We offer different service lines. We have service lines that tailor to different types of departments and personas. We serve people in the trade and compliance realm, strategy and planning, and risk management. Also sourcing and procurement, and also transportation, logistics, and distribution. You can get a sense of the different services we offer. Some of these are monitoring around, say, trade policy or logistic shocks or geopolitical shocks. So those are more ongoing advisory engagements. We also offer individual research projects such as country cost and risk analysis, geographic footprint and risk analysis there. So some different types of services we offer. If you're interested in anything here, please reach out to me or any of our speakers. Okay. Now with that, I am here to introduce our two speakers. We have both Fernanda Kroup and Adam Karson today speaking. Fernanda is Vice President, Head of Onyx Strategic Insights.
She has over 20 years of experience in management consulting, geopolitics, and macroeconomic analysis. She has lived and worked on four continents, serving clients in technology, heavy industries, basic metals, financial services, retail, and consumer goods. Also with us is Adam Karson, Chief Economist for Onyx Strategic Insights. Adam also has more than 20 years of experience, in his case, as an economic advisor to global leaders across a range of industries. He has extensive experience in the U.S., Europe, and Middle East. Adam most recently worked at Chevron as a senior economist before joining Onyx, where he is responsible for the macroeconomic analysis and forecasting. Okay. Now with that, I'd like to hand it over to Adam to get us started with the content.
Thanks, Nick. Appreciate that introduction and welcome everybody. Thanks for joining us today. As Nick mentioned, Fernanda and I are going to give you sort of a tour around the world and our outlook for 2025, covering kind of three major kind of broad topics: the macroeconomic outlook, our view on global trade, and our view on global geopolitics. Now, if you kind of think about these three areas, there is an enormous amount of uncertainty as we look into next year and even beyond. When it comes to growth, we are seeing some signs of acceleration around the world, but that is buffeted by a number of headwinds in some key markets like China and the uncertainties around the impact of tariffs and a potential trade war.
Similarly, with global trade, global trade is sort of in some ways returning to pre-COVID levels, but the potential for trade conflicts between major markets and the rise of protectionism around the world and retaliation can contribute to some wide range of potential outcomes there. And then on the geopolitical front, we're seeing, unfortunately, a number of disruptions in addition to what we saw early in this year. It seems like more and more is kind of coming to the headlines with what we're seeing now in Syria and some other countries. And all of these cases, they all sort of point towards increasing costs, whether it be the cost of production, the cost of shipping, just the cost of doing business.
And so what we want to do today is try to reduce some of that uncertainty, give you a way or a lens through which to look at 2025. Some of it's positive, some of it isn't, but want to try to clarify as much as we can for how we think things are going to unfold. So let's jump into the macroeconomic outlook. And we'll start off with the top line first. Now, we know the world is facing a number of economic uncertainties, which can have a really big impact on growth. So to get a handle on things, we wanted to start with our business-as-usual base case. So we asked ourselves, if current policies stay in place, how would the global economy perform? And the answer we came up with was that it would do pretty well.
Overall, we actually would see global growth improving slightly from this year into 2025. A little bit of a twist is that the growth engines are shifting a bit. We're seeing a modest move away from U.S. and China-led growth and some other regions stepping to the plate. Now, this doesn't mean we think the U.S. economy is going to grow slowly. In fact, even though growth is decelerating, it's still going to be above trend. So coming off of very resilient 2023 and 2024, we expect growth to be around 2.3%, which is closer to its long-term potential, but still pretty strong. China, on the other hand, we think is facing a number of really tough hurdles. In particular, they're trying to restructure their economy, deleverage their property sector, and fight off external threats to exports, which is really their key engine of growth right now.
So with stimulus already baked into the equation, China is slowing, but we think can have a moderate kind of deceleration at this point forward. And then the EU is showing some signs of improvement, but albeit off of a weak base. And Germany's manufacturing sector in particular is facing a prolonged recession, and we don't see that really turning around anytime soon. So that may sound a little bit gloomy, but really the big picture here is a little more positive. Despite these challenges that some key markets are facing, global growth overall is still on an upward trajectory. Now, if we look at the next slide, we can see that the flip side to the growth story is what's happening with inflation and interest rates. And here again, the story is moderately positive. The good news is that inflation and interest rates are both normalizing as we expected.
