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The Future of World Trade: What’s Made in Asia Stays in Asia
As developed economies stumble, all eyes are on intra-Asia trade
By Dan Brutto
AseanAffairs 15 November 2011
President, UPS International
The next chapter in the story of global trade will belong to Asia. Despite global economic worries and regional concerns about how fast ASEAN trade is growing, intra-Asia trade will triple in the next 15 years, making Asia the principal driver of global trade growth, according to projections. Companies in Asia and beyond would be wise to start preparing for this shift. The sooner the better.
Long-held notions about the world’s trade flows are changing. Trade between Asia and the West is diminishing.
Why? The sluggish U.S. housing market and steady unemployment rate have decreased Western consumers’ appetite for spending and made retailers more cautious about buying inventory. Trade statistics reflect this trend, with U.S. container imports down 1.5 percent year over year in August. Eastbound trans-Pacific trade is down 3.8 percent for the same period.
At the same time, intra-Asia trade is increasing rapidly. By 2015, intra-Asia trade will account for one third of the world’s containerized trade, according to a recent report in Harvard Business Review. And a recent HSBC report estimates Asia's trade volume will grow 96 percent to nearly $14 trillion by 2025 fueled by India, Vietnam, Indonesia and China.
There are many reasons for this bullish outlook. China joining ASEAN’s free trade network has accelerated trade in the region, with as much as 75 percent of trade in Asia originating from China and north Asia. Concurrently, there’s a rising middle class in China and in ASEAN nations – especially in fast-growing “secondary cities” that have middle-class populations of at least 250,000. As a result, companies like China-based Hisense, a $10 billion business that makes televisions and smart phones, is looking to the Philippines, Thailand and Malaysia for its future growth.
To supply these consumers, manufacturing is changing. First, as production costs in China rise, Vietnam, India and Indonesia are becoming manufacturing hubs. Second, there’s demand for more products to be made closer to market to create more sustainable supply chains and to offer just-in-time delivery of critical products, like medical devices. As a result, what’s made in Asia often stays in Asia.
Perhaps one of the reasons to be optimistic about Asia’s trade future is because many Asian nations – and ASEAN in particular – are encouraging free trade. While it took over four years for the U.S. Congress to pass free trade agreements with Panama, South Korea and Colombia, ASEAN members are making free trade a priority. ASEAN has free trade agreements with Japan, China, South Korea, India, Australia and New Zealand, and is wisely creating a framework for a potential Asia Pacific free trade zone, which is slated for discussion at the ASEAN member summit in November 2011.
To prepare for these shifting trade winds, companies have to do two key things now.
First, they should get to know ASEAN markets. Now is the time for companies to do market research and to explore trade assistance and financing options with national export boards and banks. This goes for both companies in the West and within ASEAN, as reports show that trade among ASEAN members is in its infancy. According to ASEAN, only 25 percent of ASEAN’s total trade is among member nations. In contrast, 68 percent of the European Union’s trade is internal.
Second, companies have to build partnerships now to increase their business in Asia. For example, Hisense is building up a sales infrastructure to reach consumers in Southeast Asia. And they’re also working with us at UPS to build logistics infrastructure. They want to efficiently distribute their products throughout the region and handle reverse logistics, which is critical in the electronics business.
At UPS, we’re taking steps to prepare for growing intra-Asia trade, much as we did in anticipation of the European Union over 25 years ago. We’ve opened an intra-Asia air hub in a strategic location of Shenzhen, China, and we’ve added significant capacity and service improvements to our intra-Asia network.
For UPS and others, these steps are just the beginning. As the next chapter in global trade is written, Asia will take center stage. Companies around the world should have an Asian strategy to remain competitive and grow their businesses in the future.
As president of UPS International, Dan Brutto is responsible for all international-package, freight-forwarding and logistics businesses, as well as U.S. international-package services.
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