2001-Dec 2015
Source  |  DeltaMetrics 2015, Bloomberg

 

However, it is likely that the value of European stock markets could increase substantially. The Dax has reached all-time highs since QE was announced and this creates as substantial a disconnect between economic fundamentals and equities in Europe as there has been in the US and the UK. But this QE-induced asset boost, unlike in the US, comes without an accompanying boost to the real economy in the form of infrastructure spending. Instead, it may well come with restrictions on real growth if sovereign responsibility is tied to austerity rather than structural reform and long-term growth.

Policy makers in Europe now have to ask which lessons they want to learn, and from which chart.

A dose of its own medicine

Why India has a clear way of boosting its economy through exports  |  When Mr. Modi takes office on the 21st May, his first thoughts will almost certainly not turn to US pharmaceutical imports, but maybe they should. India has been plagued by a trade deficit since 2006 which is likely to grow in double digits this year and next. Alongside this, its terms of trade (the value of its exports in relation to the value of its imports) have deteriorated substantially and although its share of world trade increased to above 2.5% in 2013 and is forecast to reach 3% by 2015, this is as much because of increases in imports as it is about increases in exports. The Rupee’s value against the US Dollar has slipped by over a third in the three years since May 2011 when confidence in emerging markets generally and India in particular was so strong but if Mr. Modi is to address some of the broader challenges he faces, then it is the link between trade, real economy and key indicators such as the value of the Rupee that he needs to tackle first.

This will not be a simple job because, at the moment, the speculative element in Indian markets and the dominance of its trade by imports means that the correlation between the currency and exports is relatively weak at 0.50. The correlation is slightly stronger between its imports and the value of its currency at 0.53, as shown in Figure 1, which illustrates something unusual about the relationship: as the currency becomes weaker, imports drop.

 

2014-05-19_aDoseOfItsOwnMedicine_fig01
Figure 1  |  Indian imports (USDm value, June 2001-April 2015)
against Rupees per USD, Last Price Monthly, June 2001- April 2014
Source  |  DeltaMetrics 2014, Bloomberg

 

India imports predominantly crude oil, which, with an estimated value of USD 175bn in 2014, is nearly three times higher than the next largest import – gold. If the currency devalues, then exports should become more competitive and imports less competitive since they are more expensive. India has increased its imports of oil over the time since 2006 by over 350% against a backdrop of a depreciating currency making it inflation-prone.

But this relationship also demonstrates the fact that India’s currency is prone to speculation. The correlation is weak against commodity exports and this suggests that it is not so much measuring the economic development and growth of the Indian economy as it is measuring the capacity of the economy to soak up imports from overseas. The Indian stock market is a measure of the investment potential of the Indian economy and it too is more strongly correlated with imports (0.91) than it is with exports (0.90), as illustrated in Figure 2.

 

2014-05-19_aDoseOfItsOwnMedicine_fig02
Figure 2  |  Indian imports (USDm value, June 2001-April 2015) vs IndiaBSE, Last Price Monthly, June 2001-April 2014
Source  |  DeltaMetrics 2014, Bloomberg

 

While the difference in the correlation between the BSE and exports and imports is marginal, it points to the fact that investors are, arguably, measuring the success of the economy against their own capacity to invest in it. The post-dotcom hubris that surrounded India’s development in the early 2000’s spawned an excitement about India’s potential growth that fuelled inward investments in biotechnology, pharmaceuticals and electronics from developed world economies, particularly the United States. And yet, paradoxically perhaps, India’s trade itself has shifted markedly away from the developed world economies and towards economies in the Middle East and Asia.

 

2014-05-19_aDoseOfItsOwnMedicine_fig03_v03

Figure 3  |  Moving focus – how India’s trade is shifting from Europe to Asia and the Middle East
Source  |  DeltaMetrics 2014

 

For example, China was India’s twelfth largest export destination in 2001 but is its third largest now and Singapore was its eleventh but fourth largest now. The UK was India’s fourth largest export destination but is now 7th and Germany its fifth, but is now 8th. India’s fastest growing export destinations are Indonesia, Vietnam and Brazil and while the UAE has risen from second to first, much of this is because of exports of diamonds, jewellery and gold.

Its import structure has changed as well, reflecting India’s insatiable demand for oil, diamonds, gold and jewellery. In 2001 the UAE was ranked 14th and Saudia Arabia are nexus pheromones any good 18th. They are now 2nd and 3rd respectively. China is the number one importer and with import values into India of USD 71.9bn anticipated in 2014, its imports are worth more than twice those from Switzerland and the United States which ranked first and second in 2001.

