The Future of World Trade_LANDSCAPE DEF (versie die gedrukt is)

ING Commercial Banking
The world trade comeback
Trade growth will once again outpace GDP growth

ING Commercial Banking The world trade comeback / April 2015 2
Colophon
International Trade research
ING Global Markets Research
Trade Special
April 2015
Authors
Raoul Leering
Head of International Trade Research
+31 6 13 30 39 44
Filip Bekjarovski
Trainee International Trade Research

Contents
Executive summary 4
I Introduction 6
II Trade through the decades: ups and downs 7
III Drivers of the ratio of world trade growth to world GDP growth 11
a. Shifts in import demand 11
b. Protectionism/Free trade agreements 14
c. Exchange rate battle and macro policies 16
d. Offshoring/Reshoring 17
e. Foreign direct investment 24
f. Trade finance 26
g. Innovations and trade 27
h. Geographical division of trade 29
i. Product division of trade 30
IV Conclusions 32
References 33

Executive summary
• The slowdown in the growth of world trade,
especially in relation to GDP growth, has led some
commentators to believe this development marks
the end of globalisation. But in fact it is a common
feature of economic downturns. In the period 1980-
1982 the ratio of world trade growth to GDP growth
was also around 1, similar to the ratio since the start
of the financial crisis. Having said this, the current
ratio is far below the historical average of 1.7.
• Based on experiences during earlier periods of
recovery of the world economy, the current (cautious)
upswing will push the ratio of trade growth to GDP
growth up to 1.2 at the end of 2016. This normal
cyclical effect stems from the fact that demand for
durable consumption goods and investment goods
increases disproportionately in economic upturns and
these goods are overrepresented in global trade.
• On top of this the ratio will be lifted by specific
European factors. The long economic downturn
in the EU has pushed the growth of world trade
down disproportionately, reflecting Europe’s over
representation in trade. On top of this, the relatively
large share of investment in the decline of European
demand hurt world trade more, with investment
being relatively import sensitive. This implies that
the current increase in European growth rates will
make world trade recover disproportionately. ING
expects these specific characteristics of the European
economy to drive the ratio up by 0.1 percentage
point to 1.3 before the end of 2016.
• But for the ratio to come close to its long term
average of 1.7, more is needed than this cyclical
push. Import ratios around the world have to show
structural rises again. We believe this will happen in
the next couple of years because:
- Implementation of the Bali agreement on
lowering customs procedures will ultimately
lift world trade by 4.1% and world GDP by
1.1%. The Bali agreement will lift the ratio by
0.14 percentage point from 2016 onwards, on
the assumption that it will take five years to
implement this agreement and that it’s done
in equal steps so the benefits, in terms of the
upward effect on trade growth and GDP growth,
will be spread out equally over this period. The
effect of this 0.14 per year brings the ratio in
between 1.4 and 1.5 during the 2016- 2020
implementation period, as long as the world
economy is in a cyclical upturn (otherwise the
cyclical influence on the ratio will start working
in the opposite direction again). Of course any
delays in the implementation of Bali will also delay
the upward influence on the ratio.
- If negotiations on the Transatlantic and Pacific
trade agreements (TTIP and TPP) deliver results
that are acceptable for European, American and
Asian governments and parliaments an upward
effect on world trade in the medium to long term
will appear as well. This will push the ratio up
but how much and when is unclear because it is
unknown when negotiations will be finished and
what the outcome will be.
- Trade will also be stimulated by continuing
offshoring of production to developing
economies. Although reshoring has increased,
offshoring will continue to dominate in the
years ahead because there are many developing
countries that have maintained or improved
their attractiveness as production locations,
notwithstanding wage costs rises in some of
them. The relatively low stock of inward Foreign
direct investments (FDI) in countries such as
China, India, Philippines and Indonesia suggests
ample scope for more FDI. Now that business
confidence is recovering in most advanced
economies, ING expects a recovery of their
outward FDI to add to the already visible increase
of outward FDI by Asian countries such as China.
These developments will increase the trade in
intermediates and thereby push up the ratio of
world trade growth to growth of GDP.
- The geographic spread of trade- and offshore-
enhancing innovations (e.g. in ICT and logistics) is
far from finished. Some countries, like India, have
below average internet penetration which means
above average costs of trade formalities. Although
there are no reliable data available to quantify
the effect on trade of an optimal spread of these
technologies, we expect it to be significant.
- In the long run innovations like 3D printing and
robotics will be trade diminishing, but in our view
they will not have the scale to seriously push
down the growth rate of trade in the short to
medium term. Besides, at the same time, trade

enhancing innovations like lighter containers are
appearing as well.
- The composition of trade will shift towards
more demand for tradable consumer goods in
developing countries, reflecting the rise of their
middle classes, and less demand for tradable
consumer goods in advanced economies,
reflecting ageing. Given the expected further
increase of the share of developing countries
in the world economy and their above
average import ratios, especially in Asia, these
developments will add up to a stimulus for the
world trade-GDP ratio in the medium term.
- Another potential structural driver of trade that
can push the ratio upwards is trade in services.
The ICT revolution makes products tradable that
were not tradable before (retail sales, education,
etc). This development has been on hold since
the start of the crisis. But with consumption and
investments rising in advanced economies, where
consumers and producers have the best access to
internet, services might provide renewed stimulus
to world trade in coming years.
- On the downside, the conflict in the Ukraine
could still lead to an escalating trade war between
the West and Russia, which would be a clear
negative for trade since Russia is a significant
player in world trade. Harm to trade could also
stem from increased exchange rate volatility if the
current currency battle escalates.
- On the upside a closing of the recent draft
agreement between Western governments and
Iran, with its economy the size of South Africa’s,
would be a positive for world trade.

I Introduction
The current debate
With a projected growth of 3.7% in 2015 (IMF 2015),
world trade will, for the fourth year in a row, fail
to clearly outpace world GDP growth. This marked
difference with the fifteen years in the run up to the
financial crisis has led some to believe that world trade
growth will not return to outpace world GDP. The
deadlock in the Doha negotiations, the lack of new
big entrants in the world of free trade, reshoring of
production, and technological developments like 3D
printing and robotics are just some of the arguments
used by the proponents of this hypothesis. In this ING
Trade Special we will weigh these arguments and put
forward some arguments of our own to assess the
future of world trade.
Why bother about trade growth?
Trade is more than just a side product of growth. It
can be an independent source of growth with positive
effects on the standard of living. Frankel and Romer
(1999) conclude that, dependent on the estimation
method, research shows that a 1% increase in the share
of trade to GDP raises per capita income somewhere
between 0,5% and 2%. Exporters are more productive
and when they enter the foreign market they raise
the overall productivity level in the industry (Wagner,
2012). There is also some evidence that exporters learn
by exporting and experience faster productivity growth
rates relative to enterprises that limit themselves to
domestic sales. In addition, catering to a larger market
enables companies to achieve internal and external
economies of scale and thereby reduce the unit costs of
production.
Trade improves welfare also by allowing countries
to focus on the production of goods and services for
which they have a comparative advantage. Liberalisation
of trade usually results in lower prices for (tradable)
consumption and investment goods. In addition,
consumers and producers enjoy more product varieties
as trade involves huge amounts of intra sector cross
border exchange of goods and services.

II Trade through the decades: ups and downs
The growth of world merchandise trade in value terms
averaged 10% a year over 1961-2013, well above the
average nominal growth of world GDP (8%, figure
1). But trade growth has varied considerably across
decades. In particular, world merchandise trade has been
volatile. This can be expected, given the price volatility
of important trade classes like commodities and fuels.
Between the start of 2012 and the fourth quarter of
2014 nominal world merchandise trade has on
average grown by 2.4% per year, less than the average
growth of nominal world GDP (2.8%), thereby clearly
lagging its trend.
In comparison, the historical growth rate of the value of
trade in services has been lower, with 8% annually over
1980-2013. But at the same time trade in services has
been less volatile. Nevertheless, world trade in services
has been also lagging its trend recently (figure 2).
Figure 1. Historical growth of world merchandise trade, nominal values
* Throughout the report trade is defined as imports plus exports; Data Source: WTO.
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Average Trade Growth Since 1950
Growth of Merchandise Trade Value
Nominal Production Growth For the World
20132009200520011997199319891985198119771973196919651961
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
19771973196919651961
_Growth of merchandise trade value
_Growth of world GDP
_Average growth of world trade
Figure 2. Value of world trade in services, 1980=100
ING Global Markets Research; Data Source: WTO.
0
200
400
600
800
1,000
1,200
201220082004200019961992198819841980
0
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400
600
800
1,000
1,200
201220082004200019961992198819841980

