The State of Global Trade Overview

Overview

Over the past few years the world economy has gone through a tumultuous period, but the recovery is continuing and the economy is growing. With moderate growth in the United States and the developed countries, the engine for growth has been China and other emerging markets.

For the United States, other developed countries, and the emerging markets, growth in global trade is a key to sustained economic growth. It is particularly important for the United States, which needs to boost exports. Trade creates jobs, increases the standard of living, benefits companies, and helps countries that engage in trade. Lack of awareness of the benefits of trade lead to protectionist attitudes and policies that inhibit growth and prosperity. Business leaders should speak out and educate the public and policymakers about trade's benefits.

Context

UPS Chairman and CEO Scott Davis shared his thoughts on the global economy, discussed the importance of exports for the U.S. economy, and answered questions about different parts of the globe.

Mr. Davis was followed by a panel of global trade experts who shared insights about global trade in general, and provided perspectives about trade in Asia, Europe, and the Americas. The panelists were Wolfgang Clement, Germany's former Federal Minister of Economics and Labor; Sergio Marchi, who served in Canada's House of Commons for 15 years, held multiple ministry positions, and served as Canada's Ambassador to the World Trade Organization; and Sandy Randt, who served as the U.S. Ambassador to the People's Republic of China and is on the UPS Board of Directors.

Key Themes (from Mr. Davis)

The global economy is growing modestly.

The U.S. economy and the global economy have been slowly climbing out of the panic and paralysis of 2008 and part of 2009. UPS estimates that the global economy will grow about 3.5% in 2011. This isn't outstanding growth, but it reflects a decent economy. The United States is likely to grow in the 2-3% range. The economy is experiencing both positives and negatives, which include:

• Positives. Credit is more available than it has been in a long time; interest rates remain low; demand in emerging markets remains strong; and both corporate profits and balance sheets are strong.
• Negatives. Energy prices continue to rise, the disaster in Japan has had an effect on the auto industry, QE2 (monetary policy) will soon end, and because of its deficit, the United States is not in a position for further stimulus.

"The negatives are easy to point out: energy, Japan, tightening in China, sovereign debt in Europe, fiscal drag in the United States…On the other side, fed funds are zero, credit availability is better than it has been in a long time, emerging markets are going to drive growth, corporate balance sheets are strong, and corporate profits are strong." - Scott Davis

When asked about the greatest risks at this moment, Scott Davis said that two years ago he saw protectionism as the greatest risk. In a global recession when things are tight, countries look internally and take steps to protect jobs, which can hurt trade. But today a substantial risk is also the sovereign debt problems in Europe as well as the federal deficit in the United States. Action must be taken to address these issues. 

Global trade is critical to economic growth, yet many people oppose trade as they don't understand its benefits.

When asked about the importance of global trade, Mr. Davis said, "It's critically important for this country." The reality is that 95% of the world's consumers live outside of the United States. It is possible for companies to grow their business domestically, but long-term success for most companies depends on access to customers around the world.

While the importance of global trade has never been greater, many Americans-and their elected officials in Congress-perceive trade as a four-letter word. They think that trade hurts the country. That's why it is so important to educate the public and policymakers on the benefits of trade-that trade produces jobs, helps exporting companies grow, and enables consumers and importing companies to purchase goods and services more efficiently, at lower prices.

"We need to get congressmen to understand the value of trade, that trade does create jobs." - Scott Davis

Growing exports can help companies grow, boost the economy, and produce jobs. Removing export barriers is necessary.

Today, only 1% of small and medium-sized U.S. companies export. And of those companies that do export, 70% only export to one market, most often Canada. Yet growing exports is crucial for America's economy. To get unemployment down, the United States needs to increase exports. (GDP growth of 4% is necessary to decrease unemployment; that is not likely in the near term, so more exports are required, which produce more jobs.)

That's why President Obama has launched the Nationa Export Initiative with a goal of doubling America's exports over the next five years. Mr. Davis supports this goal and is helping achieve it by serving on the President's Export Council. Among the areas that need attention to improve the level of exports are:

• Simplifying the process. The steps and processes associated with exporting are too complex, especially for small and mid-sized companies. We've got to simplify the process of exporting.
• Advocacy and education. Many policymakers don't understand the importance of exporting and business owners may not understand the opportunities from exporting. Mr. Davis chairs the Trade Promotion and Advocacy Committee for the Export Council, which is focused on educating the public as well as Congress. UPS works with the Commerce Department to bring small businesses together to learn about exporting. UPS makes these owners of small businesses aware that UPS can assist them with distribution, customs, and more.
• Decreasing export control lists. Today companies that make restricted products that appear on an export control list are prohibited from exporting these products. In the past, the Department of Defense has been very restrictive. But after a review process, restrictions will be lifted on approximately two-thirds of the items, providing big opportunities for many companies to grow export.
• Benchmarking. About 11% of the U.S.'s GDP is from exports, while more than 50% of Germany's GDP is due to exports. The Export Council has asked the Administration to benchmark other countries to learn how the U.S. can improve its exports.
• Tax policies. Current corporate tax policies hurt the competitive-ness of U.S. firms. Tax policies need to be revised.
• Enforcement of intellectual property rights. This is a huge issue for technology companies. Better enforcement would open up opportunities for more exports.

The United States needs to make further progress on trade agreements.

China is acting aggressively to put numerous bilateral trade agree-ments in place, while the United States is sitting on its hands. This is occurring as many countries want trade agreements with the United States to serve as a counterbalance with China.