We've been saying for a while now that we expect U.S. inflation to cool down and really come back to normal in the second half of 2025, and we're sticking to that forecast. U.S. inflation, we think, will average below 2.5% next year. Inflation in Europe will actually average below 2%, but the slower growth there plays a role in their disinflationary story. This is positive for a couple of reasons. First, it gives some time for real income growth to try to gain some ground, particularly in Europe. We think that's part of the story why growth is going to improve a little bit. But it also gives central banks some breathing room to normalize rates.
And that's going to bring down the cost of doing business, the cost of getting loans for automobiles, for houses, etc., so it kind of unlocks some of the pent-up demand that we suspect is in the U.S. housing market in particular. In practical terms, we see the Federal Reserve dropping rates to say around 3.5% by the end of next year, very close to a long-term neutral rate of about 3%. And that means mortgage rates would be somewhere in the fives, auto loans maybe in the sixes, same with corporate debt. So rates are definitely coming down. They're not going to return to the ultra-low pre-COVID rates that we were once accustomed to. But these falling rates will improve the business environment, but we're going to remain in this sort of higher-for-longer interest rate environment for the foreseeable future.
That's kind of the advanced market side of the equation. If we look at what's happening in the rest of the world, I think similarly, inflation rates are coming down across the board, and that means the cost of production, the rising cost of production is sort of easing. Now, there's a little bit of a catch here. We're seeing some renewed cost pressures in some key markets, in particular Vietnam and Mexico, so if we look at those two markets relative to the peers in their region, they've been two of the hottest destinations for foreign direct investment, and as a result, we're seeing capacity tighten up, both in labor markets, in infrastructure, you name it, so the production side of the equation in those markets is adding to cost pressure, and so in Vietnam, we're forecasting inflation to exceed 4%. Its ASEAN neighbors are averaging closer to 2%.
In Mexico, we're projecting inflation to be between 3.5% and 4%, where the rest of Latin America, if you strip out some of the really high inflation markets like Argentina and Venezuela, inflation rates are closer to 2.5%. So a difference of a percentage point or two in the short term might not seem like that big of a deal, but if you kind of extrapolate that trend out a couple of years, which we kind of expect, the compounding of that one to two percentage points difference over time starts to eat away at competitiveness. And so this is very significant because these are the markets that tend to be most popular alternatives when companies are thinking about de-risking China. So it's something to keep a really close eye on as we move forward throughout 2025 and even beyond. Now, that's sort of like the inflation rate.
Now, if we translate that into cost of doing business, we've come up with a cost of manufacturing index on a global scale and then benchmarked every country relative to the U.S. So the U.S. is pinned at 100, and every country's cost of manufacturing is relative to that. On the X-axis, we look at what our cost estimates are for 2024, and on the Y-axis, we look at 2025. So any country in that red territory, we would expect costs relative to the U.S. to be increasing and vice versa for countries that are in the blue territory. Now, interestingly enough, the vast majority of countries fall in that blue territory, meaning the cost of manufacturing relative to the U.S. is declining. So how could that be when we think inflation rates are a little bit higher, expected to be higher in key sourcing markets like Vietnam and Mexico?
When we add up things like producer price inflation, unit wage costs adjusted for productivity, and currency rates, the net result is that the U.S. cost of manufacturing in the U.S. is still rising at a marginally faster rate than most economies. Now, we don't love to pin our forecasts on currency forecasts because it can be quite volatile, but we feel like we're on pretty firm ground expecting the U.S. dollar to maintain its strength. That really kind of underpins a lot of how we view manufacturing costs next year. On the next slide, we look at another really important component of the cost of manufacturing and sourcing decisions around the world in terms of what's happening with shipping markets.
Now, we're not specifically looking at rates here, but when we think about capacity tightness and supply-demand tightness in air and ocean, we have a bit of a tale of two markets, if you will. On the air side, we expect the balance of supply and demand to be pointing in a tightening direction, so breaking this down a little bit, when we think about the demand side of the story, demand for air cargo is really supported by decent fundamentals, meaning solid GDP growth and a commensurate increase in merchandise trade, especially Europe and Asia-China. But really dominating the demand side of the story will continue to be e-commerce growth, and we're still seeing a lot of popularity in the Chinese e-commerce platforms, and we don't think that growth is going anywhere.
