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April 24, 2023

World Trade Shifts - Flexport Weekly Economic Report

World Trade Shifts - Flexport Weekly Economic Report

phil levy headshot
Phil Levy

Chief Economist, Flexport

April 24, 2023

The EU slowed its imports from extra-EU countries in the year to February 2023. We look at patterns in sourcing over the four years leading up to the most recent data and find strong shifts, but little evidence of near-shoring.

In Focus - EU Where-Shoring

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The European Union’s exports to the rest of the world were up 8.0% from February 2022 to February 2023, while EU imports from the rest of the world were down 2.8% over the same period. The year-over-year import drop was the first since the year to February 2021.

While most EU member states expanded extra-EU exports over the past year, the majority of member states saw extra-EU imports contract. The most dramatic contractions were in smaller economies – Estonia, Finland, and Latvia – but import growth was negative or tepid in Italy, Spain, Germany, and France. Among the largest economies of the EU, only the Netherlands saw an annual increase in imports.

Amidst this tapering in imports from outside the EU, we focus on the shifting origin of these flows. The chart looks at selected countries’ or groups’ share of extra-EU imports (note that for the 27 member states of the EU, roughly 60% of imports come from fellow member states). The numbers are seasonal- and calendar-adjusted. The data end in January 2023, one month earlier than the broader EU trade data.

The chart goes back four years, to the spring of 2019, capturing the lead-up to the pandemic’s onset.

The most striking development was the spike in China’s share–it rose from 17.8% in March 2020 to a peak of 29.7% just two months later.

The subsequent decline in China’s share in extra-EU imports might look like decoupling. There are two important caveats. First, China ends up with a 19.5% share in January 2023, a number that would have been at the top-end of figures in the year-long lead-up to the pandemic. Second, as we consider questions of near-shoring, much of the drop-off in China’s share ends up as an increase in the share of Asia beyond China.

The spike in China’s share seemed to eat into the share of most of the other regions, except for that of the UK, which held fairly steady throughout the pandemic, but dropped from a 10.8% share to a 5.1% share from December 2020 to January 2021, with Brexit implementation. Two years later, at the end of the data period, the UK share was 7.7%, having never fully-recovered from its drop.

The United States saw a fall from 13.7% in March 2020 to 10.7% in May 2020. It bounced back down to 10.7% in April 2021, but by January 2023 had returned to 13.6%.

Finally, measures taken against Russia and shifting energy needs make a clear appearance on the graph. Russia’s share (the dotted line) peaks at 9.5% in February 2022. By January 2023 it had fallen to 3.7%. In contrast, the countries of OPEC (bottom dashed line) collectively accounted for only 3.0% of extra-EU imports in May 2020. By January 2023, OPEC’s share was 7.8%.

It is particularly difficult to tell simple stories about EU trade, given dramatic swings in levels and sourcing, the clear multiplicity of policy causes, and the heterogeneity of member states. But there is little in the data to support assertions of a near-shoring trend.

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Last week we hosted the April State of Trade Webinar discussing the impact of maritime and aviation decarbonization policies, fuels, technologies, market mechanisms, and demand aggregation techniques on global trade dynamics.

Economic Developments

March inflation figures were released for three key advanced economies last week, each showing softening headline inflation but stubborn growth in core prices.

  • Euro area headline inflation fell 1.4 percentage points from February to 6.9% in March, but core inflation continues to tick upward, rising by 0.1 percentage point to 5.7%. Services prices were up to 5.1% from 4.8% the previous month.

  • In the UK headline inflation slowed to 10.1% in March from 10.4% in February, but core inflation, which excludes food, energy, alcohol and tobacco, remained unchanged from the previous month, holding steady at 5.7%. Motor fuel prices were down 5.9%.

  • Core Inflation in Japan held firm at 3.1% in March, above the Bank of Japan’s 2% target. It was the first reading since Ueda Kazuo took over as the central bank’s governor. Headline inflation slowed for the second-straight month after reaching a 41-year high in January.

The composite Purchasing Managers’ Indexes (PMI), a survey-based gauge of activity in the manufacturing and services sectors, all increased to remain above 50 in April in the Euro area, U.S., UK and Japan, indicating ongoing expansions. In the U.S., the manufacturing output component hit an 11-month high and the services activity component a 12-month high; the Euro area overall result was the product of strengthening services activity, which also was at a 12-month high, while the manufacturing PMI was at a 35-month low.

Taiwan’s exports declined year-on-year for the seventh consecutive month in March, coming in down 19.1% to $35.2 billion, although that was an increase of 13.3% month-on-month. Overseas orders placed to Taiwanese firms in March contracted by 29.4%, the largest drop since 2009.

Japan’s export growth slowed to 4.3% year-on-year in March from 6.5% in February. Exports to China were down 7.7%, but were up 9.8% to North America. Car exports were up 21.0% on a unit basis.

China reported GDP growth of 4.5% year-on-year for the first quarter. That would be the strongest quarter since the first quarter of 2022. Construction was up 6.7% and manufacturing by 2.8%.

Political Developments

As uncertainty grows about the approaching U.S. debt ceiling, House Speaker McCarthy announced legislation to increase the ceiling by $1.5 trillion in exchange for spending cuts. Meanwhile, credit default swaps – essentially default insurance instruments, and thus a measure of risk – on U.S. treasuries reached their highest level since 2008.

U.S. Treasury Secretary Yellen noted in remarks last week on the U.S. - China relationship that while national security would remain of “paramount importance,” the U.S. is not seeking to “decouple” from the Chinese economy, saying that a full separation would be “disastrous.”

The EU requested a “peace clause” be included as part of the deal to lift the section 232 tariffs on aluminum and steel imposed during the Trump administration and left in place by the Biden administration. The two sides are negotiating a new global arrangement on steel that aims to remove the tariffs, adhere to WTO law and “align and respect” differing approaches to the green economy as the EU’s planned Carbon Border Adjustment Mechanism begins phased implementation in October.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

About the Author

phil levy headshot
Phil Levy

Chief Economist, Flexport

April 24, 2023

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