hsbc-global-overview-march-2014.pdf

8/11/2019 hsbc-global-overview-march-2014.pdf

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HSBC Global Connections ReportMarch 2014

The near-term outlook forglobal economic growthremains patchy, suggesting

that trade will accelerate onlygradually in the near term.

Economic growth is rising in the US and UK, and

although the Eurozone is moving from contraction tomodest expansion, the recovery there remains slow.

Emerging market growth may pick up from 2013

levels but remain subdued relative to pre-crisis growth

rates, not helped by a renewed bout of volatility in

financial markets.

Nevertheless, the underlying structural factors

supporting long-run growth potential in the emerging

markets remain intact, underpinning our expectation that

these economies will be the key source of trade growth

over the medium term.

Global Overview

Forecast data modelled by Oxford Economics,based on HSBC Global Research macro data.

Summary

Trade conditions are expected to improve over

the next six months according to the Trade

Confidence Index (TCI) survey, with just over

half of respondents expecting a rise in trade.

Over the medium term, the development ofa strong middle class in countries such as China

and India presents significant opportunities for

Western brands that can establish a footholdin these markets, as well as emerging-market

firms that can use their local knowledge to

spur growth.

With emerging markets targeting Research &Development (R&D) investment to scale the

value chain in the high-tech sector, this illustrates

the need for developed economies to invest in

innovation to remain competitive.

We expect trade in high-tech goods to outpacegrowth in total merchandise exports, resulting in

the value of high-tech exports increasing more

than three-fold by 2030.


2/11

This global trade reportcontains a special focus ontrends in the high-tech sector.

We investigate whether tradein high-tech goods is helpingdeveloping countries to

catch up to the industrialisednations, or whether high-techindustries are helping theindustrialised nations to

retain their lead over theemerging markets.

This question is especially pertinent given the leading

role of the high-tech sector in the export-oriented

industrialisation strategies of many economies in

developing Asia. The rapid specialisation in high-tech

exports is most evident in China, which has grown to

become the worlds leading exporter in this sector.

But a closer look at global production networks reveals

that developing economies such as China capture only

a small share of the total value-added of these products

in the global supply chain.

This suggests that the internationalisation of supplychains for high-tech products has in fact strengthened

the technological lead of companies in the developed

world. However, the economies of developing Asia

are now increasing their technological know-how and

moving up the value chain to develop high-tech products

of their own. This suggests that there are positive

knowledge spillovers for developing economies that

integrate into global supply chains. We conclude that the

high-tech sector therefore plays a positive role in helping

emerging markets catch up with industrialised nations.

Chart 1: Global trade by sector (2014-30)

% year growth

0 108642

High-Tech

Manufactures

Chemicals

Machineryand Transport

Raw Materials

Food and Animals

Mineral Fuels

Beverages and Tobacco

Source: Oxford Economics



3/11

The TCI edged up onepoint from six-monthsearlier to reach 113 in H2

2013, signalling improvedconfidence about near-termprospects for trade expansion

amongst global businesses.Although respondents from all regions reported

a positive outlook regarding international trade,

respondents in the developed economies of Europe and

North America were the main drivers behind the latest

increase in optimism, while traders in the emerging

market economies of Latin America and the Middle East

were slightly less optimistic than previously. The view

of respondents in Asia remained unchanged on average

from the previous survey.

Chart 2: HSBC Trade confidence index (World)

1H09 2H09 1H10 1H11 1H12 1H13

Source: HSBC TCI data

Neutral

Positive

Negative

80

100

120

2H132H10 2H122H11


Short-termsnapshot


4/11

Short-term snapshot continued

Cross-border business

The economic recovery in Europe has driven a strong

increase in the number of survey respondents identifyingit as the most promising region for trade over the next

six months; Europe was chosen by 24% of respondents,

up from 17% in the last survey. Nevertheless, Asia

consolidated its position as the most promising region

for trade, with 42% of companies identifying it as having

the best opportunities for business growth compared to

38% in the previous survey. Still, this reading should be

treated with some caution, as the survey was conducted

before the most recent bout of financial market

turbulence in the region.

Corridors of choice

An improving outlook for demand globally andin key markets was identified by respondents as

the main driver behind the expected increase in

trade flows over the next six months, with 38%

of respondents highlighting these factors.

The US dollar remains the currency of choicefor international trade, with 64% of survey

respondents identifying it as their main trade

settlement currency. The euro is still firmly in

second place with 20% of respondents, whilst

the renminbi and sterling were each chosen by

around 3% of companies.