That could be counterbalanced a little bit by some policy changes with regards to de minimis rules in the U.S., EU regulations of e-commerce platforms, and those e-commerce shops themselves changing their business strategy to be positioning stock forward stock. But that's not enough to, at least in the short term, to counterbalance the demand growth that we expect. On the supply side, we also see some tightening. There's a bit of a global aircraft shortage right now, and carriers, by our estimation, are really prioritizing passenger capacity expansion over cargo. And then you add into that an indefinite Red Sea closure and even more potential port strikes in the U.S. That's going to lead to some tightness on capacity. So overall, strong demand, tight capacity on the air side suggests that the balance is moving towards an even tighter market in 2025.
Compare that to the ocean market, where there's a little bit of uncertainty around how exactly things are going to play out. On the demand side, we can see container volumes growing at a moderate pace, kind of in step with the global economy, around 2.5%- 3% next year, and a little bit of a downshift from what we saw so far this year in 2024. On the supply side, still some pretty strong growth, 6% addition to capacity next year. Again, down from 2024, but more than what we're seeing on the demand side. So some excess capacity coming onto the market. When we think about the Red Sea on the ocean side, we've basically hit a peak, right? This is already kind of baked into the baseline where it's not adding anything new to capacity constraints.
The real story we think is going to be how the carriers manage this excess capacity coming onto the market. And if they are effectively able to manage that, then the market can kind of move sideways and maintain its current equilibrium. So with that, that's kind of the base case view. Now, when we thought about different scenarios, there are really a million and one scenarios. And Fernanda's going to walk through global trade and global geopolitics and give you a sense of really the wide number of variables that are at play. What we wanted to present here was at least one bookend or how to think about one scenario for how the global economy could play out. In particular, we're focusing on what happens with an escalation of tariffs between the U.S. and the rest of the world.
And we've modeled this as a set of policies as they were stated on the U.S. election campaign trail earlier this year. In particular, 60% tariffs on Chinese imports, 10% tariffs on all other imports, and then a fairly commensurate retaliation by other countries on the U.S. The punchline here is that you can see over the course of a four-year period, the U.S. economy would be 1% smaller than it would be otherwise. The global economy would be about a half a percentage point smaller. And other countries would also feel some pain from this trade war. Consumer spending would be down across all markets in addition to capital investment. And consumer price inflation would be higher in the U.S. by nearly a full percentage point. And then on the bottom charts, you can see the disruption to trade. U.S. exporting 7% less, importing 6% less.
Those may not seem like big numbers, but those are very big shifts in trade over a short period of time. And this doesn't even get into the changes in bilateral trade flows that one would expect in this kind of scenario. Even just during the first Trump administration, with relatively fewer and smaller tariffs, we saw some pretty significant shifting in investment patterns and trade patterns over a course of several years. So we'd expect this scenario to be even more disruptive. So I don't want to end on that down of a note, but this is a realistic scenario that we need to be prepared for in addition to a wide range of other scenarios. And it highlights the potential consequences of these types of policies, at least on the big macroeconomic picture. So keep these numbers in mind as I pass on to Fernanda.
She walks through our views on global trade and geopolitics, but this can kind of help anchor you with some numbers and figures as we think about the range of scenarios going forward. So with that, I'll hand off to Fernanda, and thank you.
Thanks, Adam. So I would love to take you guys into precisely the main story for 2025, which is global trade and global trade policy. And think a little bit about geopolitical shocks as well. And then wrap up with a bit of longer-term thinking. And with this, really trying to think beyond the immediate crises and concerns that we have and what those mean for supply chains over time. Now, on trade policy, I think for good reason, the United States is top of mind for us.
I'll take you through a lot of the proposals that are on the table, what we know, what we don't know yet, which I think is super important also in terms of some signposts. There's so much uncertainty, and there's so much back and forth that we might end up with a mishmash of trade measures depending on the country and depending on the situation itself, with a domestic focus on taxes and a rollback of Biden-era sustainability measures. Now, Mexico is really going all in and upstream, if you will, in nearshoring. While the others are carefully considering a balance between retaliation, and here we see China much closer to it, and cooperation or negotiation with the United States. It will be a balancing act here. It won't be just retaliation or just negotiation.