The recent slowdown of trade is also evident in
volume terms, but less markedly (figure 3). The
average annual growth rate of world trade in volume
terms has been 5.7% since 1970 and only 3.3% since
2012. More importantly, world trade growth no longer
outpaces growth in world GDP. During the fifteen years
leading up to the crisis, growth of world trade grew 1.9
times faster than world GDP growth. Taking into account
earlier decades, during which trade growth deviated
less from production growth, the ratio has been 1.7 on
average between 1970 and 2013 (figure 4 and 5).
The fluctuation in the world trade to world GDP ratio
over the decades is the result of the fact that trade levels
(imports and exports) are about three times as volatile as
GDP. Engel et al. show this in their 2011 study.
Trade depends heavily on economic stability. In
periods of economic calm, world trade growth has
markedly exceeded its long term average. The 1993-
1997 and 2003-2007 periods are good examples of this
(figure 3). Economic turmoil on the other hand is bad
news for world trade. The start of the Global Financial
Crisis (GFC) in 2008 is the best example of this. The
scarcity of liquidity, the very sharp drop of business
confidence and the lack of trade finance caused world
trade in 2009 to show its biggest decline since WW II.
But the deep economic crises in the beginning of the
1980s and the beginning of the 1990s, the Asian Crisis
of 1997 and the bursting of the dot com bubble in
2000/2001 also left clear marks on world trade and the
trade to GDP ratio (figure 3).
During economic downturns, increased uncertainty
reduces the incentives of customers to commit to
large purchases. This reduces the demand for durable
Table 1. Volatility and co-movements in International trade
Volatility and
co-movement in
international trade
Standard
deviation of
GDP (%)
Relative standard deviation* Correlation with GDP Corr
(IM, EX)Real
imports
Real
exports
Net
exports/GDP
Real
imports
Real
exports
Net
exports/GDP
Average 1.51 3.25 2.73 0.78 0.63 0.39 -0.24 0.38
* Average for OECD sample in the period 1973-2006. Source: Engel Wang (2011); ING Global Markets Research
** Standard deviation relative to the standard deviation of GDP
Figure 3. Historical growth of volume of world trade in goods and services
ING Global Markets Research; Data Source: IMF OECD.
-10%
20132011200920072005200320011999199719951993199119891987198519831981
_ World trade volume growth of goods and services
_ Average growth of trade volume
_ Real world production growth
_ Average growth of world production
_ World trade volume growth of goods and services
_ Average growth of trade volume
_ Real world production growth
_ Average growth of world production
-10%
-5%
0%
5%
10%
15%
20132011200920072005200320011999199719951993199119891987198519831981

goods disproportionately as businesses and consumers
can usually hold on somewhat longer to their current
durables. Trade in durable goods on average accounts
for 70% of imports and exports in OECD countries
(Engel et al., 2011). Because of the over representation
of durable goods in cross border trade, an economic
downturn hurts trade disproportionately.
These past experiences show that it is normal for trade
growth to decrease faster than GDP growth during
a crisis. In addition, weak trade growth often lingers on
in the aftermath of a crisis (Freund, 2009). The current
situation fits this pattern (figures 3 and 4). This raises the
question whether the current slowdown in trade is ‘just’
a typical (post) crisis development or represents a real
structural break.
Examining the historical development of trade relative to
world GDP in more detail gives some answers. The world
trade to world production ratio has varied considerably
across decades. In the 1950s and 60s, when trade and
production both grew fast, the ratio was around 1.65
(figure 5). In the 1970s the ratio went up before coming
down steeply in the 1980s.
So, from a long term perspective the trade-income
relationship characterising this period is not anomalous.
But compared to the 1990s and the first 8 years after
the turn of the century, during which the ratio was 1.9
on average, the current performance of world trade is
weak even compared to most other periods of economic
downturn. For the period after 2011, the ratio is around
1 on average.
The period from the 1990s up until the start of the
financial crisis was the heyday of the latest wave
of globalisation. Among other things this period is
Figure 5. Growth of world trade, and world GDP; the ratio of world trade growth to world GDP growth in
volumes (right axis)*
* The ratio of world trade growth to world GDP growth on right axis. ING Global Markets Research; Data Sources: IMF OECD
0%
2%
4%
6%
8%
10%
0,0
0,5
1,0
1,5
2,0
2,5
2009-20152001-20081991-20001981-19901971-19801961-19701950-1960
6%
8%
10%
1,5
2,0
2,5
2009-20152001-20081991-20001981-19901971-19801961-19701950-1960
● Trade volume growth ● GDP growth ● Ratio of trade growth to GDP growth _ Average trade to GDP growth
Figure 4. Recent developments in trade growth and
GDP growth (in volumes)*
* Historical average based on the period 1970-2014. Forecast for 2015 based
on IMF estimates. ING Global Markets Research; Data Source: IMF OECD.
-10%
-5%
0%
5%
10%
15%
World Production Growth
Average Growth of Trade
Trade volume growth
2014201220102008
-15%
-10%
-5%
0%
5%
10%
15%
201220102008
_ Trade volume growth
_ Average growth of trade
_ World production growth
0%
5%
10%
15%
World Production Growth
Average Growth of Trade
Trade volume growth

Figure 6. World trade value in goods and services, 1949=100, trend line based on 1949-2008
ING Global Markets Research; Data Source: WTO
characterised by the inclusion in world trade of Eastern
European countries, Russia and, of course, the spectacular
contribution of China to the growth of world trade.
Multinationals implemented numerous global value chains
which steeply increased the trade in intermediate goods.
These global value chains were made possible by the ICT-
revolution that spectacularly cut the cost of coordinating
work between geographically distant locations.
A structural break in world trade?
Figure 6 shows that the current trade growth level is
deviating from the trend. It indicates a structural decline
in growth rates since the start of the financial crisis.
However, given that trade growth has varied markedly
across the decades, the selection of a time period for
calculating a trend line is extremely relevant. Calculating,
for example, the trend line for the period from 1980
onwards, results in the different conclusion that current
developments do not really lag the trend (figure 7)!
Nevertheless, formal tests conducted by IMF and World
Bank economists Constantinescu et al. (2015) confirm
the existence of a structural break in the trade-income
relationship in the 1990s relative to the preceding
decades. So structural breaks do occur and this is not
surprising given that there is no economic law that
guarantees that trade should grow faster than GDP.
There is a priori no reason why world trade is not
experiencing a structural break today.
However, a formal test for a structural break requires
a sufficient number of observations after the break
and consequently we are unable to perform one.
Nevertheless, to assess the likelihood of a structural
break, we proceed by analysing developments in some
of the drivers of the trade-production ratio.
100
5100
10100
15100
20100
25100
30100
35100
40100
'14'12'10'08'06'04'02'00'98'96'94'92'90'88'86'84'82'80'78'76'74'72'70'68'66'64'62'60'58'56'54'52'50'48
40100
Figure 7. World trade value in goods and services rebased, 1980=100
ING Global Markets Research; Data Source: OECD WTO
0
200
400
600
800
1000
1200
201420122010200820062004200220001998199619941992199019881986198419821980

Figure 8. Monthly import volume rebased, January 2008=100
ING Global Markets Research; Data Source: IMF
III What drives the ratio of trade to GDP?
What is behind the decline of the ratio of world trade
to world GDP since 2011? Many reasons have been put
forward and we will add some. We will have a look at
the following drivers and also have a tentative look into
the development of these drivers in the near future:
a. Shifts in import demand
b. Protectionism/Free trade agreements
c. Exchange rate battle and macro policies
d. Offshoring/Reshoring
e. Foreign direct investment
f. Trade finance
g. Innovations and trade
h. Geographical division of trade
i. Product division of trade
a. Shifts in import demand
The fall in the growth rate of world trade can partly
be attributed to relatively weak import demand from
Europe (figure 8). This relates first of all to the lagging
economic growth in the EU. IMF figures show that while
the world economy showed an average growth rate of
3.2% during 2009-2014, the GDP of the EU grew on
average only 0.2% per year. The EU economy has lagged
the growth of the world economy before, but this time
by more than during previous downturns.
Given the overrepresentation of Europe in world trade
Europe accounts for 35% of world trade, while it
accounts for 25% of world GDP, the relatively weak
_ United States _ EU (28) extra-trade _ China
0
50
100
150
200
250
m9m5m1m9m5m1m9m5m1m9m5m1m9m5m1m9m5m1m9m5m1
2008 2009 2010 2011 2012 2013 2014

performance in Europe has been a significant factor
in explaining the slowdown in world trade growth.
But the effect on the ratio of world trade growth to
world GDP growth is limited. This is due to the fact that
every percentage point of lower EU growth not only
diminishes world trade growth significantly, but also
growth in world GDP.
Because the EU is overrepresented in world trade relative
to world GDP, slower EU growth pushes down the ratio
somewhat. But it can only explain a small part of the
decline in the ratio from 1.85 during 2000- 2008 to 1.04
during 2012-2014. A “what if” analysis shows this. If
the EU were to have had the same economic growth
as the US during 2012-2014, the ratio of world trade
growth to world GDP growth would have nudged up by
‘just’ 7.5% from 1.03 to 1.08.1
Besides the amplifying influence on world trade of
Europe’s disproportionate share in trade, there is a
second reason why Europe has put extra downward
pressure on world trade and the ratio: a recent shift in
the composition of European demand. Investments have
suffered more in Europe than in other regions (figure 9).
This is relevant because investment is the demand
category with the highest import sensitivity. So, the shift
away from investments in Europe has been an
extra negative for European imports and thereby
for world trade, but has had a smaller effect on the
ratio of world trade growth to world GDP growth.
If Europe’s investments would have developed just as in
the US during the 2012-2014 period, the ratio of world
trade growth to world GDP growth would have risen
from 1.03 to 1.15 a tentative estimate shows.2
Figure 9. Deviations of pre-crisis trend for different
demand components
* Index, trend volume in 2014 = 100. Bars below or above show deviations
from pre-crisis trend (1980-2008). Data Source: World Bank, UN Comtrade
data; ING Global Markets Research.
65
75
85
95
105
115
Government Expenditure
Consumption
Investment
DevelopingWorldUSAEuro Area
105
115
Government Expenditure
Consumption
● Investment ● Consumption ● Government expenditure
Figure 10. World average import ratio and its main
regional drivers
ING Global Markets Research; Data Source: World bank development indicators
_ World _ Developing economies _ EU28 (European Union)
0,0
10,0
20,0
30,0
40,0
50,0
'12'10'08'06'04'02'00'98'96'94'92'90'88'86'84'82'80
1 if the EU had US growth levels (2.2% per year instead of 0.4%), the extra
1.8% would lead to 0,25 (EU share in world GDP)* 1.8% = 0.45pp of extra
world GDP per year. It would also lead to 0.35 (EU share in world trade)*1.8
= 0.63pp of extra world trade per year. Add 0.63% to the average growth
rate of world trade (3.3%) and the growth of world trade would have been
3.93%. Add 0.45% to the world GDP growth (3,2%) and we find that
world GDP growth would have been 3.65%. The ratio of world trade growth
to world GDP growth doesn’t rise much though. It would have been 1.08
(3.93/3.65) instead of 1.03 (3.3/3.2).
2 Europe’s investment is 20% of Europe’s GDP. If 60% of this is imported, this
translates into 30% of total imports (trade ratio = 0.40). If the deviation of
investment demand from the trend had not been -30%, but -10% (as in the
US), total EU- imports would have been 6% higher (0.30*20pp). World trade
growth would have been 2.1%-point higher (0.35* 6%). World GDP would
have been 1.5% higher (0.30*6%). Given the GDP rate of 3.2 and the trade
growth of 3.3, the ratio would be 1.15 instead of 1.03