Currency volatility remains the main concern forbusinesses, with 43% of respondents identifying

it as an important constraint on growth. The

cost of essential services (shipping, logistics

and storage) and insufficient margins were each

identified by close to a third of respondents as

being key impediments to trade expansion.

Chart 3: HSBC Trade Confidence Index


UAE

India

SaudiArabia

Indonesia

Turkey

Ireland

Brazil

Canada

Singapore

USA

Malaysia

UnitedKingdom

China

Mexico

Germany

Poland

Vietnam

Australia

Bangladesh

HongKong

Argentina

France

Egypt

World

141

(9)

126(-16)

126(-1)

119(-8)

118(-4)

117

117(2)

115(4)

115(10)

115(1)

113(-1)

113(5)

112(11)

109(-13)

108(7)

107

107(-1)

106(6)

103

102(1)

113(1)

99(-12)

99(5)

100(5)

Positive

Negative

Opportunities for businessThe latest TCI survey reveals a significant improvement

in sentiment towards the economies of Europe,

underscoring the renewed confidence in the regions

economic recovery. Although confidence regarding near-

term trade prospects with emerging markets appears

to have held up well, the latest survey was conducted

during a lull in financial market volatility.

Business strategies should look beyond temporary

volatility and recognise the longer-run growth potential

of developing economies. Our forecasts show that trade

routes with economies in developing Asia, in particular,

are likely to represent some of the best opportunities for

business growth over the medium term.

Chart 4: Most promising regions for Tradeover the next 6 months% of respondents

0

10

20

30

40

50

Asia Europe NorthAmerica

Middle Eastand North Africa

LatinAmerica




5/11

Thanks in part to risinggrowth in the US andthe UK, we expect global

growth to pick up in 2014.With the US Fed likely topress on with tapering its

asset purchases, potentiallydriving up global long-terminterest rates, emergingmarkets face potential

further pressures in themonths ahead.

Chart 5: Growth in merchandise exports% year growth

USA

Canada

Germany

France

UK

Ireland

Australia

China

HongKong

India

Bangladesh

Indonesia

Malaysia

Singapore

Vietnam

Poland

Egypt

Turkey

Saudi

UAE

Argentina

Brazil

Mexico

Japan

Korea

2021-30

2014-16

2017-20

0%

4%

8%

16%

12%

Source: Oxford Economics

While there may be some short-term financial turbulence

as markets adjust to US monetary policy developments,

the fundamental drivers underpinning the longer-term

growth story for emerging markets remain intact. Over alonger horizon, emerging markets are therefore expected

to be the key drivers of growth in global trade.


Long-termoutlook


6/11


7/11


Over the past two decades, the developing economiesof Asia have become major players in the global market

for high-tech goods, a trend that has also become

apparent more recently in other developing economies

such as Mexico. This rapid ascent has been led by China,

which has seen its share of high-tech exports (amongst

the 25 economies in our sample) increase from 6% in

2000 to 37% in 2013 (Table 1). China has now overtaken

the EU, the US and Japan to become the largest exporter

of high-tech goods in the world.

Table 1: Share of total exports of high-tech goods (%)

Country CountryRank 2000 2013

1 USA 29.2 China 36.5

2 Japan 7.0 HK 13.0

3 Germany 6.7 USA 9.6

4 UK 6.6 Singapore 6.8

5 HK 6.5 Japan 6.6

6 China 6.5 Korea 6.1

7 Singapore 5.9 Mexico 5.7

8 Canada 5.2 Germany 4.4

9 Mexico 5.1 Malaysia 3.3

10 Malaysia 4.6 France 1.5

11 Korea 4.3 UK 1.3

12 France 4.0 Vietnam 1.1

13 Ireland 1.9 Canada 0.9

14 Australia 1.4 Poland 0.9

15 Brazil 1.3 Indonesia 0.6

16 UAE 0.6 India 0.4

17 India 0.6 Ireland 0.4

18 Turkey 0.6 Turkey 0.3

19 Indonesia 0.5 UAE 0.1

20 Argentina 0.5 Brazil 0.1

21 Poland 0.5 Australia 0.1

22 Saudi 0.3 Saudi 0.1

23 Egypt 0.2 Egypt 0.0

24 Vietnam 0.2 Bangladesh 0.0

25 Bangladesh 0.0 Argentina 0.0

Source: Oxford Economics/UN Comtrade

It would be tempting to conclude that this surge in

high-tech exports reflects a move into high value-

added exports through the rapid development of local

technological capabilities in these economies. However,

the majority of this growth actually reflects the increased

internationalisation of supply chains. More specifically,

multinational companies have increasingly outsourced the

labour-intensive assembly stages of production to lower-

cost developing economies; meanwhile, the technology-

intensive and higher value-added stages of production

have remained concentrated in developed nations.