It will depend on the first move by the administration, how fast, how strong. India, a little bit of a different player here. Still a question whether India is India for India, or will it evolve as an export base, and I'll talk a little bit more about this. Now, in the U.S., if you look at the left-hand side of the slide, we're really sort of summarizing what has been happening so far. We're talking a lot about tariffs. A range of scenarios has been proposed by President-elect Trump. He has talked about tariffs on China in different ways in the campaign trail and after the election. Congress is looking at China's PNTR status, meaning we have an entirely different tariff schedule for China, but it's important not to forget that other measures that are already going on in the current administration are likely to continue, right?
Issues on de minimis, tech exports, entity lists, forced labor. And then for others, the famous 10%-20% on unspecified foreign goods, sometimes tied to specific issues like border and immigration. Now, important not to forget that industrial policy is going to be key in this administration, the upcoming administration, especially tax incentives and certain rollbacks on sustainability that are possible. This is what we've heard so far. Now, there are some wild cards here, and these are really signposts that I would like to keep in mind, right? As we move along closer and closer to January 20th and after that, there are a few uncertainties here, and this is where we need to carefully pay attention to what President-elect Trump is talking about and future officials in his administration. So the intensity and timeliness of retaliation, threatened or actual.
China has already issued an opening salvo on rare earths. The EU has been very vocal about this, leading to pressure for negotiated solutions. The timing of tariff increases: is it immediate or over time? What is the nature of those tariffs? Is it temporary or permanent? Is it conditional or on certain behavior? For example, Mexico, temporary tariffs of 25% to force a change on border issues. Breadth of tariff increases regarding categories and countries and the intensity of push for keeping Biden-era policies, particularly on sustainability and, say, EVs, for example. A number of voices in the auto industry have already come out saying that EVs are a part of the future of the industry, so lots of uncertainty here. Now, one thing to keep in mind when we talk about timeliness is the number of tools available to the administration.
Here we give you just a summary of what they are, how they differ from each other. From IEEPA, which confers broad powers, can be because it's national security related, it can be adopted in a matter of days, even the first day of the administration. There is public oversight, and its legality is untested when applied in a broad sweep on global trade. Now, you have a number of tools there. I won't go through all of them, but it's just to say that what's likely to happen is a combination of them and not just one or more. What's likely to happen is the creation of different levers of pressure on other countries to obtain the desired behavior. With Mexico, as we said, a lot of it is about border and immigration immediately as a priority for the incoming administration.
With the EU, it's trade balance. With China, it used to be trade balances, but now much more about containing China, which is bipartisan and is something that is already a feature of the current administration under President Biden. Now, if we continue through the range of potential scenarios here and major milestones that the incoming administration will need to think about, you can have a range of tactics from maximum pressure on China immediately to a slow ramp-up on other countries and also sort of a balance of protectionist measures under Section 122. Now, this shows you just how complicated it will be, and when we say a mishmash of potential actions, this is what we mean. Now, a lot of it is still up in the air. The next month or so will be critical.
But I would urge you to pay attention to the timing, how President Trump, if anything, will be adding nuance to the clear message during the campaign trail, which is natural. It's a natural thing to do after elections, right? So during an election, you have a very clear message, right? 60% on China, 10%-20% on everybody else. Now you see a gradual nuance emerging. And it's that nuance that we need to analyze. So Mexico, 25% border. EU, auto, for example. So we need to see where those nuances will lie. But also bearing in mind that during this time period, we'll be dealing with a budget, tax reform, border security and deportations, questions, IRA rollback, Ukraine, Russia, Israel, Gaza, a number of competing issues as well. So a lot of issues up in the air.
But again, I would urge you to pay attention to the nuance because it will be a number of different levers being pulled over time. Now, when we think about the USMCA in particular, you see a number of positions and goals here. The process for the USMCA review starts this year, right, with a public comment period. Now, the U.S.'s position is strongly in the reshoring and sort of bringing jobs back field. And so, but at the same time, trying to contain Chinese trade diversion in Mexico, contain Chinese investments in Mexico as a way to reach the U.S. And so a lever for Mexico as well here. And here's where Mexico also sort of converges with the United States. Mexico is interested in going upstream in manufacturing. And that explains a lot of the tariffs that Mexico has imposed on Chinese products, right?