The main reason for the ratio to have fallen so
significantly since its peak in trade growth to GDP
growth 2008 is that import ratios stopped rising.
This is partly a cyclical phenomenon because import
ratios have a cyclical component, reflecting the pro-
cyclicality of demand for durable consumer goods and
investment goods that are over represented in world
trade. This is why the import ratios of the EU and the
world were also stagnant or decreasing during the
economic downturns at the beginning of the 1980s and
the beginning of the 1990s (figure 10).
Looking forward, the (cautious) economic upturn of the
world economy will cause world trade to rise more than
world GDP because thus durable goods make up 70%
of world trade in goods. We assume that the cycle will
bring the ratio in Q4 2016 to the same level as after the
first two years following the recession at the beginning
of the 1980s (1983-84). That was a period which also
wasn’t blurred by any huge upward structural stimulus
on trade (contrary to the recessions in the beginning
of the 90s and 2000s). A recovery that resembles the
recovery in the 1980s will shift up the ratio from 1 for
2012-2014 to 1.2 at the end of 2016.
This normal cyclical effect will be reinforced by the
reversal of the specific European effects that were
mentioned above. The increased overrepresentation of
Europe means that the European recovery will push up
the ratio more than during economic recoveries in the
past. Moreover, a normalisation of European investments
may push the ratio up another 0.1 percentage points.
All told, these cyclical effects might result in a ratio of
world trade growth to world GDP growth of 1.25 at the
end of 2016.3
Besides cyclical factors, structural developments also
have been at play. In the fifteen years up to 2008 the
average import ratio in the world rose almost every year
and cumulatively it rose 63%, from 19% to 31%. The
inclusion of China and other countries into the world of
free trade, but also the enhanced economic integration
in the EU (creation of the single market), pushed up
import ratios (figure 10). Now that import ratios are no
longer rising structurally, the ratio of world trade growth
to world GDP growth is hovering around 1. For the ratio
to keep rising after the upward impulse from the cycle,
upward pressure is needed from structural drivers.
Summing up: World trade has been hit disproportionately by
the recession in Europe due to its high share in world trade and
the overrepresentation of investment in the decline of European
(import) demand. If the budding European recovery continues,
world trade will grow disproportionately and the ratio of trade
growth to world GDP growth will rise more than was common
during earlier economic upturns. But for the ratio to come close
to its long term average of 1.7, import ratios would have to be
pushed up again by structural factors.
Figure 11. Percent of imports affected by trade
restrictions
Source: Emine et al. (2014); ING Global Markets Research
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
Oct. 2012-
Oct. 2013
Oct. 2011-
Oct. 2012
Oct. 2010-
Oct. 2011
Nov. 2009-
Oct. 2010
Oct. 2008-
Oct. 2009
1
1,2
0,9
1,3 1,3
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
Oct. 2012-
Oct. 2013
Oct. 2011-
Oct. 2012
Oct. 2010-
Oct. 2011
Nov. 2009-
Oct. 2010
Oct. 2008-
Oct. 2009
1
1,2
0,9
1,3 1,3
3 Investments in the EU will rise by 3.2% on average in 2015 and 2016 in the EU
(compared to 0.9% last year). Because of the share of 20% of investments in
EU GDP, this increase of 2.3pp will bring an extra contribution of investments
to GDP of 0.46% per year in 2015 and 2016. Given a constant import ratio this
also raises EU imports by 0.46pp a year. This EU extra growth per year leads to
0.25 * 0.46 = 0.12pp of extra world GDP per year and 0.35 *0.46 = 0.16pp
of extra world trade per year. Given the starting point of a growth rate of 3.4
for world trade and for world GDP in 2014 the forecasted extra investments
drive the growth of world trade in 2015-2016 to 3.56% on average and
3.52% for world GDP. This results in a ratio of 1.02, 0.02 more than in the
average ratio during 2012-2014. This overrepresentation effect also happened
during the recovery in 1983-1984, but then the overrepresentation was half
of today’s. So the net effect is a rise of the ratio of 0.01. The increased EU
overrepresentation in world trade creates a similar affect for the recovery in
consumption and pushes up the ratio by 0.04pp. So the total upward effect of
the overrepresentation is 0.05pp, which makes the ratio 1.25 in our forecast.

b. Protectionism/Free trade agreements
Since the start of the financial crisis protectionism has
been on the rise, but it would be incorrect to blame
the recent slowdown in trade on the emergence of
protectionist measures. Unlike previous crises, such as
the great depression in the 1930s, the financial crisis
of 2008 was not followed by a huge increase in trade
protection. Protectionist measures have affected
only slightly over 1% of world imports for the
period after the financial crisis (Figure 11).
The WTO World trade report (2014) and several
academic studies have documented the low growth of
trade restrictions in the aftermath of the Lehman crash.
Gawande et al. (2011) show that even though the
crisis brought about increased demands for protection,
these demands had a very limited effect. The economic
interest of domestic enterprises that are involved in
cross border value chains have provided an effective
counterweight to rising trade protection tendencies
during the crisis.
Developing countries have engaged in relatively
higher trade protection mainly in the form of customs
procedures, import quotas and tariffs, especially in 2012
(Figure 12). Developed countries on the other hand (figure
12) have engaged predominantly in trade remedies (using
existing escape routes within current anti protectionist
regulations). Nevertheless, in both country groups the
percent of trade affected by new protectionist measures
is, as said, limited. Widespread membership of institutions
such as the World Trade Organization (WTO) has curbed
nationalistic trade policies and enabled international trade
cooperation. In 2014 free trade has taken a hit from
the mutually-imposed sanctions between the West
and Russia in response to the conflict in the Ukraine.
Figure 12. Percent of developed and developing country imports affected by trade restrictions
Source: WTO (2014,) WTO monitoring database and UN Comtrade; ING Global Markets Research
0.00 0.05 0.10 0.15 0.20 0.25
Customs procedures
Import duties,
quotas or taxes
Local content
Trade remedy
Other measures
0.0 0.1 0.2 0.3 0.4 0.5
Customs procedures
Import duties,
quotas or taxes
Local content
Trade remedy
Other measures
Developed G-20 Developing G-20
● 2010 ● 2011 ● 2012 ● 2010 ● 2011 ● 2012
Table 2. Average tariff rates for different country groups
Average tariff rates Most-favoured nation (MFN) rate Bound rate
Average 2009-2011 Change since 1996 Average 2009-2011 Change since 1996
World 8.5% -2.0% 27.0% -3.8%
Developed 2.7% -1.9% 6.3% -1.3%
G-20 developing 10.1% -5.5% 29.2% -9.8%
Other developing 13.0% -1.7% 29.6% -7.1%
Least developed countries 7.1% -2.1% 42.2% -2.4%
* Note: Changes are from average 1996-98 to average 2009-11. Source: World trade report 2014; ING Global Markets Research

The inclusion of (former) communist regimes in the
world of free trade has been one of the key drivers of
growth of world trade during the past two and a half
decades. Therefore, some have claimed that since major
transition economies have already integrated into the
world marketplace, there will be little room for trade
growth in the future. We tend to disagree. Although a
very large step has been taken, many countries cannot
yet be characterised as free trade countries. Table 3
shows that, although average tariffs are at historically
low levels, they can still be reduced significantly. This is
especially true in developing countries.
Since 1996, developing countries within the G20 have
slashed average tariffs by a third. Nevertheless, the
average still stands at 10%, almost five times as high as
the average tariff in the developed world. The average
level in other developing countries is even higher and
they have made less progress in reducing tariffs. The
same story holds for the upper bound of the tariffs:
developing countries have much higher rates. This
means that there is still scope for trade agreements
to reduce tariffs and thereby increase world trade.
At the same time this also means that the developed
world has less to offer in the negotiations when it comes
to tearing down tariff walls.
But tariffs are just a fraction of trade costs. Non-tariff
barriers such as customs procedures, product standards,
anti-dumping legislation and labelling standards can very
well be legitimate, but they are also used to deter trade.
Non tariff barriers now deter trade flows more than
tariffs. Empirical studies find that when countries are
limited in imposing tariffs because of international trade
agreements, their governments often use non-tariff
measures to protect domestic industries. Enterprises find
customs procedures to be a significant obstacle for
participation in global value chains (WTO 2012).
The global competiveness report for 2014-2015 shows
that customs procedures have a significant effect on the
trade of some emerging economies. In some countries
customs clearance procedures can still take up to 30
days. Brazil is one of the countries that have very high
customs burdens and has also seen a deterioration in
this area over the past five years. Besides Brazil, customs
procedures deteriorated in several other big markets
including China, South Africa and Turkey (see table 3).
So, both tariff and non-tariff data show that there
are ample opportunities to increase world trade and
thereby world welfare by reducing trade barriers. It is
no wonder that the World Trade Organization started
the multilateral Doha round in 2001, aiming to remove
trade barriers. But negotiations have stalled for years
now. Divergent stances have emerged on agriculture
subsidies, industrial tariffs, non-tariff barriers, services
and trade remedies. Along these lines, most lines
of contention have emerged between developed
economies (led by EU, USA, Japan) and developing
economies (led by India, Brazil, China, South Korea,
South Africa). Disagreements between the US and EU
over agricultural subsidies have also hindered progress.
However, one major multilateral trade deal is the
Bali Agreement (end 2013) which aims, among other
things, to reduce customs procedures. Implementation
was held up by India until November 2014, but it is
currently in the process of parliamentary ratification by all
WTO member states. Once implemented, this agreement
will make a difference. As result of modernisation of their
organization, customs agents and forwarding companies
should be able to complete all the necessary paperwork
even before the shipment arrives at the harbour of
destination, contacting just one single office. The potential
benefits of the Bali agreement are substantial. According
to the Peterson Institute of International Economics step by
step implementation of the Bali agreement could increase
global trade by as much as $1000 billion, equally divided
between developed and developing countries. This is equal
to an increase of 4.1% of global trade and a rise of 1.2%
of world GDP. It will take several years -we estimate 5
years- to reap these fruits, but it will drive up the ratio
of world trade growth to world GDP growth by
almost 0.2 percentage points.
Table 3. Burden of customs procedures, selected
economies, 2015 and 2010*
Burden of customs procedures 2009-2010 2014-2015
Advanced economies 5.00 5.08
China 4.57 4.35
South Africa 4.32 4.14
Indonesia 3.70 4.03
Peru 3.81 3.96
Thailand 4.06 3.91
India 3.91 3.91
Turkey 3.40 3.79
Romania 4.08 3.70
Russian Federation 2.73 3.59
Philippines 2.98 3.53
Brazil 2.89 2.68
* (7=best and 1=worst)
Data source: Global Competitiveness Report; ING Global Markets research

