A Collective Sigh of Relief - Deloitte

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Dr. Satish Raghavendran is Vice President at Deloitte Research, India 40 Neha Jain is an Analyst at Deloitte Research, India Trade patterns of the future: Waking up and smelling the coffee by Dr. Satish Raghavendran and Neha Jain It is becoming apparent that China may be losing its status as the “factory of the world.” Cost economics that long worked in China’s favor have come full circle; domestic wages are on the rise, eroding much of the cost arbitrage offered to foreign companies. Even Chinese companies are affected as improving living conditions in the hinterland discourage potential migrants from seeking work in urban coastal provinces. Furthermore, an aging population in the next decade will likely weigh down labor supply and impact wage competitiveness. As Chinese production moves up the value chain, workers are demanding higher wages, better working conditions, and added welfare benefits. Thus, rising labor costs, along with pressure to loosen control on its exchange rate, could pose a serious threat to China’s international competitiveness if productivity does not correspondingly improve. Economists have already begun speculating the end of “cheap China,” beckoning some companies to reassess their Chinese footprint and proactively explore other low-cost geographies in emerging trading networks. While China may lose its sheen as the factory of the world, companies could benefit from leveraging the emerging Asian networks for low-tech, labor-intensive trade and production. Rapid-growth economies such as Bangladesh and Vietnam are catching up quickly, providing cheap alternative destinations. Today’s supply chains mimic complex webs involving minute levels of intermediate production rather than locally produced finished goods. This structure presents immense opportunities for emerging markets to develop specific capabilities and capture a bigger share of the supply chain. From a company’s perspective, an emerging trade network with a wide portfolio of capabilities allows for diversification of the supply chain rather than extreme reliance on a single country whose competitiveness may be decreasing. Nonetheless, China will remain an important, if not dominant, player in the future. The country’s burgeoning middle class is set to become more affluent and boost consumption levels in the next decade. It is estimated that urban household disposable income will grow almost twofold between 2010 and 2020, fueling discretionary spending. The government itself is strategically envisaging a shift away from a reliance on exports in favor of a more consumption-driven economy in the future. China’s 12th Five-Year Plan for 2011–2015 calls for higher minimum wages, income tax reform, and increased welfare schemes, all of which will likely boost consumption in the future. The Plan further highlights the government’s ambition to move away from just being the world’s factory to transforming China’s coastal regions into hubs of research and development or high-tech manufacturing. Thus, as China moves up the value chain from “made in China” to “made for China,” it will likely leave room for other emerging economies to gain a larger share of global trade. The most obvious contenders are India and other APAC economies within China’s trading network. However, China and
India’s recent economic interest in Sub-Saharan Africa and the Middle East is a testament to the growing alliance between these regions, which could significantly alter trade patterns of the future. Silk road to Africa Trade linkages between China, India, and Africa date back centuries to the era of the Silk Road, which primarily involved the trade of silk, tea, porcelain, spices, and other luxury goods. However, the 21st century has seen a newfound interest in trade with Africa, which is evident from the proliferation of not just goods and services but also massive foreign investment, technology transfer, and the movement of human capital. In recent years, Africa’s trade with Asia has been booming, surpassing trade volumes with the European Union and the United States, Africa’s traditional trading partners. During 2003–2010, Africa’s exports to China and India surged by about 31–32 percent per year, with the bulk going to China. During the same period, imports from China grew at an almost Trade patterns of the future: Waking up and smelling the coffee identical pace of 32 percent, and imports from India grew at 28 percent per year. Thus, these countries are growing their trade relationship. With vast natural reserves and ample availability of arable land, Africa came under the Asian radar as a source of energy and food security. The voracious appetite of Asian Tigers drove them to import high volumes of resource commodities from Sub-Saharan Africa. However, China and India’s industrial capabilities have become more sophisticated, requiring more diversified, labor-intensive imports such as light manufactured goods and household consumer goods from Africa. Consequently, the Asian interest in African exports has expanded beyond traditional oil and food imports to manufactured goods and services. Multinational firms are increasingly recognizing the long-term growth prospects of Africa. By 2020, more than 50 percent of Africa’s population will have discretionary income (beyond basic needs); meanwhile, the Topics 41
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A Collective Sigh of Relief - Deloitte

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