This is reflected in the large share of high-tech importsdestined for developing Asian economies that also have

a high share of exports in this segment (Table 2).

Table 2: Share of total imports of high-tech goods (%)


1 USA 20.3 HK 20.0

2 Japan 15.9 USA 19.7

3 Singapore 8.3 China 17.1

4 HK 8.2 Japan 5.0

5 Mexico 7.1 Germany 4.3

6 China 6.9 Mexico 4.0

7 Korea 6.7 Korea 3.8

8 Malaysia 6.0 Singapore 3.4

9 Germany 4.8 Canada 2.9

10 UK 4.8 Malaysia 2.7

11 Canada 3.2 UK 2.5

12 France 3.1 France 2.4

13 Ireland 2.4 India 1.9

14 Indonesia 1.0 UAE 1.7

15 Brazil 0.3 Brazil 1.4

16 Poland 0.2 Australia 1.4

17 Australia 0.2 Indonesia 1.3

18 Turkey 0.1 Vietnam 1.2

19 India 0.1 Poland 0.8

20 Vietnam 0.1 Turkey 0.7

21 UAE 0.0 Saudi 0.7

22 Argentina 0.0 Argentina 0.4

23 Bangladesh 0.0 Ireland 0.3

24 Saudi 0.0 Egypt 0.2

25 Egypt 0.0 Bangladesh 0.1


but they specialise in low value-added,labour-intensive stages of production

Multinational corporations have therefore been able

to lower production costs by outsourcing the low-skill

segments of the supply chain for high-tech products todeveloped nations. This raises the question whether the

high-tech sector is helping developing countries to catch

up to the industrialised nations, or whether the high-tech

sector is actually helping the industrialised nations to

retain their lead over the emerging markets.

The link between exports and imports of high-tech

goods is illustrated in Chart 7. For the 25 economies in

our sample, the chart compares the share of high-tech

exports in that countrys total trade (exports + imports)

with the share of high-tech imports in total trade. The

45-degree line in the chart shows the point at which there

Developing economies have grown to dominatetrade in high-tech goods

Spotlight: Technology


8/11

Spotlight: Technology continued


is balanced trade in high-tech goods countries abovethis line have a trade surplus in these products, while

countries below the line have a trade deficit.

Chart 7: Exports and importsof high-tech goods (2012)

Source: Oxford Economics / UN Comtrade

0

5

10

15

20

25

30

0 5 10 15 20 25 30

Balan

cedt

rade

in

high

-tech

good

s

High-tech imports (% of total imports and export s)

High-techexports(%o

ftotalimportsandexports)

CHN

HK

MYS

SGP

MEX

VNM

USA

UAE

CHN

DEU

IDNTUR

INDSAU

EGY

BGD ARG

CANBRA

FRA

POLIRL

KOR

JPN

as evidenced by their high propensity to importhigh-tech goods

China operates a trade surplus in high-tech goods, which

undoubtedly represents a net positive for the economy.

Nevertheless, the size of this surplus is perhaps not as

large as one may have expected given the countrys

apparent dominance of international exports in this

segment. A similar pattern of trade can be observed in

Malaysia, which also has a high export specialisation

in high-tech products, largely generated by domestic

assembly lines. Vietnam is more of a latecomer to the

high-tech sector, but it is now becoming an increasingly

significant producer of telecommunications equipment

following major investments in processing factories by

multinational corporations. Outside Asia, Mexico has also

recently received significant investment in manufacturing

facilities by foreign companies seeking to outsource

labour-intensive assembly.

Although Hong Kong appears to have an especially highpropensity to trade in high-tech goods, its position of

near-balanced trade in these products reflects its role

as a regional trading hub. This entrept role also helps

to explain why the more developed Asian economy of

Singapore has such a high specialisation in the trade

of high-tech goods, although Singapore is also a major

producer of high value-added electronic components

such as semiconductors, explaining its trade surplus in

this sector. Korea and Japan also have significant roles

in the production of high value-added components that

are shipped for assembly elsewhere in the region.

At the same time, this internationalisation of supply

chains explains why the United States the designer of

devices such as the iPhone and a country with an evident

comparative advantage in the high-tech sector operates

a trade deficit in these goods. The outsourcing of

production of high-tech goods by US companies to serve

the large domestic consumer market for these goods

means that US companies import a large quantity of

assembled products that they have designed themselves.

Developing economies can benefit from knowledgespillover effects

Outsourcing of labour-intensive production by large

multinational corporations can therefore explain the

leading role of developing countries in high-tech exports.