"China is getting these great trade agreements. We are doing nothing. We've got to move." - Scott Davis

A poll by the Wall Street Journal said that 55-60% of the public thinks that trade agreements are bad for the country, and an even higher percentage of Congress may feel this way. But trade agreements aren't bad. Despite the controversy about NAFTA, it has been beneficial for America. A trade agreement with South Korea will create 70,000 jobs in the United States. (The EU will finalize its free trade agreement with South Korea in mid 2011, while the U.S. is lagging behind.) Free trade agreements with Panama and Colombia will also be beneficial for the United States and need to get passed. This requires educating the American public and Congress on the job-creating benefits of free trade agreements.

Key Themes (from the panel)

The emerging markets are the engine powering the world economy.

Sergio Marchi said, "The financial crisis spared no one." The developed countries and the emerging countries were both affected. However, unlike past downturns, where the United States was the locomotive that pulled the world's economy out of the downturn, the situation this time was different. The locomotives have become emerging markets like China, India, and Brazil. Actually, these are no longer emerging markets; they have emerged.

"We should almost stop talking about 'emerging' because they are here. Not only are they here, they're leading the global economic growth." - Sergio Marchi

Importantly, trade is playing a key role in driving these countries' growth. In total, trade grew by 14% in 2010, but China's growth in trade was 28%.

China is the face of globalization and will continue to grow, but significant challenges lie ahead. 

Since China joined the WTO in 2001, it has grown spectacularly, observed Sandy Randt. The World Bank reports that China is responsible for 25% of global growth in the past ten years. The country has developed and implemented economic plans and has invested heavily in infrastructure. As a result of China's economic growth, hundreds of millions of people have been lifted out of poverty and in doing so China has built a middle class that is bigger than the entire population of the United States. This has been done largely through the power of trade, as China has been an export-driven economy.

"China's growth has made it the face of globalization and China really shows the power of international trade." - Sandy Randt

China is currently the United States's third-largest trading partner. It is America's leading source of imports and the fastest-growing export market for U.S. businesses, with exports to China having grown 468% over the past ten years. China has been a success story for UPS, and China relies on UPS to get goods in and out of the country. Great growth opportunities remain.

However, China has challenges. Inflation in China is a significant risk, and interest rates are rising to try to curtail inflation. Also, China's leaders view the export-based model that has driven the country's growth over the past 30 years as unsustainable. Chinese leaders want to move up the value-added chain, to increase imports, and to raise the standard of living, which presents opportunities for foreign companies. But there is a wave of protectionism and nationalism sweeping China, creating a new set of challenges for firms doing business in China.   

Reiterating Scott Davis's comment, Mr. Randt emphasized that with sagging demand from the United States and Europe, China has focused on forging trade agreements with other countries in Asia. This is resulting in a significant increase in intra-Asian trade.

Also noteworthy in Asia is the growth of India. While India's growth rate is not quite as high as China's, India has been a growth engine for Asia and the world. Also, India has a much younger population than China, which provides a distinct advantage. (Indonesia is even younger, which makes Indonesia a great future prospect.)

Despite the economic rollercoaster of the past few years, the Americas are stable and prosperous.  

When asked to describe the economic situation of the Americas, Sergio Marchi termed the past few years a "rollercoaster." After the 2008 economic crisis, global trade contracted by 12% because demand tanked. But in 2010, global trade grew by 14.5%. For 2011, the projection is for continued prosperity with growth of around 6%. Mr. Marchi is hopeful the world can sustain this level of growth beyond 2011.

Over the long term, trade for the Americas has meant stability and prosperity. Trade has been an engine for prosperity across all of the Americas, including Canada, Mexico, and particularly Brazil.

"I think trade as a prosperity engine and a stability engine certainly is reflected in the Americas." - Sergio Marchi

One of the reasons for stability and prosperity has been a general lack of protectionism in the Americas. Minimizing protectionism is difficult, especially in challenging economic times, but learning from the past has shown that sustained growth requires open trade.

An area where the Americas has not excelled is in infrastructure. Mr. Marchi observed that his hometown of Toronto is a great city but it has experienced urban sprawl and has not made adequate investments in its infrastructure, which is typical of many developed countries.

In Europe, integration provides advantages, but significant challenges remain. 

Europe has really just begun to coordinate its financial, economic, and social policies. Doing so provides the Euro region with the potential for greater competitiveness.

"Over the next years, the policies of the European member states will become more and more coordinated."- Wolfgang Clement

While integration has advantages, Europe faces many challenges. Among them are:

• Lack of leadership. Mr. Clement sees in countries like China, India, Brazil, and others a political will to lead the world. But he doesn't see this attitude and this ambitious leadership in Europe.
• An aging population. Countries throughout Europe have low birthrates and an aging population. This creates a problem for the workforce and for Europe's future competitiveness. By 2015, 25 million Europeans who are currently working will leave the work- force. Low birthrates and outdated immigration policies are resulting in a big hole in the workforce.
• Hesitancy on Turkey. Turkey is a young, successful country that is growing about 6% per year. It is democratic, industrialized, and successful in trade. In Mr. Clement's view, Turkey should be welcomed into the EU, which would be advantageous for Europe. However, several political leaders are being extremely cautious because Turkey is mainly Muslim and the politicians don't want to antagonize their citizens by appearing to move too quickly to embrace a Muslim country, even though Turkey is a secular country that separates religion and politics. Mr. Clement is hopeful that these political barriers will be overcome because he sees Turkey's inclusion in the EU as beneficial. 
• High youth unemployment. High rates of youth unemployment-up to 40% in Spain-are causing social unrest. This is an issue not just in Europe, but also in America and the Middle East. The solution is education that enables young people to get good jobs.