IN BRIEF

  • The Trade Confidence Score in the United States remained stable compared to six months earlier, with the majority of respondents (77%) expecting trade volumes to increase over the next six months.
  • The US economy remains well positioned to benefit from a faster expansion of global activity over the medium term, with two-way trade between the US and Asia expected to grow in importance relative to slower-growing but more established trade ties with industrialised economies.
  • US manufacturing production, particularly in investment goods, appears poised to take advantage of the expected recovery in foreign demand over the next five years. Additionally, petroleum products and chemicals will be key growth sectors, as they benefit from the development of shale oil.

While domestic momentum in the US economy appears robust, helping to drive continued growth in imports, US exports remain constrained by sluggish global demand and the strong US dollar. Much of the recent weakness in foreign demand stems from a cyclical slowdown in emerging markets, however, so we remain confident that the medium-term outlook for US exports is brighter.

SHORT-TERM SNAPSHOT

HSBC Trade Confidence Score – The Trade Confidence Score in the United States declined modestly to 126 in H2 2015 compared to 127 six months earlier, reflecting a broadly stable view of near-term prospects. The majority of companies surveyed (77%) continue to expect trade volumes to increase in the coming months. Notably, the proportion of respondents expecting changes to government trade regulation to have a ‘very favourable’ impact on trade volumes jumped to 18% in the latest survey from 13% in H1 2015, which likely reflects the recent positive news regarding a preliminary agreement on the Trans-Pacific Partnership.

Trade Confidence Score

On the other hand, the slowdown in expectations of demand growth amongst emerging markets was clearly felt amongst survey respondents, with the share expecting Asian countries to have the best opportunities for international business growth over the next six months falling to 30% from 40% previously. Latin America was also viewed less favourably by respondents, with the share expecting the region to have the best opportunities for growth falling from 21% to 15%. In contrast, the share identifying Europe as having the best near-term opportunities for trade increased to 21% from 13% previously, reflecting the region’s unfolding economic recovery.

With global trade volumes having disappointed recently and concerns mounting over the impact of the slowdown in China and imminent Fed tightening, respondents expressed concern over risks to the outlook. More than 15% of respondents felt that the risk of suppliers not honouring trade agreements over the next 6 months had increased significantly, while 13% of respondents reported that the risk of buyers defaulting on payments had risen substantially.

On a positive note, the survey indicated that credit conditions had eased, with 14% of respondents reporting a significant improvement in their capacity to access trade finance over the next six months.

LONG-TERM OUTLOOK

Economic Outlook – The economic outlook for the US appears positive, as it benefits from solid labour market gains, strengthening domestic demand and a revitalised financial sector. Although the recent weakness of foreign demand and the strength of the US dollar will act as a drag on exports in the near term, the economy remains well positioned to benefit from a faster expansion of global activity over the medium term.

The longer-term outlook also appears positive, as the US benefits from an abundance of cheap domestic energy supplies, a flexible labour force and continued expansion of its working age population in the years to 2030. With high ongoing levels of investment in R&D, the US is expected to retain its competitive advantage in the production of high value-added and research-intensive goods.

Notwithstanding the slowdown in China, global economic growth is projected to be strongest amongst the economies of East and South Asia in the decade to 2030. Two-way trade flows between the US and Asia will therefore grow in importance relative to slower-growing but more established trade ties with industrialised economies. A preliminary agreement on the Trans-Pacific Partnership in October 2015 promises to further accelerate the US “pivot” to Asia, but there remain political obstacles that could yet block the path to ratification by the US congress.

Export Corridors to watch – At the sector level, machinery and transport equipment are set to play the biggest role in driving long-term growth in US merchandise exports, contributing close to 45% of the projected increase in the decade to 2030. This reflects US expertise in high-end manufacturing and continued investment in technological innovation to retain a leading position in a highly competitive international market. As well as a broad range of machinery and equipment, US exporters will also benefit from continued growth in demand for their vehicles and aircraft.

Sector contribution to increase in exports

Another major contributor to growth in US exports will be the chemicals sector, which accounts for 13% of the forecast increase in merchandise exports in the decade to 2030. One of the most dynamic categories in this sector will be pharmaceuticals, as US companies continue to invest heavily in R&D to bring new products to market where they are then well protected by patents (the US patent term is 20 years). US expertise in the healthcare industry also extends to medical and scientific apparatus, which is one of the main sub-components driving the strong contribution to growth from ‘other manufactures’.

Top 5 Hotlist Export Destinations

Rank

2014

2030

1

Canada

Canada

2

Mexico

China

3

China

Mexico

4

Japan

Korea

5

UK

Brazil

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

In 2014, around 19% of US merchandise exports were destined for Canada, making it the single largest US export market. Although Canada’s pace of economic expansion will lag that of fast-growing Asian markets, its proximity and size will enable it to retain its position as the top destination for US exports through to 2030.