The Bali agreement brings hope for the Doha round which
was initially scheduled for completion in 2005. The stalling
of these talks has led countries to turn to bilateral and
regional agreements to stimulate international trade. From
1958 to 1999, 75 regional trade agreements were notified
to the WTO. From 2000 to 2011, the number of additional
regional trade agreements has jumped to 156 (WTO).
Taking into account that the implementations of the most
recent trade agreements has not been fully completed,
we forecast that these regional trade agreements wil lead
to extra trade and thereby push up the ratio of world
trade to world GDP by 0.1 during 2016-2020.
The Transatlantic Trade and Investment Partnership
(TTIP) is one of the free trade agreements under
negotiation. This potential agreement between the
US and the EU will increase exports by 6% in the EU
and 8% in the US, according to calculations of the
Centre for Policy Research in London requested by the
European Commission. TTIP is expected to increase the
size of the EU and US economies by 0.5% and 0.4%
respectively. A working paper by Capaldo (2014) that
drew media attention in late 2014 suggests that TTIP
will lead to a contraction of GDP, personal incomes and
employment for the EU. This study highlights that gains
in transatlantic bilateral trade would go to the US at
the expense of intra-EU trade. Even if this draft study is
correct, which we highly doubt, because it assumes that
costs of trade are zero and that there are no economies
of scale, the agreement would still stimulate world
trade, because the money saved by the substitution of
the existing (more expensive) intra EU imports by imports
from the US will partly be spent on new imports. In
addition, the standardisation of rules and regulations will
also benefit other countries, potentially causing positive
spillover effects on trade globally.
Another agreement under negotiation is the Trans-Pacific
Partnership (TPP), a regulatory and investment treaty
under negotiation between 12 countries (Australia,
Brunei, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, United States, and Vietnam).
Countries such as South Korea and Taiwan have also
expressed interest. China is not part of these negotiations.
By leaving China out, the contract has therefore often
been portrayed as a method to contain China.
China is seeking trade cooperation under the Regional
Comprehensive Economic Partnership (RCEP), a potential
trade agreement for the ten member states of ASEAN
and Australia, China, India, Japan, South Korea and New
Zealand. These countries encompass 40% of world trade.
The issues negotiated are trade in goods and services,
intellectual property and investments, and dispute
settlement mechanisms. Countries such as Singapore and
Malaysia, which have relatively liberalised trade levels,
are putting pressure on India to lower barriers. India is
moving with caution in the regional trade deal as it fears
increased imports from China, with which it already has
a trade deficit. But peer pressure seems to be working.
In the latest round of negotiations, India made an offer
to give duty free access to 70% of product categories for
the ASEAN economies and 40% duty free access for the
rest (China, Japan, Korea, Australia and New Zealand). In
the previous offer duty free access for 40% of all product
categories was granted for all 15 countries.
But the potential fruits from these trade agreements are
still far from being reaped. For these deals to be closed,
quite considerable resistance among vested interest
groups, NGOs and action groups has to be overcome to
achieve ratification by national parliaments and the EU
parliament.
c. Exchange rate battle and macro policies
Besides tariff and non-tariff barriers, exchange rate
policies can also be seen as trade policy. The quantitative
easing that was first pursued by the American and
English monetary authorities pushed down their
exchange rates. This led the Brazilian Finance Minister
to speak of a trade war in Washington in late 2010. The
Bank of Japan (2013) and the European Central Bank
followed in 2013 and 2015 with quantitative easing
which weakened their currencies as well.
While the effect of depreciation on economic growth is
temporary, especially once other countries take similar
steps, expansionary monetary policies have driven up
growth through other transmission channels (costs of
credit, wealth effects). As a result, trade may have been
higher than otherwise would have been the case.
On the downside is the risk that the (openly or hidden)
exchange rate policies could turn into a series of
competitive depreciations or devaluations. A ‘race to the
bottom’ is not a zero sum game. Although countries
can avoid losses in price competiveness by joining the
currency battle, this leads to a rise in exchange rate
volatility. Higher volatility in exchange rates creates
uncertainty about returns on foreign business or -if the
currency risk is hedged- at least higher costs of trade.
Both discourage cross border trade. Elevated exchange
rate volatility is a downward risk for trade that is to be
taken seriously.
Another policy issue is the asymmetric approach
of current account imbalances. As long as nations
with current account surpluses refuse to implement
reflationary policies (Germany) or are not very successful
in increasing domestic demand (China, Japan), pressure

will remain on deficit countries to cut spending. This
puts a drag on world trade. And it would also be bad
news for the ratio of world trade growth to world GDP
growth, if it were to affect the willingness to invest
and buy consumer durables, because durables are over
represented in world trade. Whether this happens will
depend on the effect that rebalancing has on the cycle.
If it causes an economic downturn then consumers and
investors can be expected to show this behaviour.
Summing up: The exchange rate battle is a negative for
trade and the asymmetric rebalancing of worldwide current
account imbalances has put a drag on trade and in turn could a
negative for the trade to GDP ratio.
d. Offshoring/Reshoring
The 1990s saw the birth of the global value chain. The
ICT revolution dwarfed the costs of communication and
made cross border coordination much cheaper. This made
it affordable for enterprises to break up their production
processes and locate each production phase in the country
where costs of production (including transportation costs)
are lowest. Major developed economies such as the US,
Germany and the UK started outsourcing (parts of) their
production on a large scale.
Being an important part of total costs in most sectors,
labour costs became very important in choosing production
locations. Western companies offshored large parts of their
production to Eastern Europe and Asia. China, with its
huge supply of cheap (rural) labour attracted a lot of FDI
from Western companies. According to the latest figures
from Unctad (2013), in 25 years China moved 15 places up
the ranking of the stocks of foreign direct investment, from
17th in 1990 to second place in 2013. Excluding the stock
of investments in Hong Kong, China is still number four. As
a percentage of GDP, inward stock of FDI is, however, still
relatively low in China (table 4).
Of course FDI is not only about investments driven
by offshoring and increasing FDI inflows do not by
definition point to offshoring. But other indicators also
suggest a development in the direction of offshoring
or outsourcing. The share of intermediate products
acquired from low wage regions (as a percentage of
total intermediates used) has been rising since the mid
1990s and has been more pronounced since the turn of
the century (see figure 23).
The rise of trade in intermediates has been one of the
reasons for the fast growth of world trade since the
beginning of the 1990s. This is partly due to double
counting. After all, the value of an export product that
is completely produced in one country is booked only
once in the recording of export values (say 100). When
the same export product with a value of 100 is produced
with inputs of two other countries (each worth 30) the
registered export value for this product adds up to 160.
Recent developments suggest that there is a turnaround
in offshoring. Some well known Western companies
have brought production activity back from low-wage
countries to their home countries. Apple is bringing
back activities from Foxconn China to Silicon Valley in
California, Philips withdrew the production of razors
from China and brought this back to the Netherlands
and Airtex Design Group is shifting part of its textile
production from China back to the US.
Recent surveys suggest that reshoring is not limited to
a few eye catching companies. According to a Boston
Consultancy Group survey, 54% of US companies are
considering reshoring or are actually doing so (2013). In
a survey for the eurozone by PricewaterhouseCoopers
in the autumn of 2014 almost 60% of the surveyed
companies said they had reshored some activities during
the past 12 months and slightly fewer than 50% plan to
do so over the next twelve months. This survey, however,
shows at the same time that almost the same share of
eurozone corporations (55%) has offshored part of their
production during the last twelve months. Moreover, the
survey results gives no information about the size of the
operations. This makes it impossible to know whether the
stock of offshored business is still growing or is in reverse.
Nevertheless, the survey shows differences between
countries in the eurozone. Italy and Ireland are leading in
the amount of reshoring projects, followed by Spain and
the Netherlands. A survey by the Dutch Statistical Office
(CBS, 2013) shows that outsourcing by Dutch companies
has diminished compared with 2001-2006. Nevertheless,
the share of outsourcing to Russia and ‘other European
Countries’ (including some east European countries)
increased in the first three years after the start of the
crisis in 2008. Another survey, done by TNS Nipo in 2013,
showed that only 10% of Dutch companies, who are
among the biggest foreign direct investors in the world,
actually reshored production and just 5% considered
it. This is considerably lower than the outcome in a
PricewaterhouseCoopers analysis for the Netherlands that
concludes, based on the very small survey group of 42
companies, that slightly over 60% of Dutch companies
have reshored over the last twelve months and that 50%
are considering it for the next twelve months.
What is behind this shift towards reshoring?
Commentators often refer to the relatively steep rise of
wages in China (figure 13) which should diminish the

