Hello! hello! welcome everyone to this month's webinar topic. My name is Nick and I am with ONYX. I'm a director with Onyx and I'll be your host and moderating questions and other things throughout the event today. So as we come to the end of 2024, it's time to look ahead to next year, and we have a lot to say today. Today's session is called the 2025 Global Outlook. We'll be analyzing the essential areas to watch for supply chain professionals in the next year, with a backdrop of cost pressures, geopolitical uncertainty, and a number of new policy areas that governments are expected to explore. Businesses like you need to prepare for a number of changes in global trade.
Our team will zoom in on several geographies, including the U.S., Europe, China, Mexico, Vietnam, and India, and elsewhere, and laying out the policy factors and trade tactics to watch for next year. We've also seen a lot of geopolitical shocks to global trade over the last few years, some of which still persist. We will review the state of things and impacts to consider going forward into next year and beyond. A lot to cover. Before we begin, just a few administrative notes about the session. We have a full hour, 60 minutes of content here. You're muted, and no audio for you as an attendee. If you have questions, please submit those in the Q&A box. You'll see that at the bottom of the screen here today. We'll be watching for questions throughout. If we can answer those in writing, we'll do that.
Some we may take and serve up to our speakers out loud. So either way, just feel free to get those questions in. Also, if you want to get a copy of the presentation today as well as a recording, we are recording this session. You will see a survey within a couple of hours after the event, and by filling out that survey, you'll get a link to a page where you can download the presentation deck as well as get a link to the recording, and the survey gives us great feedback too for how you view this session and other topics you're interested in seeing going forward. All right. If you're interested in this material that we're offering today or in general from ONYX, there's a couple of ways to keep up with our information online. You can follow us on LinkedIn.
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We are a division of Expeditors. We help companies build adaptable and resilient supply chains to withstand the ongoing risks and disruptions and build just overall resilience in their global footprint. We offer advisory engagements, which are long-term partnerships where we're with you, helping you answer questions and supporting your strategic needs, and also do more one-off projects where there are very targeted, scoped-out questions to explore. We deliver that in a number of ways through presentations, analytical reports, and other very customized deliverables. That's a bit about us at a high level. More specifically, we offer lots of different service lines that tend to cater to different departments and personas. You can see those there on this wheel graphic on the outer ring.
Whether you're in trade and compliance, strategy, planning, and risk management, sourcing and procurement, or transportation, logistics, and distribution, we have a lot of services that we're offering to companies today. Some of these are monitoring-type services, such as our trade policy forecasting and regulatory monitoring. Also, we do logistics shocks monitoring, geopolitical shock monitoring. There's ongoing service that we provide, and then we could do individual projects, things like deep dives, country analysis, risk analysis to supplement those ongoing advisory engagements, so let us know if there's anything of interest. Feel free to reach out to me or anyone on our ONYX team. Okay, so with that, I'd like to introduce our speakers. We have two great speakers today. We have Fernanda Croup, Vice President, Head of ONYX Strategic Insights. Fernanda has more than 20 years of experience in management consulting, geopolitics, and macroeconomic analysis.
She has lived and worked in four continents, serving clients in technology, heavy industries, basic metals, financial services, retail, and consumer goods. Adam Karson also will be speaking today, Chief Economist for ONYX. He has more than 20 years of experience 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, and he is responsible for ONYX's macroeconomic analysis and forecasting, so Adam will kick us off today, and then he'll pass it over to Fernanda after that.
All right, Adam. All right. Thanks, Nick. Thanks, everyone, for joining us today. Really appreciate you taking the time to be with us. I'll echo what Nick said. If you have any questions, please post them in the chat.
We'll hold off towards the end to address those, but we'll try to get to as many as possible, but let's jump into the content. We have a lot to cover. 2025 is going to be quite a year, and as we've thought about how to kind of address the outlook for 2025, there's obviously a ton of uncertainty around policy. I mean, if you tuned into prior webinars, we dubbed 2024 the year of elections, and 2025 is really the year of policy, so we're going to be living with these newly elected leaders and the policies that they bring, but they also bring a lot of uncertainty. So we've tried to organize this outlook into three sections to try to reduce that uncertainty and limit the number of variables that you all need to think about as we head into next year.