Indeed, official data from Chinas Ministry of Science and

Technology shows that 82% of the countrys high-tech

exports were produced by foreign-owned or joint-venture

firms in 2011 (Chart 8).

Chart 8: Chinas exports of high-tech productsby firm ownershipShare of high-tech exports (%)

0

60

40

20

100

Foreign-owned

Joint-venture

2002 2005 2008 2011

Source: PRC Ministry of Science & Technology

80


9/11



It may appear that the emerging markets are merelyhelping to strengthen the technological lead of companies

in the developed world. However, this overlooks the

potential for knowledge spillovers from foreign firms.

Moreover, these developing economies are now making

rapid advances in developing their domestic research

capabilities, with rates of R&D expenditure in Developing

Asia now fast-approaching the levels seen in the West

(Chart 9). This reflects both the rapid growth of R&D in

the region, as well as the near-stagnation of R&D levels

in the US and EU over the past two decades.

Chart 9: R&D expenditure trends% GDP

1996 1999 2002 2005 2008 2011

Source: World Bank World Development Indicators

European Union

North America

Developing Asia

Latin America

0

1

2

3

...and they are rapidly developing their owntechnological capabilities

Examining current levels of R&D spending at the

country level, Chart 10 reveals that China now compares

favourably with many developed nations. Similarly,

Malaysia has also managed to increase R&D from very

low levels just a few years ago. These two economies

may have depended on foreign investment to fuel their

early growth in high-tech exports, but they are nowincreasing their technological know-how and moving up

the value chain to develop high-tech products of their

own. This investment appears to be paying dividends

after the US and Japan, China now ranks joint-third

alongside Germany in terms of the number of PCT

applications filed each year.

Chart 10: Expenditure on Researchand Development% GDP

0 1 2 3 4

Saudi Arabia

VietnamEgyptMexico

ArgentinaHong KongIndiaPoland

TurkeyMalaysia

BrazilCanadaIrelandUnited KingdomChina

Singapore

FranceAustralia

USA

GermanyJapan

Korea

Indonesia

ource: World Bank World Development Indicators

This shift is further evidenced by the rise of

Chinese brands such as Huawei (the worlds largest

telecommunications equipment maker), Haier (the

largest white-goods manufacturer), Lenovo (the second

largest PC manufacturer) and BYD (the leading producerof lithium-ion batteries for mobile phones). A common

strategy employed by all these brands is that they initially

used their local knowledge to focus sales efforts on

emerging markets before expanding further afield to

compete with established Western competitors.

It is very likely that this progression from assembly

lines to the domestic design and production of high-

tech products has been aided by knowledge spillovers

from foreign invested firms. Indeed, an analysis of the

emerging market economies in our sample reveals a

positive relationship between growth in high-tech imports

and growth in GDP over the past two decades (Chart11). This relationship does not appear to exist for the

developed economies in our sample, where the scope

for such knowledge spillovers is much more limited.


10/11



Chart 11: Technology imports and GDP

Source: Oxford Economics / Haver Analytics

0

5

10

15

20

25

0 2 4 6 8 10 12

R=0

.5

R = 0.0

VNM

IND

BAN

IDN

TUR

KOR

MYS

SAUAUSUSA

MEXJPN

FRACAN

UK

GEREGY

ARG

IRE

SGP

Emerging markets

Developing economies

CHN

POL

UAE

HKBRA

GDP (CAGR (%), 1992-2012)

High-techimports(CAGR(%),1992-2012)

which will enable them to move up the value chain

in high-tech goodsLooking forward, we expect trade in high-tech goods to

continue to outpace growth in total merchandise exports,

increasing its share of total goods traded from 22% in

2013 to over 25% by 2030. Internationalisation of supply

chains will explain much of this trade, we do not expect

it to be driven solely by Western brands, as emerging-

market firms will continue to gain market share. These

factors will combine to make global trade in high-tech

goods even more skewed towards developing Asia in the

years ahead (Table 3).

Table 3: Share of total exports of high-tech goods (%)