The importance of Canada as an export market will be gradually eroded, however, as US exporters increasingly look to faster-growing Asian economies for expansion opportunities. In particular, US exports to China are expected to grow by 9% a year on average in the decade to 2030, so that by the end of this period China will have surpassed Mexico as the second largest market for US exporters (amongst the 25 economies in the HSBC Trade Forecast).

Import Corridors to watch – As an advanced economy with industries integrated into cross-border supply chains, the sector composition of US imports closely mirrors that of exports. We therefore expect industrial machinery to be the most significant driver of merchandise imports, contributing close to 20% of projected growth in the decade to 2030.

Sector contribution to increase in imports

Transport equipment will also be a major driver of imports, in part reflecting projected increases in production from Mexican car assembly plants operated by US firms such as General Motors, who then export finished cars back to the United States. But the US will also import a growing number of vehicles from foreign car manufacturers, which are competing successfully with domestic brands.

Other major contributors to import growth in the decade to 2030 will be consumer goods including household appliances, ICT equipment (such as mobile phones and computers) and clothing and apparel. Such products will continue to be imported from abroad, from countries where they can be produced at a relatively lower cost. The strength in these sectors will mainly reflect robust growth in US disposable incomes and consumer spending.

Top 5 Hotlist Import Origins

Rank

2014

2030

1

China

China

2

Canada

Canada

3

Mexico

Mexico

4

Japan

Japan

5

Germany

India

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

The leading origin of US merchandise imports is currently China, which usurped Canada for this pole position in 2007. We expect China, Canada, Mexico and Japan to remain the top four suppliers of US imports in the decade to 2030 (amongst the 25 economies in the HSBC Trade Forecast), although imports from smaller Asian countries such as Vietnam are expected to grow rapidly (averaging 9% a year over this period). Notably, India is projected to overtake Germany as the fifth most important source of US imports by 2030.

DRIVERS OF RECOVERY

  • Although the near-term outlook for US exports is clouded by the weakness of foreign demand, we expect growth in the value of merchandise exports to accelerate towards 6% a year by 2019/20 as the external environment gradually improves.
  • With relative unit labour costs at their lowest level in 30 years and an abundance of cheap energy now available due to hydraulic fracturing, US manufacturing production appears poised to take advantage of the expected recovery in foreign demand. And although the US dollar will remain strong as the Federal Reserve normalises monetary policy over the next 2-3 years, a subsequent gradual weakening is expected as monetary policies are re-aligned globally, providing a further boost to the export recovery.
  • We expect mineral fuels to lead the export recovery, with growth of 8% a year on average in 2016-20. This reflects the expected upturn in demand as the global economic recovery unfolds, a firming of energy prices from recent lows, as well as the relaxation of laws governing the export of oil products. The US is now one of the world's largest exporters of refined oil products such as gasoline and diesel, due to the increase in domestic drilling and hydraulic fracturing, but there is a ban on most exports of crude oil. The Department of Commerce has recently expanded opportunities to export certain forms of oil, however, including lightly processed ‘condensate’, which is already helping to generate strong growth in exports of these products.
  • Another leading sector in the projected export recovery will be chemicals, with growth expected to average 7% a year as the industry benefits from enhanced feedstock competitiveness. The development of shale gas has moved the US to being one of the lowest-cost producers globally of petrochemicals and resin, which will support strong export growth in these categories as demand recovers and new investments come online.
  • Other categories where export growth is expected to strengthen significantly over the next few years include machinery and ‘other manufactures’ - a broad category that includes cyclical sectors such as metals, but also scientific instruments. These sectors will benefit from an eventual recovery in foreign investment spending, which has been a major drag on global growth recently.

Exports by sector

About the HSBC Trade Forecast – Modelled by Oxford Economics

Oxford Economics has tailored a unique service for HSBC which forecasts bilateral trade in goods, based on HSBC’s own analysis and forecasts of the world economy. A top-down approach is employed, with Oxford Economics’ suite of models used to ensure consistency between HSBC’s forecasts for economic growth and exchange rates in key countries and the more granular projections for bilateral trade flows presented here.

Oxford Economics employs a global modelling framework, with headline bilateral trade forecasts constructed as a function of final demand in the destination market and the exporter’s competitiveness (as measured by relative unit labour costs). Exports, imports and trade balances are identified, with both historical estimates and forecasts for the periods 2015-20 and 2021-30.

These headline bilateral trade forecasts are also disaggregated by sector, using Oxford Economics’ Industry forecasts to inform future production trends. Sectors are classified according to the UN’s Standard International Trade Classifications (SITC) system at the two-digit level and grouped into 30 sector headings.

Oxford Economics produces a global report for HSBC, as well as country specific reports on the following 21 countries: Hong Kong, China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam, Bangladesh, Canada, USA, Mexico, Argentina, UK, France, Germany, Poland, Ireland, UAE, Saudi Arabia, and Egypt. The analysis also includes trade with Japan and Korea for a total sample of 25 key trading nations.

All trade flows data are reported in nominal US-dollar value terms (using market exchange rates) unless otherwise specified. This means that fluctuations in a country’s terms-of-trade due to relative price and exchange rate effects are reflected in the data.

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