It's not just aligning itself with the United States, its largest trade partner, but also this desire to move upstream in manufacturing and adding a lot of whole chunks of value chains in bringing them to Mexico. So rules of origin will be incredibly important here. The border issues, as we said, although those issues can come earlier than the review period and the classic strengthening labor provisions. Now, does this mean withdrawal if the parties cannot come to an agreement? No. This is a review period, right? And if the agreement is not confirmed, you continue to see reviews. The review period was instituted as an opportunity, particularly for the United States, to review issues or aspects of the agreement that it did not agree with. But it does not mean that it leads to withdrawal necessarily.
Now, for Mexico, as we were saying, going upstream on nearshoring is the absolute priority and the development of an industrial corridor. Now, this is also balanced with a desire to develop relatively underdeveloped regions in Mexico. So it's a little bit of a balancing act here. We haven't seen a lot of evidence that infrastructure will improve. But the government has expressed, under the new president, that it intends to prioritize, including energy transition. Now, looking at the bilateral relationship between Mexico and China, as we said, targeting Chinese imports is one way for Mexico to move upstream and encourage companies to set up shop in Mexico. That does not necessarily exclude Chinese companies. But two industries that seem very vulnerable in particular are machinery and electrical, so really equipment here, and then auto and transportation.
So two industries that feature very prominently in bilateral trade or imports from China into Mexico, and also as part of this push to go upstream. Now, very quickly, for the EU, there's a range of responses that we put here if the EU is targeted. Now, the EU has a bit of a more collaborative approach than China on this. Part of it is because of its alignment with the United States on other issues, especially Ukraine and the need for U.S. support. Now, so there's an incentive to negotiate, but if the intensity of initial U.S. action may lead to retaliation even from the Europeans, which was unthinkable not three years ago. The EU is also particularly aligned with the United States on containing the flood of imports from China and the issue of idle capacity and excess capacity in Chinese manufacturing.
So there's opportunity for alignment, and this goes to that mishmash that I was talking about. It won't be necessary. It doesn't look at this point like it will be likely a clear cut 10%-20% on everybody else, 60% on China. You can see how there are different nuances evolving even for the Europeans and even for the Chinese as well. Now, the Chinese, if what we hear is correct, have been considering what would happen during a Trump administration and how best to retaliate for a long time. Of note have been the exceptions to 301 measures that U.S. industry has requested. We hear that Beijing has taken note of those as points for pressure on the United States. Now, it would have to be a situation where there's room for negotiation for both sides without losing face, which seems a little bit impossible right now.
And so the range of retaliation and the pain become likely to take place rather than a negotiated solution here. Now, we've seen already restricting exports in raw materials that has already happened. Retaliatory tariffs on U.S. imports might happen as well. But the export restriction piece is what we hear most prominently in terms of the most important piece in terms of Chinese reactions to U.S. tariffs. China will also continue to try and stimulate its own economy, which puts it in a collision course with the United States if the emphasis on exports continues. It also puts it in a collision course with other countries that have already initiated action, especially anti-dumping on Chinese imports to protect their own domestic industry. So the sense that Beijing may have burnt bridges even with allies amongst emerging markets is pretty strong at this point.
And so the need for stimulating domestic demand is painfully real. And no wonder that you see the government now turning to domestic consumption and trying to boost domestic consumption however it can. And so we'll see a range of also industrial policy action from Beijing being considered. Now, you hear a lot about the support for overseas expansion. It's not unwelcome by a number of countries, including Mexico, because it means that what used to be a Chinese import is now a domestic production. Now, Vietnam continues to make strides in terms of improving its infrastructure. It is investing in improving logistics and power generation in particular and distribution. Now, the issue for Vietnam is that it is also figuring out prominently in the U.S. trade balance. Now. And it imports a ton from China.
What it means is that it is potentially a target for action by the Trump administration, but at the same time, it can offer a negotiated solution through its bilateral trade agreement with the United States. Now, unclear at this point, President-elect Trump and potential members of the incoming cabinet have not been specific about Vietnam, but Vietnam is one player to watch given its share of the U.S. trade deficit. For India, we do see a number of incentives towards manufacturing continues to be a priority for the Modi government. Lots of investments in logistics infrastructure as well. The big question for us at Onyx is whether India is going to continue in terms of India for India trying to develop a domestic market or whether it will make strides in terms of establishing itself as an export base as well.