1 China 36.5 China 51.1

2 HK 13.0 HK 10.1

3 USA 9.6 USA 6.6

4 Singapore 6.8 Korea 5.7

5 Japan 6.6 Mexico 4.5

6 Korea 6.1 Singapore 4.5

7 Mexico 5.7 Japan 4.0

8 Germany 4.4 Malaysia 3.7

9 Malaysia 3.3 Germany 2.3

10 France 1.5 Vietnam 1.8

11 UK 1.3 Poland 0.9

12 Vietnam 1.1 France 0.8

13 Canada 0.9 Indonesia 0.8

14 Poland 0.9 UK 0.8

15 Indonesia 0.6 India 0.8

16 India 0.4 Canada 0.6

17 Ireland 0.4 Turkey 0.5

18 Turkey 0.3 Ireland 0.3

19 UAE 0.1 Brazil 0.1

20 Brazil 0.1 UAE 0.1

21 Australia 0.1 Australia 0.1

22 Saudi 0.1 Saudi 0.1

23 Egypt 0.0 Egypt 0.0

24 Bangladesh 0.0 Bangladesh 0.0

25 Argentina 0.0 Argentina 0.0


ConclusionThe preceding discussion leads us to conclude that the

high-tech sector has a positive influence on growth in the

emerging markets and helps them to catch up with the

industrialised nations. While developed countries have to

continue innovating to stay ahead, developing economies

can also benefit from knowledge spillovers to catalyse

local production. And while levels of R&D in North

America and Europe are stagnating, rapid growth rates in

emerging markets are creating home-grown competitorsin the high-tech sphere that are now threatening the

dominant position of established Western brands.

More generally, the example of the high tech sector

illustrated here presents lessons for other sectors and

the future pattern of global trade. The world economy is

becoming more knowledge-intensive and it is essential

for developed nations to invest in research, innovation and

education to retain competitiveness and enhance future

growth. Technological know-how is helping developed

countries to retain their lead over the emerging markets,

but without the appropriate investment, this lead will

gradually be eroded over time.


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This document is issued by HSBC Bank plc. It is not intended as an offer or solicitation for business to anyone inany jurisdiction. It is not intended for distribution to anyone located in or resident in jurisdictions which restrict thedistribution of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient.The information contained in this document is of a general nature only. It is not meant to be comprehensiveand does not constitute financial, legal, tax or other professional advice. The views and opinions expressed bycontributors are their own and not necessarily those of HSBC Bank plc. Under no circumstances will HSBC Bank plcor the contributors be liable for any loss caused by reliance on any opinion or statement made in this document

About the Data:

About the HSBC Trade Forecast Modelled by Oxford Economics

Oxford Economics has tailored a unique service for HSBC which

forecasts bilateral trade for total exports/imports of goods, based

on HSBCs own analysis and forecasts of the world economy to

generate a full bilateral set of trade flows for total imports and

exports of goods, and balances between 180 pairs of countries.

Oxford Economics produces a global report for HSBC, as well as

country specific reports on the following 23 countries: Hong Kong,

China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam,

Bangladesh, Canada, USA, Brazil, Mexico, Argentina, UK, France,

Turkey, Germany, Poland, Ireland, UAE, Saudi Arabia, and Egypt.

The analysis also includes trade with Japan and Korea for a total

sample of 25 key trading nations.

Oxford Economics employs a global modelling framework that

ensures full consistency between all economies, in part driven

by trade linkages. The forecasts take into account factors such

as the rate of demand growth in the destination market and the

exporters competitiveness. Exports, imports and trade balances

are identified, with both historical estimates and forecasts for

the periods 2014-16, 2017-20 and 2021-30. Sectors are classified

according to the UNs Standard International Trade Classifications

(SITC) system at the two-digit level and grouped into 30 sector

headings. More information about the sector modelling can be

found on http://www.globalconnections.hsbc.com/

About the HSBC Trade Confidence Index:

The HSBC Trade Confidence Index is conducted by TNS on

behalf of HSBC in a total of 23 markets, and is the largest trade

confidence survey globally. The current survey comprises six-

month views of 5,550 exporters, importers and traders from small

and mid-market enterprises on: trade volume, buyer and supplier

risks, the need for trade finance, access to trade finance and the

impact of foreign exchange on their businesses. The fieldwork

for the current survey was conducted between November

December 2013 and gauges sentiment and expectations on trade

activity and business growth in the next six months.

Technology Focus Methodology

This report focuses on how emerging markets are targeting

R&D investment to scale the value chain in the high-tech sector,

illustrating the need for developed economies to invest in

innovation to remain competitive. For this analysis, we collected

together four key high-tech sub-sectors into one group:

Office machines and automatic data-processing

machines (SITC code 75)

Telecommunications equipment (SITC code 76).

Electrical machinery and appliances (SITC code 77)

Photographic apparatus and optical goods (SITC code 88)

Based on the same underlying forecasts used for the existing

analysis of trends in bilateral trade flows, the report examines howexports/imports of this group of products are expected to evolve

over time.

About HSBC Bank plc

Headquartered in London, HSBC is one of the largest

banking and financial services organisations in the

world. HSBC is one of the worlds most international

commercial banks with over three million customers

in almost 60 markets.

For more information please see:

www.hsbc.com/globalconnections

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hsbc-global-overview-march-2014.pdf