Asia On Top for Trade

Asia will remain the world's top trading partner as barriers come down and economic growth continues. 

By Anand Pande, Head of Trade, Global Transaction Services, RBS


The region’s exports will grow by 6.9% and imports by 6.4% in 2014, according to the World Trade Organization (WTO). Both numbers are expected to rise to around 7% next year.


Links between Asia and the UK are particularly strong. In the last decade, foreign direct investment by UK companies in Asia has doubled while Asian investment in Britain has tripled, according to the Office of National Statistics. Also, seven of the top 20 export destinations from the UK are in Asia.


Trade between the region and the European Union (EU) reached €1.25 trillion in 2013—double what it was 10 years earlier. Asia now accounts for over a third of trade in the EU, making Europe its biggest trading partner according to the European Central Bank (ECB).


Much of the credit for this growth should go to countries such as China, India and those within the Association of Southeast Asian Nations (ASEAN), which have encouraged a more open trading environment. They rightly recognise that trade liberalisation is inevitable in today’s increasingly globalised economy.


ASEAN has positioned itself well for global trade flows and become a major hub of manufacturing and trade. Singapore, for example, has set up a network of 20 regional and bilateral free trade agreements. And while Myanmar is just beginning to open its economy by undertaking some major reforms such as opening its Thilawa Special Economic Zone, interest continues to grow as more companies either export to or invest there.


Indonesia’s efforts to have regulations that support growth meant it was rated the top destination in ASEAN for business expansion, according to the ASEAN Business Outlook Survey 2014, followed by Vietnam and Thailand. The rapid growth of a middle class population in these countries has led to higher consumption and trade flows. The number of consuming households in ASEAN is expected to almost double in the next decade, says McKinsey & Company Research.


Governments in the region are also gearing their economies towards technology-driven industries, including machinery and transport, rather than focusing only on labour-intensive areas such as agriculture and textiles. This is boosting these countries’ share in the region’s exports.


More broadly, positive developments for Asia in the past fewyears include the EU setting up its first comprehensive free trade agreement with an Asian partner—South Korea—in 2011. This led to about 70% of trade between them being duty free, boosting EU exports to South Korea by 16.2% from 2011 to 2012 and imports by 4.7%, according to the European Commission. A similar agreement between Singapore and the EU in 2012 was the first ASEAN country agreement with Europe to cover both services and trade.


China still sits centre stage in Asia’s growth story despite its economic rise slowing from a double-digit speed. Escalating wage pressure means goods from China are no longer as cheap as they used to be, which has seen production facilities shifting to other developing nations that offer a competitive advantage in terms of wages and other incentives.


Nevertheless, China remains the biggest and most high-profile trading partner in Asia by far.


It recently overtook the US as the world’s largest trader, according to the WTO—measured by the sum of exports and imports in 2013. The renminbi has replaced the euro as the second most-used currency in trade finance behind the dollar, according to global messaging giant SWIFT. Today, almost 9% of letters of credit or collections use the renminbi—up from a mere 2% at the start of 2012.


China’s economy is expected to keep growing by more than 7% a year for the next few years too, according to the International Monetary Fund, so there is no sign of its importance diminishing any time soon.


India is set to follow suit following the recent elections that brought the Bharatiya Janata Party (BJP) to power with a clear mandate to open up the economy.


That economy had become sluggish because of a sharp decline in investment caused by currency volatility, high inflation and a lack of investor confidence. The elections themselves also had an impact as they caused uncertainty.


But the BJP, previously the opposition, wants to focus on dealing with these issues, and this agenda is widely expected to boost business and investor confidence.


This is potentially good news for the rest of the world, particularly in Germany—India’s largest trading partner in Europe—where large companies would benefit from both bilateral trade and direct investment with India.


Asia’s economy has slowed recently and there is certainly no room for complacency as new growth areas such as Latin America and Africa start snapping at its heels.


But it remains a force to be reckoned with.


It has the advantage of behaving like a mini EU as more than 55% of its trade happens within the region. More importantly, rising domestic consumption—a significant part of GDP—provides another strong engine for growth.


Businesses must keep this all firmly front of mind when developing their trading strategies to ensure they make the most of the huge opportunities the region offers.