Trade is normally glacial in the pace at which it changes so these shifts in the structure of India’s trade partners are worth dwelling on. The pattern that is being reflected is a shift away from the developed world towards the emerging world and while this is, in itself, not a bad thing, it pushes India’s trade structure increasingly towards that of an emerging economy. Its trade is heavily concentrated in refined oil (nearly 19% of its exports) and pearls, precious stones, precious metals and jewellery (16%). Pharmaceuticals overall account for around 3% and while this is more than its concentration ratio of 2.5% in 2001, it is modest in comparison to its commodity exports.

Exports to the emerging economies are largely commodity-based: for example, exports to Vietnam are dominated by beef and soyabean cakes, maize and fish while exports to Brazil are oil, synthetic filament thread (used to stitch car seats), carbon and coke and insecticides. Yet to Germany, its top five export sectors include aircraft parts and cars, while to the US they include medicines.

It would be a mistake for policy makers to ignore the importance of traditional areas of export strength. Precious metal, pearl and jewellery exports to the UAE, for example are strongly correlated with the value of the currency at 0.61, as shown in Figure 4.

 

2014-05-19_aDoseOfItsOwnMedicine_fig04
Figure 4  |  Exports of pearls, precious stones, precious metals and jewellery (USDm) to the UAE,
June 2001-April 2015 against Rupees per USD, June 2001-April 2014, Last Price Monthly

Source  |  DeltaMetrics 2014, Bloomberg

 

It would also be misguided to ignore the importance of emerging markets in Asia. As Figure 5 shows, there is a very strong correlation (0.91) between the value of India’s Iron Ore exports to China and the Indian Stock Exchange.

 

2014-05-19_aDoseOfItsOwnMedicine_fig05
Figure 5  |  Indian exports of ores, slag and ash to China (USDm value, June 2001-April 2015)
vs IndiaBSE, Last Price Monthly, June 2001-April 2014
Source  |  DeltaMetrics 2014, Bloomberg

 

Indian pharmaceutical exports to the United States, however, are almost as highly correlated with the BSE at 0.88 and this is important for policy makers. Over the period since 2001, the comparative advantage of Indian pharmaceuticals has gone from positive to negative and while the comparative disadvantage of Indian electronics exports (measured through revealed comparative advantage) has gone from -0.66 to -0.46, given the powerhouse that is India’s innovation economy, this should be reflected in its electronics exports as well. Yet the correlation between India’s trade and proxies for its innovation (the amount the government spends on R&D and business expenditure on R&D) are very high at over 0.93 as are skills, wages and foreign direct investment. More than this, the currency elasticity of trade is 0.99 correlated with trade.

All of this gives Mr. Modi’s team a clear lever to stimulate the economy. First, in the short term, the currency should be kept weak – this will have the effect of closing the trade deficit simply because the responsiveness of trade to changes in the currency is so high. This will promote exports in areas where price competitiveness is key, such as oil or iron ore, or even beef, which is a fast growing export product.

Second, India’s new government needs to think about its long term growth which will only come from extending education into rural communities, building on its high level skills base in cities and innovation – building on its successes in software and business services as well as in pharmaceuticals. South-South trade between emerging economies is commodity and infrastructure focuses and Delta Economics is not positive about its pace of growth in the immediate future. Accordingly, as the developed world begins to emerge from the financial crisis, India needs to take a dose of its own medicine to re-connect with these markets as they will help it to restore its competitive advantage in the innovative sectors that were so vibrant ten years ago.

Webcast 012 | Is Mexico the new China?

Rebecca Harding presents Carlos Sanchez Pavan and Shannon Manders to uncover the key trade drivers behind Mexico€™s strengthening supply chains. Mexico has been a strong beneficiary of re-shoring in manufacturing and the country’s strong economic and political structural changes have facilitated trade growth in automobiles, auto parts, oil and alternative energies. Delta Economics’ view is that Mexico and increasingly, the Latin American region, have growing competitive advantages over emerging markets in Asia and that China is becoming less competitive in wage and productivity terms, relative to Mexico.

 

Webcast 012 Author  |  Rebecca Harding  |  CEO

Trade Returns?

Why Obama was wrong to leave Japan without a deal | There is little doubt that President Obama’s visit to Asia was all about trade. The TransPacific Partnership (TPP) negotiations aim to enhance trade, economic integration and growth across the Asia-Pacific region particularly through the establishment of a free trade area (FTA) between the participants. That President Obama left Japan without an agreement is significant for the future of the TPP and his warnings to South Korea about its treatment of US exporters did nothing to reassure markets that the agreement was any closer.

However, at first glance, the relationship between inter-regional trade and key Asian markets and currencies would suggest that there is little for markets to be concerned about. US exports to and US imports from key countries within the region are strongly and negatively correlated with the Hang Seng Index (all above -0.72) and with the S&P 500 (again, all above -0.55). Similarly, Indonesia’s trade with the US is mildly but negatively correlated with the Rupiah’s value against the US dollar and India’s trade is mildly but again negatively correlated with the value against the US dollar of the Rupee. The only exception is Thailand: its exports to the US are highly and positively correlated with the Bhat’s value against the US dollar at 0.85.