Right now, what we see even in historical data is that the external sector, so imports and exports, are kind of the same in terms of as a percentage of GDP. India's share of global exports is a bit the same as well. It has grown from a very low base in the past seven years or six years or so. So a bit of a question there whether India is really India for India or India is here to become an export base. So that's a summary of global trade and global trade policy as it stands today. So a lot to manage. I think really the so what here is that companies will be facing a number of.
And if the nuance and the various sort of bilateral issues evolve in the way that they seem to be, you're going to end up with a mishmash of different actions depending on the country. And that increases compliance risks. And it increases the need for a lot more investment in compliance for companies, especially trade compliance, because you are likely to see different regimes being proposed for different countries in different categories with a temporary nature or permanent nature. So something to observe here is how big a patchwork this will become. Turning to geopolitical shocks, we do see them escalating, right? Russia, Ukraine, South China Sea, China-Taiwan, and Israel-Hamas and the Middle East as a whole are sort of the most prominent geopolitical fault lines today, the most active ones.
We do see an escalation in Russia-Ukraine, the balance of power definitely tilting towards Russia, especially with the incoming Trump administration and the pressure for a negotiated solution. If a negotiated and Ukraine has already offered or indicated that it would be open to a negotiated solution, sort of reading the tea leaves there that its coalition is sort of fraying. Now, if a negotiated solution was achieved today, it would likely involve Eastern Ukraine or the areas under Russian control being either incorporated into Russia or being independent, sort of semi-autonomous regions. Now, that would still create a focal point for instability, much like Crimea in 2014. So you're not likely to see a fundamental resolution of the issues between Russia and Ukraine, and most importantly, between Russia and the European Union.
And this constant battle for influence on the periphery of Russia, if you will, the bordering states, is likely to continue. So you see that in Georgia. You see that in Armenia. You see that in a number of former Soviet states and Russia and Ukraine. And Ukraine, in particular, is no exception to this rule. Moldova, most recently. So a number of questions there in terms of whether this is really a long-term peace and more of a cessation of hostilities. South China Sea seems to be veering towards escalation, particularly between China and the Philippines. These claims, right, that involve not just China and the Philippines, but also Vietnam and other countries in the region, Malaysia, not just against China, but against each other as well, remain fundamentally unresolved, right? With the potential for the U.S. security umbrella faltering or U.S. involvement in the region faltering.
And the more we press into 2026, 2027, if one or more of the parties believes that it can prevail with acceptable economic costs, you're likely to see a definite escalation. It's not necessarily just an accident that leads somewhere, right? But one of the parties needs to believe that it can win this war. We don't necessarily see that for 2025, but 2026 and 2027 become, according to most analysts, experts, sort of closer and closer to that point. South China Sea and China-Taiwan are intimately linked. Control of the South China Sea is essential for military action in Taiwan. And so if one sees escalation in one, likely to see escalation in the other as well, or a higher probability of escalation in the other.
For now, they seem to be firmly in status quo despite the rhetoric and the issues, right, between China and the very public disputes between China and the Philippines. But it is the potential for escalation increases as we go into 2025 and 2026. And then Israel, Hamas, we now see what is happening in Syria. Let me go a little bit into those two and a little bit into detail here. Now, here the key hotspots, if we were to say, you know, where should we be paying attention to? It's definitely the Spratly Islands, which is a region in the South China Sea that's claimed by many. Definitely Philippines and Vietnam. Malaysia, Brunei tend to be, or Brunei tend to be less focal. Indonesia is a semi-to-non-claimant. It does, but it does have interests in the region, particularly one island. And then the United States.
The big question here and the big signpost is, of course, what kind of involvement will the United States have in the region, if that presence will remain consistent or even ramp up in these operations started in the first Trump administration, and whether the defense deal with Manila will stand, and then in the Middle East, we're seeing what's happening in Syria with President Assad fleeing to Moscow, and the big question of who's going to lead Syria. In terms of impacts on global supply chains, I would say, though, that most likely you will see, if anything, a continuation of the issues with the Red Sea as a sort of a new normal. We're not seeing any improvement there, but if escalation happens, it will really impact oil prices, right?
A lot of the impacts on supply chains or the most important impacts are already priced in with the Red Sea. The next sort of domino piece here would be oil, right? As we've said before, the Strait of Hormuz is affected or impacted, right? But here's the thing. Nobody wants a war here. And nobody wants a regionalized war. Iran is being, in many ways, pressed to show its hand. Its coalition is fraying with Syria now a bit off the board here. Hezbollah also battered. That coalition hasn't necessarily disappeared completely, but it has greatly diminished. And so the question of what happens to Syria and observing who effectively leads Syria will be the key question for the future in terms of Iranian involvement and certainly Israeli involvement in the region.