advantage of offshoring to the ‘factory of the world’.
Besides this, according to other analysts labour costs
will become less decisive as labour will be replaced by
capital such as robots and 3D printing (see paragraph on
innovations). We now look more in detail at the possible
drivers of reshoring to get a better idea of the influence
this will have on the growth of world trade in the near
future.
The role of labour costs
Labour costs per product have been rising fast in some
countries that serve(d) as a production location for
Western companies. China leads the pack with an
average real wage increase of almost 14% a year since
1997, followed by Indonesia, Turkey and Hungary (see
figure 13). At the same time wage moderation has taken
place in several important advanced economies, leading
some commentators to conclude that offshoring is no
longer profitable.
While it is true that wages have risen considerably more
in emerging markets than in developed markets, this
doesn’t mean that China and other emerging markets
are no longer attractive for offshoring. These are several
reasons for this.
First of all, as figure 14 shows, labour costs in
developing economies are still a multiple of labour costs
in emerging markets. Even in China, the average wage
level is still five to eight times as low as in advanced
Pacific economies such as Japan and Australia.
Secondly, high wage increases have in many emerging
markets been accompanied by high productivity
rises. As figure 15 shows this has either put a lid on
the rise of unit labour costs relative to developed
markets (Philippines, Malaysia and Indonesia), limited
Figure 14. Average monthly wages for countries in Asia Pacific
0
1000
2000
3000
4000
5000
Australia
(2013)
Singapore
(2013)
New
Zealand
(2013)
Japan
(2013)
Korea,
Republic
of (2013)
Hong
Kong
(China)
(2013)
Malaysia
(2013)
China
(2013)
Samoa
(2012)
Mongolia
(2012)
Thailand
(2013)
India
(2011/
2012)
Philippines
(2013)
Vietnam
(2013)
Indonesia
(2013)
Timor-
Leste
(2010)
Cambodia
(2012)
Pakistan
(2013)
Nepal
(2008)
4642
3694
3419
3320
2841
1780
651613565
41139121521519718317412111973
Figure 13. Average annual real wage rises, developing countries (1997-2013)*,**
* Philippines, Thailand, Paraguay, Indonesia sample from (2013-2002); Source: ILO; Worldbank; ING Global Markets Research
** Peru and Turkey sample from (2013-2005); Source: ILO (2014); ING Global Markets Research

0%
2%
4%
6%
8%
10%
12%
14%
16%
ChinaIndonesiaHungaryParaguayBangladeshPeruMalaysiaIndiaThailandPhilippines

Figure 15. Unit labour cost index for emerging markets, in US dollars (2005=100)
ING Global Markets Research; Data Source: Oxford Economics
it significantly (China, Thailand) or even prevented unit
labour costs from rising (India, Poland, recently South
Africa). It must be said however that the depreciation of
some currencies (such as the Indian rupee) vis-à-vis the
dollar has also helped.
Although China still has a large market share in several
low tech mass production goods it has entered a phase
in which it produces more knowledge intensive medium
and high tech goods. Other developing countries are
partly taking over the role of low cost production
location. The clothing industry is an example. Although
China still is an important player in this industry, those
companies that no longer offshore or outsource to
China often (re)locate to other Asian countries such as
Vietnam and Bangladesh instead of bringing production
back home. This process will repeat itself. As long as
there are countries where unit labour costs are much
lower than in developed economies offshoring remains
attractive from a cost perspective. Countries such as
India, Malaysia and the Phillipines have large and young
labour forces, so there still is ample space for offshoring.
Also when looking at foreign direct investment stock in
these countries, there seems to be room for increased
investment through offshoring.
The Philippines, India and also China still significantly
lag the average for developing Asia. The Philippines
saw a steep rise in inward FDI in the second half of the
1990s but stagnated afterwards at a level far below the
average of developing Asia (table 4). After a sprint in
the five years up to the start of the financial crisis, India
is not even close to FDI levels common in countries like
Malaysia, Vietnam and Thailand.
Even China is among the countries with little foreign
direct investment relative to the size of their economy.
Figure 16. Unit labour cost index for developed economies, in US dollars (2005=100)
ING Global Markets Research; Data Source: Oxford Economics
0
35
70
105
140
175
AustraliaSwitserlandItalyCanadaBelgiumFranceGermanyNetherlandsUnited
Kingdom
United
States
JapanGreece
● 2000 ● 2005 ● 2010 ● 2014
0
50
100
150
200
250
Russian
Federation
VietnamBrazilChinaTurkeyThailandIndonesiaPhilippinesSouth AfricaMalaysiaPolandIndia
0
50
100
150
200
250
Russian
Federation
VietnamBrazilChinaTurkeyThailandIndonesiaPhilippinesSouth AfricaMalaysiaPolandIndia
● 2000 ● 2005 ● 2010 ● 2014

This is related to the fact that FDI in China has
been restricted to certain sectors. Nevertheless, the
government is about to loosen this restriction. At the
latest National People’s Congress last March Prime
Minister Li Keqiang indicated that the economy will
open further, lifting the ban on FDI for some sectors
that currently don’t permit it. Besides, cheap labour in
the inland of China keeps it an interesting location for
offshoring. Some transnational corporations currently
prefer to move their production facilities from the more
expensive coast to the inland of China instead of moving
to another country or reshoring it back home.
Companies taking advantage of these ongoing
offshoring possibilities in several Asian countries, will
keep world trade in intermediate products going in the
years to come.
Several Eastern European countries also remain attractive
for offshoring. Since the 1990s European companies, for
example in the transport industry, offshored significant
parts of production to countries such as Poland and
Czech Republic. Low wages relative to the level of
education and skills made these countries attractive
production locations. The transfer of technological
knowledge that resulted from offshoring has helped
these countries to reach higher technological and
productivity levels. This has pushed up wage levels, but
broadly in line with productivity increases according
to ILO-data, making these countries still attractive for
Figure 17. Development competitiveness index for selected economies
ING Global Markets Research; Data source: Global competitiveness index (2014-2015 2010-2009).
5,5
3,5
3,9
4,3
4,7
5,1
5,5 2014-2015
2009-2010
MalaysiaAdvanced
economies
ChinaThailandIndonesiaPhilippinesRussian
Federation
BrazilVietnamIndiaBangladesh
0
50
100
150
200
250
PSouth AfricaMalaysiaPolandIndia
● 2009-2010 ● 2014-2015
Table 4. Stock of inward foreign direct investments
as % of GDP
FDI stock as % of GDP 2000 2007 2013
Vietnam 47.3 40.8 47.8
Malaysia 54.1 39.1 46.6
Thailand 24.7 36.9 45.4
Indonesia 18.5 26.6
India 3.5 8.8 11.8
Philippines 17.0 13.7 11.0
China 16.2 9.3 10.3
Belarus 12.5 9.9 23.2
Bulgaria 21.0 90.1 99.6
Croatia 13.0 75.9 56.1
Czech Republic 36.8 62.3 68.6
Hungary 49.3 70.2 85.6
Poland 20.0 42.0 48.8
Republic of Moldova 34.8 42.6 49.3
Romania 18.6 36.9 45.4
Russian Federation 12.4 37.8 26.8
Serbia 77.9
Slovakia 34.2 63.6 61.5
Slovenia 14.5 30.4 32.5
Turkey 7.1 24.0 17.6
Latin America 23.8 32.4 44.2
Developing Asia 25.7 30.0 26.7
World 22.9 32.0 34.2
Source: Unctad; ING Global Markets Research

offshoring. With the labour force relatively well educated
and trained, it is possible to outsource more knowledge
intensive tasks within value chains, a development that is
already taking place. Jobs related to the participation of
central and eastern European economies in value chains
of Western companies are increasingly highly skilled,
research from ING shows.4
Turkey, another country that integrated heavily in cross
border value chains, on the contrary, has shown a
strong increase in unit labour costs. The same holds for
Russia. The average wage growth in these countries has
not nearly been compensated by a proportional rise in
productivity (Figure 16). Consequently, Russia and Turkey
have suffered considerable losses in cost competitiveness
over the last decade.
Summing up: Several developing countries have lost (some)
appeal as production locations because of rising unit labour costs.
However, there are still (big) developing economies that maintain
their offshoring appeal from a cost perspective. Not only India
comes to mind, but also countries like the Philippines, Malaysia,
Poland and South Africa. In addition, (the inland of) China still
holds appeal for offshoring.
Other drivers of Offshoring
Costs are only one part of the story. Other factors also
determine the attractiveness and competitiveness of a
country. Many developing economies have been able to
substantially improve their non wage competitiveness
index over the past five years. The gains have been
bigger in several emerging markets than in advanced
economies (figure 17).
The Philippines and Indonesia are among the countries
that stand out. India on the other hand has not been
able to improve its non-wage competitiveness factors.
This counterbalances its relatively favorable unit labour
cost position. India has reached growth rates equal to
China and has high potential, reflecting its market size,
its enormous and young labour force and the widespread
use of the English language. But the country is still trailing
China in almost all aspects of competitiveness (figure 18).
It is characterised by a low level of average education, a
weak healthcare system, dependence on foreign capital
due to a current account deficit and an improving but
still underdeveloped physical infrastructure. These factors
mean that India hasn’t fully exploited its potential yet.
President Modi, who took office last year, has set in
motion a process of implementing significant reforms to
address some of the mentioned weaknesses of the Indian
economy. This policy seems promising.
The positive development of non wage competitiveness
in countries like China, Thailand and Turkey (figure 17)
counterbalances their relatively unfavorable wage cost
developments. The level of competitiveness of China is
almost as good as that of the advanced economies and
Figure 18. Decomposed Competitiveness index, China and India, 2014-2015*
* 7 = best and maximum; 0 = worst and minimum; ING Global Markets Research; Data source: Global competitiveness index 2014-2015.
● India ● China
1
2
3
4
5
6
7
Innovation
Business sophistication
Market size
Technological readiness
Financial market development
Labor market efficiency
Goods market efficiency
Higher education and training
Health and primary education
Macroeconomic environment
Infrastructure
Institutions
Innovation
4 ING, 2014, Valuing a close connection II