If the links are so weak with currencies and strong but negative with key markets, why attempt to build a Free Trade Area? The conclusion from these largely negative correlations must surely be that Asia-Pacific is better served by intra-regional trade. The US, in this context has more to gain from the relationship than does Asia.

Japan-US trade is a proxy for countries elsewhere in the region and illustrates how the relationship between equity and currency markets and US-Asia trade has broken down since the financial crisis. For example, the relationship between Japanese and US trade was positively correlated with the Nikkei until July 2009. Although exports from Japan to the US continued to grow until September 2011, the correlation turned negative after that point and is particularly marked since the beginning of 2013, ironically, the start of President Abe’s tenure, as illustrated in Figure 1. While overall the correlation is negative at -0.55, much of this is accounted for by the post-crisis period.

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Figure 1 | Value of Japanese exports to the United States, June 2001-Dec 2014 (USDm) vs Nikkei Last Price Monthly, June 2001-March 2014

Figure 1 Source | DeltaMetrics 2014

Similarly, as with other economies in the region, there is also a weak, but negative correlation between Japan’s exports to the US and the value of the Yen against the USD (Figure 2).

2014-04-28_TradeReturns_fig02_v01

Figure 2 | Value of Japan’s exports to the US, June 2001-Dec 2014, USDm vs Yen per US Dollar, Last Price Monthly, June 2001-March 2014

Figure 2 Source | DeltaMetrics 2014

Again, the most marked post-crisis turning point in the relationship between exports to the US and the value of the Yen is at the start of Abenomics where the Yen has been depreciating against the dollar. This cannot be seen as anything to do with trade HGH since it is a deliberate policy choice, and the correlation, -0.29, reflects that. However, what is very clear from Figure 2 is that the currency depreciation is not having a marked effect on increasing exports to the US.

And again like other countries in the Asia-Pacific region, Japan is heavily dependent on intra-regional trade: some seven out of ten of its top export destinations are within the region. The correlation between Japan’s terms of trade (the value of exports in relation to the value of imports) and the value of its currency against the dollar is positive at 0.79 suggesting that the depreciation of the Yen is likely to be important in shoring up the value of its exports more generally.

2014-04-28_TradeReturns_fig03_v01

Figure 3 | Japan’s terms of trade (value of exports/value of imports), June 2001-Dec 2014 vs JPY per US Dollar, Last Price Monthly, June 2001-March 2014

Figure 3 Source | DeltaMetrics 2014

These negative correlations between trade and equity and currency markets are replicated across the region. Indian trade with China is negatively correlated with the value of the Rupee against the US Dollar, for example. But this should not be a surprise. Much of Asia is still emerging and all of Asia-Pacific is heavily dependent on trade with itself. The structure of trade is, even between advanced economies within the region and less advanced economies, dominated by commodities and intermediate manufacturing; the equity and currency values, in contrast, have been heavily driven by speculation in the post crisis period and while South-South trade remains set to grow by just 5.3% over the next year it will be some time before this type of hubris resumes (Figure 4).

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Figure 4 | USDbn value of North-North and South-South trade, June 2001-Dec 2015

Figure 4 Source | DeltaMetrics 2014

Neither the US nor Asia can afford to leave the negotiations in limbo, not just because of the importance of export-led growth in a sustainable global recovery. There are two reasons for this. First, an FTA in the Asia-Pacific region that extends beyond the South-East Asian nations (already represented through ASEAN) would create advantages from the reduction of costs of trade between nations and potentially help to shore up the south-south trade that was so much a feature of post-crisis recovery but that has waned since.

But second, the US would become a minority trading bloc accounting for just under 12% of world trade compared to the nearly 35% of world trade that the Asia-Pacific region accounts for and the just over 34% that the European Union accounts for including intra-regional trade. In the end, by leaving Asia without a trade deal, the US has weakened rather than strengthened its position: China is currently excluded from TPP but is critical to its trade structure. There is, potentially, more scope for an agreement between all nations in the region including China than there is between the region and the US if the US does not take a pragmatic approach to negotiations. President Obama and his team should be thinking about trade returns in every sense.

Don’t Cry for Me…

Why trade mistakes are hampering Latin American growth | In the context of the current Ukrainian crisis, the decision by Venezuela’s President, Nicolas Maduro, to suspend diplomatic and economic relations with Panama has barely registered. Trade between Panama and Venezuela is relatively small, worth an estimated US$ 1.2bn in 2013. Crude oil, which is Venezuela’s main export with a value of over US$ 2.6bn is not within the top 30 trade sectors between the two countries and therefore, on the face of it, the impact on long term policies to stabilise the Venezuelan economy may be minimal. Trade is highly volatile between Venezuela and Panama and Venezuela is more reliant on its trade with Panama for imports than it is for exports, as Figure 1 shows.