So I just wanted to close with a few thoughts on sort of the long-term, longer-term future for supply chains. We've heard a number of things here, right? Companies are being pushed into different directions and to establish their supply chains as best as they can. They have to manage quite a lot, right? But when we de-risk, is it really de-risked? So if we think about medium and high-tech merchandise exports, right? In 1990, you see these exports firmly anchored into North America and Europe and Japan. Now, and to some extent, South Korea as well. Now, if we move to 2023, you see naturally the emergence of China and Southeast Asia to the detriment of Canada, for example, in terms of their participation, the participation of medium and high-tech in total exports.
A lot of our production, as we know, moved to China and then on to Southeast Asia. But that went into Eastern Europe as well. But if we think about where these geopolitical fault lines that I was talking about, where they're located, we can see how supply chains friendshored to locations where their exposure to geopolitical risk is either the same or even higher. So we're putting a lot of global manufacturing capacity at a level of exposure to geopolitical risks that will invite a lot of thinking in the future, especially as, for example, the situation in South China Sea and Taiwan has a higher likelihood of escalation. Now, what does that mean then for supply chains? So we moved, right? We wanted to de-risk from U.S.-China. We went to Southeast Asia, but really we're just still exposed to a lot of geopolitical risk there.
South Korea, Japan, Eastern Europe. So a lot of potential risk on global supply chains. So what does that mean? It means that in the long term, there will be even more pressure to regionalize or even reshore. And if we add to this equation the fact that costs are rising, as Adam went through right at the beginning of this presentation, and demographics, the world is getting older, right? There are fewer people of working age. Over time, merchandise trade is likely to stabilize. And that's what we're already seeing in terms of merchandise trade as a percentage of global GDP. It has sort of stabilized. It's not growing as it did for so many decades. And so we're going to need to reshore. There seems to be a lot of pressure, and that's where geopolitics and domestic policy and trade policy is going.
It's pushing everybody to reshore, nearshore, and to regionalize trade. Now, but how do you deal with the rising costs, right? If you're going to reshore in the United States, what are you going to do to remain competitive? And it seems that automation is a bit inevitable as well. So if I look at really where the macroeconomics of supply chains are pointing, where the geopolitics of supply chains are pointing, they're pointing towards these pressures for regionalization, right? Let's see how 2025 shapes up. It is a bit of a no turning back here, depending on the choices that are made this year. And this is what we mean by no turning back, because it just increases the pressure on automation and increases the pressure on companies to have sort of multiple and fragmented and sort of just-in-case configurations of their supply chains.
With that, I'm going to turn over to Nick. Thank you for tuning in.
Great. Thanks, Fernanda. We've got one question in the Q&A, maybe sort of on that point of no turning back. The question is, is globalization still the trend, or is it over? Very broad question, but any thoughts from you, Fernanda, or Adam, if you want to jump in?
Yeah, I've heard this question a few times. It's not over. It's been a feature of humanity since the beginning. If we think about globalization as being the movement of people, right, or the movement of capital, right, money, right, in some way, shape, or form, always moving. The breadth of the movement might be more constrained sometimes, right? If you're talking about goods, people, or money, right, it might be more regionalized. It might be less regionalized.
But you're just likely to see different activation of localization and not necessarily the end of it. Adam, any thoughts here?
I agree. I mean, I think you hit the nail on the head. I think, you know, by some measures, you could say globalization's increasing. I mean, the pace at which things move in the financial markets, for example, is always increasing. So we're in an ever-connected world. And I agree that the next iteration of globalization and trade looks like more regional than what we've seen in the past, but not reversing. Yeah.
Adam, let me ask you this. What are the biggest factors that would impact global growth next year? Like how much, for example, how much will the expected U.S. tariffs impact any sort of growth projections pre-tariff?
Yeah. Yeah, there's some pretty big economic uncertainties out there. We touched on a couple here.
