A new engine of growth

Last week’s Financial Times (Oct 25) included an in-depth analysis of global trade that focused on the apparent de-coupling of merchandise export growth from overall GDP growth. Its message in part was that we should worry that this decoupling means the engine of growth is no longer driving the world economy forward. I see it differently.

Regional supply chains, local economies

Data cited by the FT shows merchandise export growth during 1992-2012 at just above 5% per year and GDP growth of just below 3% per year for the same period. Other historic time periods, including early industrial times (1870-1913), post-WWII recovery (1950-1973) and the late 20^th century tech boom (1973-1998), all show a similar ratio of trade to GDP growth rates. The only exception is, minously, 1913-1950 when protectionism, depression and conflict ruled the times and GDP growth exceeded export growth by almost two to one. The implication is that we should brace for trouble.

Data from our manufacturing field study last year points to a different explanation. Trade and growth are decoupling because we seem to have hit a turning point in the wave of globalisation. Much of the growth we’ve seen over the past few decades came in the form of low cost country manufacturing (especially in China) supporting a transportation heavy supply chain that moved raw materials, WIP and finished goods often and far. In the past two years, this trend has apparently peaked and started to reverse.

Between 2011 and 2013, the share of supply chain leaders who say they are still increasing offshore manufacturing dropped slightly while the share that said they were decreasing non-home country manufacturing rose nearly threefold. Other data we have collected shows continued growth in global trade, but at decreasing rates and in general decreasing more quickly on the sourcing side than the selling side. Re-shoring is also a reality, especially in the United States where more than half say they plan to bring at least some manufacturing capacity back home. The movement toward regional supply chains is clear. Growth under these circumstances is more likely to happen in-country than across borders.

ABC’s of growth: Africa, Brazil and China

As a case in point, consider the example of Danone, who has taken a 49% stake in Fan Milk International, located in Ghana and the largest producer of frozen dairy in West Africa. The acquisition gives Danone a production and distribution network already tuned to the characteristics of the region and a platform for sales growth based on Danone’s R&D, marketing and manufacturing knowhow that does not depend on trade. Coming on the heels of investments in Morocco, the Fan deal gives Danone a chance to grow revenues on a regional foundation. Exports in this case are mostly knowledge, not merchandise.

Another factor de-coupling GDP growth from merchandise export growth is the increasing complexity of the three T’s: taxes, tariffs and terms. We did field research here in the past year and found huge amounts of money and time are lost in the confusion around these elements.

The extreme case is Brazil where trade barriers are notoriously high and complex, leading many hoping to sell there to build facilities as a way to supply in-country for-country. Our data shows Brazil as the third most popular location for planned manufacturing capacity increases in the next three years (behind China and the US) despite the fact that few supply chains export from Brazil. Free trade may be good economic gospel, but Brazil’s experience could encourage others to experiment with protectionism.

As for China, what once was held up as factory to the world is quickly becoming customer of the world. Plant locations in China used to be all about export. Today everything from food to capital equipment is being made in China for Chinese consumption. The attractiveness of China as a market has finally caught up with its competitiveness as a supply base.

In country-for country is the new growth model in regional supply chains whether the market is Atlanta or Accra, Sao Paolo or Shanghai. GDP growth in the next 50 years could easily outpace merchandise export growth, and that would be a good thing.