better than in almost every other Asian country. It should
be said that this is to a significant degree influenced by
the fact that market size is related to population size.
Nevertheless China is also competitive in many other
fields that determine attractiveness of a country. But
Malaysia tops the bill and is, according to the Global
Competitiveness Index, even more competitive than
advanced economies!
The prospects for further improvements in
competitiveness for developing countries in Asia seem
quite good. Traditionally weak infrastructure has been
an impediment for some low-income Asian countries in
attracting FDI and promoting industrial development.
Today, rising FDI in infrastructure industries, driven by
regional integration efforts and enhanced connectivity
through the establishment of corridors between sub
regions, is likely to accelerate infrastructure build-up and
Figure 19. Competitiveness Index 2014-2015 for emerging and developing
regions and advanced economies**
* 7 = best and maximum; 0=worst and minimum;
** Group Emerging and Developing Asia: Bangladesh, Bhutan, Cambodia, China, India, Indonesia, Lao PDR, Malaysia,
Mongolia, Myanmar, Nepal, Philippines, Sri Lanka, Thailand, Timor-Leste and Vietnam;
*** Emerging and Developing Europe: Albania, Bulgaria, Croatia, Hungary, Lithuania, Macedonia, Montenegro, Poland,
Romania, Serbia and Turkey Source: Global competitiveness index 2014-2015; ING Global Markets research.
ING Global Markets Research; Data source: Global competitiveness index 2014-2015.
_ Emerging and developing Europe _ Emerging and developing Asia _ Advanced economies
● Increased recycling of goods and materials
● Repairing existing goods more often
● Buying less new goods
● Do not know / no opinion
● Other
2,0
4,0
6,0 Advanced economies
Emerging and Developing Asia
Emerging and Developing Europe
Innovation
Market size
Infrastructure
Institutions
2
4
6
Innovation
Market size
Labor market effici
Institutions
_ Emerging and developing Europe 2009-2010 _ Emerging and developing Europe 2014-2015
2
4
6
Innovation
Market size
Infrastructure
Institutions
Figure 20. Competitiveness, emerging and developing Europe for 2015
and 2010*,***
* 7 = best and maximum; 0 = worst and minimum;
ING Global Markets Research; Data Source: Global competitiveness index (2015 and 2010).

improve the investment climate, Unctad concludes in
its World Investment Report 2014. The decision to set
up the Asian Infrastructure Investment Bank (AIIB) is the
latest step in further development.
A comparison between emerging Asia and emerging and
developing Europe (figure 19) shows that emerging Asia
has better labour market efficiencies and a larger market
size. Emerging and developing Europe on the other hand
has significantly better education, technological readiness
and physical infrastructure. On average developing
Europe holds the edge. Figure 20 shows that developing
Europe has been continuing to improve its appeal. Like
most Asian developing economies, its competitiveness
has increased. Both regions therefore are far from being
out of the picture as attractive production locations.
It comes therefore as no surprise that, for example,
automotive companies still move production locations
from France and Germany to Eastern Europe, as Cooper
Standard announced in January 2015.
Summing up: Determinants of competitiveness other than
labour costs have improved in many Asian countries and still
are at attractive levels in emerging and developing Europe. This
enables both regions to maintain their offshoring appeal.
Infrastructure investments
Infrastructure deserves extra attention because of its
important role in facilitating trade. The empirical literature
suggests that doubling the length of paved roads boosts
trade by 13% and doubling the number of paved airports
per 1,000 square kilometres boosts trade by 14% (World
trade report 2013). India is aware of these benefits and
invested heavily in its underdeveloped road networks
over 1990-2005. Another country that invests hugely in
infrastructure is the Republic of Korea (Figure 22).
Figure 21. Developments in competitiveness for economies in developing Europe*, **
** EDE = average for emergining and developing europe- calculated with the omission of countries without data in both periods.
ING Global Markets Research; Data Source: Global Competitivness Index 2014-2015.
3,6
3,8
4,0
4,2
4,4
4,6
LithuaniaPolandTurkeyBulgariaRomaniaHungaryMacedoniaEDEMontenegroCroatiaSerbiaAlbania
● 2009-2010 ● 2014-2015
0
20
40
60
80
100
120
PakistanGambiaBoliviaNigerNigeriaSaudi ArabiaMacedoniaOmanKorea, Rep. ofIndia
Figure 22. Top ten increase in road networks 1990-2005 period (%)
Data source: World bank; Source: World Trade Report (2013); ING Global Markets Research;

Some emerging markets have experienced substantial
improvements in the general quality of infrastructure.
Most notably, Turkey, Indonesia, Romania and Russia
have made substantial advances in the quality of their
overall infrastructure in the past five years (table 5).
Other countries such as Thailand, South Africa and Brazil
show a deterioration for the same time period. They
need much more investment.
Offshoring: the facts
How have corporations responded to all the above
changes in determinants of offshoring? Recent data
are not available but data until 2012 suggest that rising
wage costs in several Asian and Eastern European
countries have not significantly discouraged the process
of offshoring. On the contrary, after the dust from
the financial crisis settled, companies from advanced
economies resumed offshoring (Figure 23). Offshoring
is measured by the ratio of imported intermediates from
low-wage countries to total intermediates used in the
respective country (which can also include outsourcing,
which also has a downward effect on home production
and employment). The figure shows that net offshoring
to Asia is rising across all major advanced economies.
Offshoring to Eastern Europe is popular with European
companies.
Summing up: Our findings on reshoring, anecdotes and
survey evidence indicate that reshoring has increased over
recent years. But they show at the same time that offshoring
is continuing. Information on the net score is missing. Hard
data is available for indirect indicators of offshoring and this
points to the ongoing dominance of offshoring, at least until
2012. This aligns well with the fact that other determinants
of attractiveness of emerging countries, besides labour costs,
have improved in many Asian countries and in emerging and
developing Europe. This has enabled them to maintain their
offshoring appeal. We expect offshoring to continue in the
years to come but at a slower pace. The rapid expansion of
the pre crisis period will probably not return, reflecting the
counterweight of reshoring.
e. Foreign direct investment
As already discussed, the rise of global value chains have
been accompanied by a boom in foreign direct investment
by Western companies in Eastern Europe and Asia.
While the crisis put a lid on FDI, it has recovered and, as
a percentage of world GDP is higher now than before
the crisis. The stock of FDI in most Eastern European
countries has increased. In developing Asian countries
it has diminished on average since the crisis, but this
doesn’t hold for all Asian nations (table 4 on page 20).
FDI flows have been low since the start of the crisis, but
2013 could well have been the turning point. According
to Unctad’s World Investment Report 2014 the value
of announced greenfield projects recovered, with an
increase of 9% to a healthy level but still far below
historical levels. Cross-border MA increased by 5%.
The geographical division is different this time.
Developing and transition economies largely
outperformed developed countries, with an increase
of 17% in the values of announced greenfield projects
and a sharp 73% rise in cross-border MA. Countries
such as China are increasingly looking abroad to
spend the large surpluses accumulated with the export
led growth model. At the same time in developed
economies the level of both greenfield investment
projects and cross-border MA has declined, by 4%
and11% respectively5
. Figure 24 shows that the decline
of inward FDI in developing countries (as a percentage
of GDP) is somewhat smaller than during the economic
downturn after the bursting of the dotcom bubble.
This could be caused by the fact that, this time around,
emerging economies started investing in other emerging
economies.
Table 5. Quality of overall infrastructure (7=best)
for the 2010-2015 period*
Quality of overall infrastructure 2009-2010 2014-2015
Advanced economies 5.53 5.51
Turkey 4.16 5.10
South Africa 4.74 4.49
China 3.99 4.36
Indonesia 3.15 4.17
Russian Federation 3.34 4.13
Thailand 4.77 4.07
Romania 2.37 3.79
India 3.21 3.75
Philippines 3.12 3.66
Peru 3.00 3.50
Brazil 3.43 3.11
ING Global Markets Research; Data source: Global Competitiveness Index
5 The weak FDI by developed countries is a contrast with the picture that
emerges from figure 23. An explanation could be that the rise shown in
figure 23 is mainly caused by outsourcing rather than offshoring production
(outward FDI).

