Asia Pacific’s trade flows to experience exponential growth in the next decade

• Ernst and Young says Asia-Pacific RGMs will see their share of global consumption rise from under 14% in 2010 to 25% by 2020
• Increased demand for products and services tailored to Asian consumers
• Significant growth potential in intra-regional trade

Rapid-Growth Markets (RGMs) in Asia-Pacific are expected to dominate world trade over the next 10 years and will account for a quarter of global consumption by 2020, according to Ernst and Young’s report titled “Beyond Asia: New patterns of trade.” These RGMs, which refer to the nine rapid-growth markets in East and Southeast Asia included in Ernst and Young’s forecasts, are China (Mainland), Hong Kong (Special Administrative Region of China), Indonesia, Malaysia, Singapore, South Korea, Taiwan, Thailand and Vietnam.

Commenting on this trend, Lou Pagnutti, Ernst and Young’s Asia-Pacific Area Managing Partner says, “Asia has become the world’s workshop over the last decade. Over the next 10 years, Asia will also become the world’s fastest-growing consumer market. Rising incomes will propel millions of Asians into the middle class, affecting not only intra-regional trade between RGMs, but global trade as well.

“From 2010 to 2020, trade flows from Asia to North America, the Middle East, Latin America and Africa are estimated to grow 10% annually. In addition, RGMs in Asia-Pacific are well positioned to benefit from expected trade growth within the region. This could be a result of vertical specialisation, where contributions of these economies are increasingly complementary, thus enabling every country in the region to thrive. We estimate that there will be continued stronger up tick for consumer spending in Asia’s RGMs than in advanced economies.”

This rapid increase in wealth could trigger a circle of self-sustaining growth, reflecting a combination of favourable demographic trends and strong contrast with productivity in high-income countries. Unlike many developed countries, RGMs can expand unhampered by high levels of public debt and large budget deficits.

Increased demand for products and services tailored to Asian consumers

The report also reveals the impact that changes to purchasing power within Asia’s middle class have on regional and global trade flows. The rise of this consumer segment, with its increasing incomes and purchasing power, ultimately results in a growing demand for Asia-tailored products.

“The increase in purchasing power will affect the way cross-border business is done. In targeting the needs of Asian consumers, companies wishing to introduce or increase recognition of their brand will need to further innovate and differentiate their offerings to remain competitive,” says Gerard Dalbosco, Ernst and Young’s Markets Leader for Asia-Pacific.

The expanding middle class also creates demand for a wide variety of sophisticated financial services such as investment advice, pensions and personal insurance. This has a significant impact on the financial sector given that the industry remains underdeveloped in many of Asia-Pacific’s RGMs. In this regard, the demand for financial services in the region is likely to rise faster than high-income countries.

Real growth potential in intra-regional trade

Asia-Pacific RGMs will continue to play a key role in global trade where, capabilities of economies in the region will become increasingly complementary, enabling every country to thrive.

As Dalbosco explains, “Bilateral free-trade agreements (FTAs) will help to lower trade barriers. To this end, stronger economies tend to have more cross-regional FTAs. The trend toward cross-regional agreements has become even stronger recently, indicating that Asia-Pacific continues its outward trade trend.”

However, the report reveals that leading exporters in the region (China, Thailand, and South Korea) are increasingly becoming importers. A virtual cycle of inter-regional trade is created as Asia-Pacific RGMs from low-cost Vietnam to highly skilled South Korea, bring complementary capabilities and products. Eventually, China will become the main driver of intra-regional trade in Asia-Pacific, both as exporter to other economies in the region and as well as the fastest-growing source of demand for exports from those economies.

For most Asia-Pacific economies, it is the trade flows to Middle East and North America over the coming decade that will witness accelerated growth rates rather than trade to the Euro zone. In addition, established trade routes between Asia-Pacific and Japan will continue expanding. The US will also continue to remain the single largest growing opportunity for Asia’s RGMs. “Perhaps the most striking findings are the growth rates for Asia-Pacific exports to India. Over the next decade, trade with India is likely to be a key opportunity for nearly every country in the region,” adds Dalbosco.

The promise and peril of growth

Given the uncertainties inherent in any forecast, the report also takes into consideration two alternative scenarios for the evolution of trade in Asia:

A faster-than-baseline growth in Asia’s middle class would generate a virtual circle of growth in the region, feeding higher levels of intra-regional trade.

One country’s more rapid move up the value chain, beyond the baseline (China, for example), would lead to a decline in intra-regional trade levels, as more components of the supply chain for high-technology products would be within China.

“Over the next decade, exports of services will increase strongly, in part driven by increased demand for services in home markets as the population grows wealthier. To this end, the rapid growth of the consumer market in Asia represents a significant opportunity for multinationals that are able to interpret these trends as well as the possible alternatives, and adopt their business strategies to cater for Asian tastes and preferences,” concludes Dalbosco.