But when we think about these three broad sections of macro, global trade, and global geopolitics, there are a couple of key themes that kind of jump out. First, as I mentioned already, is the level of uncertainty and the wide range of potential outcomes that could occur. The second is when you kind of look across the board, most of these themes are pointing towards higher structural costs across the supply chain. So on the macro side, we are at a global level kind of returning to more normal growth, but the inflation is trending down slowly in a lot of markets. Price levels remain high. A lot of policy threats out there that could push costs higher. Same with global trade.
Global trade is probably at the epicenter of our 2025 outlook with a potential looming trade war and the costs that tariffs and non-tariff barriers can bring to the market. And then on global geopolitics, there are a number of hotspots that are well covered and well known, but then kind of emerging hotspots that could also put pressure on supply chains from raw commodities all the way through to intermediate goods. So that's kind of it in a nutshell. We're thinking about these various uncertainties and the pressures that they put on supply chains. But let's jump into some of the specifics on the macro side and start at a high level, just kind of how we're viewing global growth overall.
Now, when we look at the kind of top-line numbers, the world economy is obviously facing uncertainties and a number of policy levers that could really sway things in either direction. So to get a handle on things, we started with a business-as-usual base case. We asked ourselves, if current policies stay in place, how would the global economy perform? And the answer is it would perform pretty well. Overall, we actually expect global growth to improve slightly from 2024, but there's a bit of a twist. The growth engines are shifting. So we're moving away from the U.S. consumer driving growth so rapidly and away from China-led growth into other regions. So Japan, emerging markets, the E.U.'s improving a little bit off of a low base, albeit. But the drivers of growth are kind of moving away from the U.S. and China.
Now, that doesn't mean the U.S. is going to be weak, but after a very strong 2023 and 2024, we're forecasting growth to be at a more moderate pace, around 2.3%, which is closer to long-term potential. China, on the other hand, is facing a much tougher situation. They're trying to restructure their economy, deleverage the property sector, and fight off various external threats on the policy side and geopolitical side, while trying to maintain exports as a key engine of growth. Now, trying to do any one of those things, it would be challenging, but they're trying to basically juggle three balls at the same time, which is going to prove difficult. They just recently set a 5% growth target for 2025. We are a little bit skeptical of that.
We think it's going to take quite a bit of stimulus, and we are maintaining a 4.5% growth rate target for China next year, kind of indicating directionally that growth is going to continue to be sluggish there. As I mentioned, the EU is showing some signs of improvement and could accelerate to somewhere in the low ones. 1.2% is where we have pinned growth for next year. Now, that's coming off of a weak two very weak years, right? And at the same time, we see growth improving a little bit, driven mostly by consumer spending. We have some red flags, in particular, Germany's manufacturing sector, which is facing. It's in the midst of a prolonged recession, and we don't see that returning anytime soon.
So that may sound a little bit gloomy, but the bigger picture here really is that global growth is trending back towards 3%, which is around the long-term average. So despite the challenges that some major markets are facing, growth is still on a decent trajectory. Now, if we go to the flip side of the coin, on the next slide, we look at inflation in mostly advanced markets is also trending in a fairly positive direction. The good news is that both inflation and interest rates are starting to normalize, especially in the U.S. and E.U. And we've been saying this for a while now, that we expect inflation to cool down and kind of, at least in the U.S., normalize by the second half of 2025. And we're sticking to that forecast for the time being.
And so U.S. inflation, we think over the course of next year, will average about 2.5%. Europe will dip below 2% given their slower growth. And that plays a role there. But this is positive for two particular reasons. First, it gives real incomes a chance to grow and gain some traction. And that's one of the main reasons why Europe is going to improve a little bit and will sustain growth in the U.S. But it also gives central banks breathing room to normalize rates. So by the end of next year, the Federal Reserve, we think, will drop the Fed funds rate to somewhere around 3.5%. European Central Bank will drop it below 2%. And so both of these markets are going to be much closer to their long-term neutral rates, which we're pinning in the U.S. around 3% for the Fed funds rate.