You know, the level when it comes to trade policy, the level of U.S. tariffs, the level of retaliation can be just as big of an impact, if not bigger. In addition to the rest of the Trump administration's platform around tax policy, immigration, etc., those are all big movers. In addition to that, you got to look at China and its property sector and the pressure it's under, second largest economy in the world. It matters a lot, and as Fernanda kind of touched on, we're working on a variety of stimulus policies to try to reinvigorate growth. We'll see how that goes. Quite a challenge, and then the geopolitical issues that Fernanda talked about as well. As long as those things remain relatively well contained, we don't anticipate a major impact to growth or inflation.
But just like 2022, if they do spill over into regional or larger events, impacts to oil and other raw materials could cause another hiccup on the global scene.
Awesome. Thank you. So there's some questions coming in now. There's one about e-commerce business increase. Will it be higher next year than this year or slow down? I will say we had a session last month all about e-commerce from Asia. Fernanda or Adam, you're welcome to chime in on this. But I do think our webinar last month, we didn't predict necessarily what would happen, but we did look at a number of policy areas, notably PNTR. Fernanda mentioned that again today, as well as de minimis, some of those examples. But I know that was a big topic for us last month. So I would maybe point you to that. There's a great deck on our website.
But anything else either you want to add on e-commerce, any new updates there?
Nothing much.
I agree, Nick. Policy is the big lever. I think setting policy aside, we're still seeing a lot of demand growth for e-commerce. But what the U.S. does with regards to de minimis will be a big factor.
Okay.
Yeah. You know, I would just add that we're going to be testing whether the price sensitivity of people buying on these websites, how sensitive are they, right? If instead of four, it being $8, right? And instead of receiving your goods in a week, it takes three weeks or something, right? The sense that sort of income is shrinking and that everything is much more expensive, right? And that the idea of shopping like a millionaire will be testing that.
But I would speculate that de minimis alone is okay to depress some of the demand, but not all of it, because the delta between a regularly priced item and goods coming from these websites is so huge that it might actually encourage people. Some people will not be necessarily discouraged.
Okay. I know we're just about at time. There's one question here about will CBP, so U.S. Customs and Border Protection, will it be more restrictive for goods from Mexico to the U.S.? I don't know what that's in comparison to. So sorry, I'm not sure we can answer that one.
Yeah, I think that's one of the wild cards, right? Like how will it be in terms of enforcement, right, of provisions? I'm going to interpret it as how will CBP enforce USMCA provisions, right? Especially, for example, when it comes to auto, let's say, right?
I think that that's one of the critical questions here in one of the major issues coming into the USMCA review period.
Okay. Maybe time for one more. So with potential claims between China and Southeast Asia countries, I'm interpreting, are there any big influences of trade between China and those countries, especially with U.S. involvement? I know you touched on a bit of that, Fernanda. So influences of trade between China and Southeast Asian countries with U.S. involvement. Does that make any sense?
Yeah. I mean, if anything, the irony of this story is that friendshoring to Southeast Asia has actually deepened the trade and supply chain relationships between China and Southeast Asia. It will be a balancing act for ASEAN between not alienating China, not alienating its two main trade partners, China and the United States.
But we're coming to a point where Southeast Asia is going to have to make a choice, and different countries are likely to make different choices here. But, for example, Vietnam tends to have a much more independent type of trade policy. So it might try to really separate China and the U.S. into two separate tracks here. But some period of adjustment will be necessary because China is such a provider or such an important supplier into Southeast Asia at this point.
Okay. Maybe one last one. Any thoughts on where sustainability fits in the economic outlook? Any major influences there? Maybe any things to watch the next year? Anything come to mind there?
I guess the rollback of IRA provisions. That's the most important thing in how states rush to enshrine. For example, California is already doing that, right?
Sort of, as they call it, Trump-proof their sustainability regulations. I don't know that it will be as clear-cut as in the first Trump administration because a number of companies have come to rely on those provisions, particularly when it comes to the entire EV industry. And to the extent that they can impact U.S. jobs, for example, or manufacturing jobs, that puts the Trump administration in a bind. So you might see a range of just cosmetic action or, depending on the political dynamics, it's really uncertain at this point or more meaningful action.
Okay. Okay. We do have more questions, but I might want to call it here. I know we're a little over time. So we can follow up to those questions via email afterward. So thank you both of you for your content today. And thanks to our audience for joining.
We hope to see you again soon.
Thank you.
All right, and look for a survey coming up here shortly. Thanks, everyone.