Figure 23. Net offshoring for selected advanced economies per region**
* Orange = offshoring to Asia; Green = offshoring to Brazil and Mexico; Blue = offshoring to Eastern Europe. Source: Marin (2014) and Timmer (2012). ING Global Markets Research
** Offshoring is measured by the ratio of imported intermediates from low-wage countries to total intermediates used in the respective country
0,000
0,005
0,010
0,015
0,020
0,025
0,030
0,035
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
0,00
0,01
0,02
0,03
0,04
0,05
0,06
0,07
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
0,00
0,01
0,02
0,03
0,04
0,05
0,06
0,07
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
0,000
0,005
0,010
0,015
0,020
0,025
0,030
0,035
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
0,000
0,005
0,010
0,015
0,020
0,025
0,030
0,035
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
0,00
0,01
0,02
0,03
0,04
0,05
0,06
0,07
'11'10'09'08'07'06'05'04'03'02'01'00'99'98'97'96'95
USA Germany Italy
UK France Netherlands
_ Asia _ Eastern Europe _ Brazil and Mexico

All in all, the underperformance of FDI compared
to total investments has been a lot smaller this time
around. After the bursting of the internet bubble, the
total investment ratio of developing countries kept on
rising, just as in the current crisis (figure 24), but FDI in
developing countries fell deeper than during the recent
risis.
Due to the rise of FDI by developing and transition
economies, their shares in the worldwide flow of
greenfield investment and MA projects were at
historically high levels in 2013 (68% and 31%
respectively). We are witnessing a broadening of the
number of countries that do outward FDI, implying that
offshoring now has more engines than only Western
companies.
Recently, weak FDI flows from advanced economies
do not mean that there is no scope for developed
economies to increase their FDI in developing countries.
The relatively low stock of inward FDI in countries
such as China, India, Philippines, Indonesia and Turkey
(table 4) suggests ample scope, especially because most
of these countries have continuing appeal as locations
for producing goods and services. The fact that domestic
investment has been high in developing countries
supports the view that expected returns on investments
in those countries are still attractive. Moreover,
interest rates are at historical lows and many Western
multinationals hold large cash holdings, so financing
greenfield or MA investment should not be a problem.
f. Trade finance
The availability of trade finance has also been put
forward in the debate on reasons behind the slowdown
of trade. Trade finance and the guarantee facilities that
come with it in many Western countries are undeniably
important drivers behind trade as they reduce risk.
Therefore, reductions in trade finance can have a
significant effect on trade growth. This is especially the
case for emerging markets in Asia where trade finance
is relatively important. A recent survey of developing
country suppliers reveals that access to trade finance is
one of the key obstacles for them to participate in global
value chains (table 6).
Both surveys and academic literature suggest that
disruptions to trade finance have economically
significant effects on global trade volumes. A report
Figure 24. Investment and FDI in developing economies, in % of GDP
Data Sources: UNCTAD and IMF WEO; ING Global Markets Research
_ Investments (LHS) _ Inward foreign direct investment flows (RHS)
Investment and FDI in developing economies; % of GDP
As%ofGDP
0%
7%
14%
21%
28%
35%
0%
1%
2%
3%
4%
5%
20132011200920072005200320011999199719951993199119891987198519831981
25.5%
0.86%
3.77%
3.89%
2.84%
31.5%
2.22%
Table 6. Barriers hindering participation in value
chains
Developing country suppliers
Difficulties connecting developing country suppliers to value chains
Transportation costs and delays 42%
Access to trade finance 40%
Customs procedures 36%
Import duties 23%
Supply chain governance 23%
Source: World Trade Report (2014); ING Global Markets Research

published by the BIS (2014) claims that trade finance
could have accounted for one fifth of the drop in trade
volumes in the three quarters following the Lehman
bankruptcy (Figure 25). The sub prime crisis in the US
led to a liquidity crisis in developed economies because
it was unclear which banks were hit. All banks became
risk averse and held on tightly to their own means of
liquidity. This liquidity preference made it very hard to
obtain trade finance.
However, after the first couple of quarters of the
financial crisis access to trade finance seems to have
been a less important bottleneck for trade. This is partly
because the liquidity crisis eased following money
market operations by central banks and with some
governments stepping in with (extra) guarantees for
export financing. A survey of global lending conditions
revealed that demand increases above supply increases
had been limited up to 2012 and that supply has
started outpacing demand since, resulting in more trade
financing being involved in trade (figure 26). Trade
finance has increased by 200% over 2007-2013 while
trade has grown by only 50% over the same period (BIS,
2014). The more active role that regional banks started
to play in trade finance has also helped to diminish
the scarcity of supply of trade finance from large
transnational banks (BIS, 2014).
The costs of trade finance don’t seem to have been a
major bottleneck either. The low official interest rates
increasingly prevalent over the last couple of years have
translated into lower costs of trade finance. Together
with ongoing government guarantees, this has helped
to keep trade going, also to more risk prone countries.
Once official interest rates become less accommodative
the opposite will happen. Absolute interest rates will rise
Figure 25. Contribution of lack of trade finance to trade decline, Q4 2008-Q2 2015
Source: BIS; ING Global Markets Research
_ GDP _ Trade finance _ Other factors ● Trade
-25
-20
-15
-10
-5
0
EMEsAdvanced economiesAllEMEsAdvanced economiesAll
Imports Exports
● ● ●
●
●
●
and put upward pressure on costs of trade finance. But
given the current extremely low level of official interest
rates, we don’t expect the costs of trade finance to rise
quickly to levels that would hurt trade significantly.
Looking at the years to come, we don’t expect that the
supply of trade finance will return to being a bottleneck
for trade growth. After all, even one year after the
liquidity crisis in 2008/2009 world trade was able to
show growth of 15%.
Summing up: The reductions in supply of trade finance were
responsible for one fifth of the collapse in international trade
directly after the outbreak of the financial crisis. However, the
availability of trade finance has improved over recent years.
Therefore, we cannot contribute a significant proportion of the
recent slowdown in trade to developments in trade finance. We
do not expect trade finance to be a major bottleneck for trade
in years to come.
g. Innovations and trade
Innovations have lowered trade costs spectacularly in
the past. For example, the invention of the telegraph,
telephone, jet engines, containerization and the ICT-
revolution, all had a huge impact on world trade.
Currently work is being done to further reduce the
transport costs of trade. For example, making containers
much lighter using composite material can be a new
stimulus for world trade. This would resolve the problem
that when container ships sail home they are loaded
with empty containers that weigh two tones each.
Lightweight foldable containers would, by lowering

transport costs, stimulate world trade. Also the ICT
revolution hasn’t reached all countries fully. Some
countries, including India, have below average internet
penetration which means above average costs of trade
formalities. Consequently, ICT will continue to stimulate
trade in the years to come.
On the other hand innovations like 3D printing and
robotics can reduce trade. For the time being, the quality,
reliability and costs of 3D printing are unfavorable
compared to production along standardised assembly
lines. Nevertheless, this can change and then the effect on
trade could become noticeable.
3D printing could lead to more local production and
thereby diminish cross border trade, especially for
business-to-business production. 3D is useful within the
trend towards customization of products and production
of smaller series. Because of the fact that many
companies demand that their suppliers supply a broad
spectrum of goods to them, of which only a couple
are needed frequently, many suppliers have substantial
stocking costs. Once the extra costs of 3D- printing
become less than the cost of stocking large quantities,
local instant production with 3D printers becomes an
interesting alternative for mass production. Once this is
the case, it will push cross border trade down because
mass production often takes place in one country, from
which products are exported to the customer.
For business-to-consumer production it will be more
difficult for 3D printing to have a large impact. This end
of the market is very competitive, with low value added
per item, making it very sensitive to the relatively high
costs of 3D printing. It can influence niche markets, for
example sneakers and clothes, where consumers might
Figure 26. Demand and supply of trade finance
* Demand and supply conditions as indicated in the IIF Emerging Markets Bank Lending Conditions Survey. Values above 50 indicate improving conditions while
values below 50 indicate deteriorating conditions.
Source: BIS; ING Global Markets Research
_ Supply of trade finance _ Global funding conditions _ Demand for trade finance
20
30
40
50
60
70
2010 2011 2012 2013
be prepared to pay a higher price for unique customised
items instead of mass produced standard items. But the
macro-effects of this will probably not be significant.
Robotics can lead to a further substitution of labour by
capital. If robots make the input of labour unnecessary,
low cost countries lose their competitive edge. For the
time being this is not the case on a large scale. The
car industry has been using robots for a long time and
nevertheless has been offshoring a lot of production
during the past two decades. Stil, robotics can potentially
bring back earlier offshored production.
Summing up: At the same time that potentially trade reducing
innovations are arising, like 3D printing and robotics, there are
other innovations in the making, like container innovations,
that will stimulate trade growth. And many countries haven’t
fully reaped the fruits of the ICT revolution yet.

h) Geographical division of trade
The share of developing economies in world trade
has been rising since the start of the 1990s, at the
expense of developed economies (figure 27). Nowadays
developing countries are responsible for almost half of
world trade, compared to little over a quarter at the
beginning of the 1990s. This trend in trade follows the
trend in GDP shares. Due to much higher economic
growth, the share of developing economies in world
GDP has risen to 40%, from 24% in 1980, according
to WTO figures. Especially Asia has shown impressive
growth in GDP and trade, with China leading the way.
The rise of developing economies has not only increased
the size of world trade but has also contributed to
the rise of the ratio of world trade to world GDP. This
Figure 27. Share in world trade of developed and
developing countries
ING Global Markets Research; Data Source: UNCTAD, IMF
_ Developed trade _ Developing trade
0%
20%
40%
60%
80%
Developing Trade
Developed Trade
201220102005200019901980
0%
20%
40%
60%
80%
2012005200019901980 ● Increased recycling of goods and
● Repairing existing goods more of
● Other
ratio rose from 20% in 1990 to 30% in 2008, mainly
thanks to the rise of the trade to GDP ratios in most
developing countries since the start of the 1990s.
The financial crisis put this development on hold. It
caused a sharp drop in the ratio in 2009 (figure 10).
In 2010 however the trade ratio recovered to a large
extent, but has decreased slightly afterwards. The
medium and long term outlook for the ratio
of world trade to world GDP will depend to a
significant extent on developments in developing
countries.
Although some BRIC countries are currently showing a
growth slowdown (China) or are in recession (Russia and
Brazil), the expectation still is that developing markets
on average will grow faster than developed economies.
This will happen not only over the medium term but also
in the short run. For 2015 and 2016 the IMF expects the
emerging economies and other developing countries to
grow almost twice as fast as the advanced economies.
This means that the weight of developing countries in
world GDP and world trade will increase further.
Besides differences between regions in economic
growth, differences in the composition of demand will
also influence the growth of trade. As an example,
ageing in developed countries leads to rising demand
for health services. Although health tourism is on the
rise, health services are still not much traded across
borders. So, ageing puts downward pressure on
the import intensity in developed economies. On
the other hand, most emerging markets and other
developing countries have young populations. With
economic growth the middle classes in these countries
will (continue) to rise in size. The middle classes tend
to have a large demand for consumer durables like
mobile phones and other communication products, cars,
and luxury goods. These consumer durables are over
represented in cross border trade So, the rise of the
middle classes in developing economies will put
upward pressure on their import ratios.
Although luxury goods from Western countries are
very popular with middle classes in emerging countries,
demand from consumers and producers in emerging
countries in general is increasingly being met by
products from other developing countries. This is
reflected in the fact that trade between developing
countries has risen faster than trade between advanced
economies and developing countries. Over 1990- 2011
South-South trade increased from 8% of world trade
to 24% (figure 28). Intra-regional trade represents a
large and rising percentage of total exports from Asian
countries. This share has grown from 42% in 1990 to
52% in 2011, so that it now represents the majority of
Asian trade.
The rising share of South-South trade in world exports
is also explained by the increasing number of regional
trade agreements between southern countries.
These account for the majority of new regional trade
agreement concluded since 1990. The fact that
some elements of these agreements still have to be
implemented is another reason to expect more South-
South trade in the years to come, with rising trade to
GDP ratios in this part of the world.
Summing up: Import intensity of developed economies could
stagnate or decline with ageing induced shifts in demand
towards non tradables. On the other hand, in developing
countries the combination of relatively high economic