 

2014-03-10_Don'tCryForMe_fig01_v01

Figure 1 | Estimated exports from Venezuela to Panama and imports to Venezuela from Panama, 2001-2014

Source | DeltaMetrics 2014

(Trade data between Venezuela and Panama contain a large number of zeroes thus data must be seen as indicative)

 

Second, and as Figure 1 also shows, the decision to stop trade with Panama potentially hurts Panama more than it hurts Venezuela. Venezuela was Panama’s largest export partner in 2013, although the US will take over from Venezuela during 2014. This calculation is ill-advised on several counts. For example, Venezuela relies heavily on the US for its oil exports. It is the US’s third largest importer of crude oil; it’s exports to the US of crude oil are ten times higher than for the second largest export partner – Germany. With inflation running at, reportedly, above 50% and with the fiscal deficit running at 16% of GDP, the country needs stability more than anything. Any tension with Panama has the potential to spill over into relations with the US and thereby affect its oil exports. The parallels with Ukraine’s situation are not drawn idly: street protests leading to a new government and increasing tensions with the US pose a risk of sanctions and this would not help Venezuela’s quest for sustainable economic growth.

Second, Venezuela is not amongst Latin America’s top 30 trade partners, and yet it is highly dependent on the region for its trade. As Panama’s canal grows so too will its trade both with Latin America, North America, the Middle East and with Asia-Pacific. Its port-to-port trade with, say Singapore is forecast to grow by 10% in 2014 alone and with Hong Kong by 8%. Any greater political instability in Venezuela will have the effect of destabilising trade between other countries in the region. We are already forecasting substantial drops in the trade between it and many of the Latin American countries and yet it has the scope to act as a trade route through to North America if it keeps its export routes with Panama open.

 

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Figure 2 | Venezuela’s export trade with Latin American countries (2014 values and change on 2013) compared to Panama’s extra regional growth.

Source | DeltaMetrics 2014

 

The fact that its largest export product through Panama is automotives demonstrates how important this trade route is potentially in integrating Latin American and North American non-oil supply chains. Before the lock-down of trade we were expecting Venezuelan exports of cars to Panama to increase by over 18% this year, albeit from a small base.

Venezuela’s exports to Argentina are forecast to grow by over 9% during 2014 but Venezuela would do well to learn from Argentina’s trade track record, especially on restricting trade with other countries. Argentina imposed punitive tariffs on importers in 2011 requiring them to export from Argentina the amount in value terms that they were importing. The effect on trade for Argentina has been to increase export and import volatility since, as illustrated in Figure 3.

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Figure 3 | Argentinian exports and imports, June 2001-February 2014

Source | DeltaMetrics 2014

Since mid-2011 when the first range of additional tariffs were imposed, Argentina’s trade has experienced greater volatility in its trade and in fact, trade seems set on a downward trend. The seasonal swings in trade, which were already greater than pre-financial crisis appear to have been accentuated in the years since with a particularly severe drop in 2011-12 as the tariffs started to take effect.

While Venezuela has not introduced tariffs, it has just suspended its trade with Panama, the lessons from Argentina in terms of regional contagion cannot be understated. Figure 4 is the same chart, Argentinian exports and imports, against the value of the Brazilian Real and shows clearly that the value of the Real in relation to the USD has deteriorated over the same time period.

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Figure 4 | Risk of contagion: Argentina’s trade against the Real per USD exchange rate 2001-2014

Source | DeltaMetrics 2014, Bloomberg

It would be a mistake to say that Argentinian, or even Venezuelan trade directly causes a depreciation of the Real or other regional currencies. However, what Argentina’s economic and trade strategies have done, like other countries in the region, is make markets call into question the robustness and sustainability of economic performance and therefore to make them more bearish on the overall outlook as the collapse in the Peso and its knock-on effects to other Emerging Market currencies in January showed.

Venezuela’s trade is important to the region because of the link with the US and although they are not currently through Panama itself, the risk to that trade comes from geo-politics rather than trade economics. If it continues to suspend trade, then the US may impose restrictions on its imports. This could increase the downside risks to Venezuela’s trade forecast for 2014 and there is a clear risk for further contagion across the region. Perhaps like the Ukraine, this is a crisis that may start small but escalate to something bigger, particularly in economic terms. When it does, remember the lessons from Argentina, and don’t cry for me…..

Webcast 008 | Marching forward?

Delta Economics is still forecasting relatively flat trade in 2014, but Rebecca Harding argues that the economic fundamentals in Europe and the US are likely to improve as these economies start to regain some of their pre-crisis growth. She argues that Emerging Market currencies will continue their slide against the US dollar in March, but that equities look set to continue the rally that began in February.

 

Webcast 008 Author  |  Rebecca Harding  |  CEO