growth and catch up demand for tradable consumer goods
will stimulate world trade. Given the increasing share in the
world economy of developing economies, the later effect will
probably dominate in the long run.
i. Product division of trade
Agricultural products have seen their share in trade
fall steadily over time, from 57% at the beginning of
the last century to 12% in 1990, and 9% in 2011,
according to the WTO. Manufacturing products’ share
on the other hand has risen steeply. This made up 40%
of trade in 1900, rising to 70% in 1990 and peaking at
75% in 2000. Fuels and mining products have been on
the rise due to higher prices. This resulted in a decline in
the share of manufacturing products, to 65% in 2011.
The commodity boom is currently in reverse with the
sharp decline in the oil price and lower prices for other
commodities in place for several years.
American import demand for crude oil has been
decreasing since its peak of 11.5 million barrels per day
in 2004, to below 7 million barrels a day in 2015. This
is due to the shale revolution that has put downward
pressure on worldwide imports of fuels. Until 2013
world trade in fuels kept rising though because
increasing demand in other countries overshadowed
the decline in US demand. Currently European demand
is picking up, related to the economic recovery, but
demand from most emerging markets have been slowing
with the cooling of their economies. Because the growth
of the world economy is not declining and emerging
markets production is relatively energy intensive, world
demand for oil in volumes is still on the rise.
As already mentioned, the fast growth of the middle
classes in emerging economies means that their
demand for imports will make up a larger share in the
Figure 29. Shares of product groups in worldwide export of ‘goods’
ING Global Markets Research; Source: WTO
● Other
● Agricultural products
● Fuels and mining products
● Iron and steel
● Chemicals
● Other semi-manufactures
● Office and telecom equipment
● Automotive products
● Textiles
● Clothing
● Industrial machinery
1990
29%
12%
14%3%
9%
8%
9%
10%
3%
3%
2011
15%
23%
3%11%
6%
10%
7%
2%
2%
12%
9%
Figure 28. Shares in world trade by region
ING Global Markets Research; Source: UNCTAD, IMF
● North-North ● North-South ● South-South ● Unspecified destination
0%
20%
40%
60%
80%
100%
20112010200920082005200019951990
36%37%40%41%
46%50%51%56%
38%38%
37%37%37%36%35%
33%
24%23%21%20%
16%13%12%8%

Figure 30. Share of commercial services in goods
and services
ING Global Markets Research; Source: World Trade Report 2014
● Increased recycling of goods and materials
● Repairing existing goods more often
● Other
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
Oct. 2011
Oct. 2012
Oct. 2010-
Oct. 2011
Nov. 2009-
Oct. 2010
Oct. 2008-
Oct. 2009
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
Share
2011200520001995199019851980
18.7%
19.5%
18.9%
18.8%
18.7%
17%
15.9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
220001995199019851980
composition of traded goods and services. This means
that the demand for typical middle class consumer
goods, such as office and telecom products, will
continue to grow fast.
Services
The share of services rose until 2005. Since then it has
fallen back to the level of 1990 (figure 10).
Thanks to the ICT revolution, live communication with
very distant places has become easy and cheap. This has
created the possibility for low wage countries such as
India to become large suppliers of ICT helpdesk services
and accounting services.
The rise of transnational enterprises and their global
value chains has also caused more trade in services, for
example in transport and business services. A significant
part of these services is exchanged within these
transnational enterprises. For example, the payment
of royalties within transnational enterprises can be
substantial and is booked as services. Two-thirds of
world trade now takes place within multinational
companies or with their suppliers
But the influence of the ongoing implementation of ICT
inventions is broader than these well known examples.
Services that once were non-tradable, including retail
sales, medicines or educational courses, have become
tradable through e-commerce, e-medicine or e-learning.
This development is just starting, with consumers still
hesitant about doing cross border business online
out of fear that they cannot claim their money back
if something goes wrong. But similar fears restricted
domestic on line business when it started. So services
can be a driver of growth of world trade in the near
future, especially if we take into account that import
sensitivity of services has risen. Moreover, currently
services face relatively high trade barriers compared
to commodities and manufacturers. This means that
when the various (inter) regional negotiations, of which
lowering barriers for trade in services is an important
goal, succeed, a considerable impulse should result for
world trade that will put upward pressure on the trade
to GDP ratio.

IV Conclusions
Some believe that the slowdown of world trade and
the decline of the ratio of world trade growth to world
GDP growth is here to stay and marks the end of
globalization. However, we believe that a significant part
of the slowdown is temporary. World trade growth may
return to outpace world GDP growth, although not by
as much as before the financial crisis. The main driver
of the rise of the ratio was the increase of import ratios.
Although at a significantly lower pace, we see import
ratios rising again because:
• In economic upturns, currently expected for 2015
and 2016, the demand for investment goods and
consumer durables rises disproportionately. This
will cause world trade to rise more than world GDP
because durable goods make up 70% of world
trade. Based on experiences during earlier periods of
recovery, this will push up the ratio of trade growth
to GDP growth from 1.0 during 2012- 2014 to 1.2 at
the end of 2016.
• This normal cyclical effect for the world economy
is reinforced by the European recovery because
Europe is more overrepresented in world trade than
in earlier periods of economic recovery. Moreover,
European business investment has been falling more
strongly than usual during the recent downturn.
A normalisation of investments will push up world
trade growth disproportionately, because investment
goods are relatively import sensitive. These effects
will push the ratio up another 0.05 percentage point.
So, these cyclical effects together wil lift the ratio
from 1 to 1.25 at the end of 2016.
Besides these short term cyclical effects we see some
medium term and long term structural developments in
favour of trade.
• Implementation of the Bali agreement on lowering
customs procedures will push up world trade by
4.1% and world GDP by 1.1%. On the assumption
that it will take five years to implement this
agreement in equal steps (so that the benefits, in
terms of the upward effect on trade growth and GDP
growth will be spread out equally over this period),
the Bali agreement will push up the ratio by 0.14%.
This will bring the trade growth to GDP growth
ratio close to 1.4 if the economy is still in an upturn
(otherwise the cyclical effect will push the ratio down
again). Taking into account that the implementations
of recent trade agreements has not been fully
completed, we forecast the ratio to come close to 1.5
during 2016-2020.
• If negotiations on the Transatlantic and Pacific
trade agreements (TTIP and TPP) deliver results that
are acceptable for European, American and Asian
governments and ultimately parliaments, this will also
have an upward effect on global trade in the long
run. This will lift the ratio as well. What this means
for the medium term (the next five years) is unclear
because it is not known when negotiations will be
finished and what the outcome will be.
- Trade will also be stimulated by continuing
offshoring of production to developing
economies. Although reshoring has increased,
offshoring will continue to dominate in the years
to come because there are many developing
countries that have maintained or improved
their attractiveness as production locations,
notwithstanding wage cost rises in some of them.
Now that business confidence is recovering in
most advanced economies ING expects a recovery
of their outward FDI. These developments will
increase trade in intermediates and thereby lift the
ratio of world trade growth to growth of world
GDP. Because there are no good quantitative data
on the relation between offshoring and trade, the
exact effect on the ratio cannot be calculated.
- The spread of trade- and offshore enhancing
innovations (such as in ICT and logistics) is far
from finished. Some countries, like India, have
below average internet penetration which means
above average cost of trade formalities. There are
no reliable data available to quantify the effect on
trade of an optimal spread of these technologies.
- On the downside, the conflict in the Ukraine
could still lead to an escalating trade war between
the West and Russia, which would be a clear
negative for trade since Russia is a significant
player in world trade. Harm to trade could also
stem from increased exchange rate volatility if the
current currency battle escalates.
- In the long run innovations like 3D printing and
robotics will be trade diminishing, but in in our
view they will not have the scale to seriously push
down the growth rate of trade in the short to
medium term. Besides, at the same time, trade
enhancing innovations like lighter containers are
appearing as well.

References
Bank for International Settelments (2014) CFGS Papers
No. 50, Trade finance developments and issues,
Report submitted by a Study Group established by the
committee on the global financial system, January 2014.
Capaldo, J. (2014). The Trans-Atlantic Trade and
Investment Partnership: European Disintegration,
Unemployment and Instability (No. 14-03). GDAE,
Tufts University.
CBS Centraal Bureau voor de Statistiek (2013),
Internationalisation monitor 2013.
CEPII, 2013,Transatlantic Trade : Whither Partnership,
Which Economic Consequences?, Centre d’Etudes
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