That translates to mortgage rates in the 5% range, auto loans maybe a little bit higher, around the 6s, corporate debt also in the 6s for investment grade. So we're not returning to the ultra-low pre-COVID interest rate environment. We're in a higher-for-longer environment, for sure. But taking 200 basis points off of the peak of interest rates is going to help open up some of the demand, in particular, for investment and equipment and other capital goods. So some positive story there as well. If we flip from advanced markets to the more sourcing side of the equation, emerging markets and the rest of the world, the good news here is that on average, inflation is also really trending down. There is a little bit of a catch, though. We are seeing renewed cost pressures in several key markets, in particular, Vietnam and Mexico.
And these are two of the hottest destinations for foreign direct investment, which has really driven up demand and is stretching those markets in terms of capacity utilization. So we're seeing on the infrastructure side, I mean, if you're trying to move goods out of Vietnam, as you know, it's challenging. Also, on the labor market side, both Vietnam and Mexico are experiencing pressures there and wage growth that's pushing inflation a little bit higher. So in Vietnam, we're forecasting inflation to exceed 4%, which is significantly higher than its ASEAN neighbors and India, which are averaging around 2%. And then in Mexico, we're also projecting inflation to be 3.5%-4% there, where the rest of Latin America, excluding some of the outliers like Argentina and Venezuela, are going to see inflation around 2.5%.
Now, you may argue, oh, in any given year, one percentage point or one and a half percentage points in inflation differential isn't a huge deal. But if you compound that over several years, and we really see this differential in inflation rates for three, four, five years, that's going to erode cost competitiveness of Vietnam and Mexico over time. So this is something to really pay close attention to if you're sourcing from those markets. If we switch more broadly then to manufacturing costs in general, we're looking at here we compare manufacturing costs relative to the US. So part of the narrative here on global trade that Fernanda will talk about is rering and whether or not that makes economic sense.
But when we compare foreign markets to, in this case, the U.S. market as a place to manufacture, most sourcing markets are seeing cost decline on a relative basis. So countries in that red territory are seeing relative costs rise in 2025, and countries in that blue segment are seeing relative cost decline in 2025. And this is a combination of, yeah, producer price inflation in a lot of markets is increasing, but unit wage costs in the U.S. are rising faster, and the strong dollar is going to offset a lot of the cost pressures that we're seeing in other markets. So from a sourcing perspective, the inflation story is looking pretty decent for a lot of emerging markets. On the next slide, we look at another component and another important component of costs, and that is what's happening in shipping markets.
Now, we're not forecasting rates here, but we do look at capacity utilization in both air and ocean markets, and a bit of kind of two different stories here, if you will. On the air market side, we're seeing solid demand growth, in particular, driven by e-commerce, so that's lifting the whole tide, but also causing the seasonality and big trends in Q4. That could be offset by some policy changes, in particular, the U.S. de minimis rule or E.U. regulation changes on how they treat Chinese e-commerce platforms, but on net, we think that demand pressure will sustain. At the same time, where we're seeing on the supply side some constraints on new capacity as air carriers are kind of promoting air passenger over cargo and leading to some constraints there, so overall, the air market remains tight in 2025. On the ocean side, it's a little less clear.
Demand is growing, but slowly, and capacity is scheduled to grow faster than demand. So that would lead you to believe that there actually be a loosening in the ocean markets. And I think we've seen some rates come down on particular lanes over the past few weeks. But as we look across the average of next year, there's uncertainty in how the carriers are going to manage that excess capacity coming onto the market. They've proven more adept at managing that excess capacity. And so we think there's reason to believe the market outlook for ocean is a little more neutral on the capacity side. Now, what I'll leave you with is we started with a lot of talking about uncertainty, and then we focused on the base case, sort of business as usual.
Now, when we think about uncertainty and how to incorporate that into our outlook, it's really the best approach here is to use scenarios. And there are a million scenarios that you could run. And here we're focusing on sort of one bookend, if you will. So sort of a more extreme example, if there were essentially a trade war or trade policies implemented as they were stated on the U.S. election campaign trail, which were pretty aggressive, right? We're talking about 60% tariffs on U.S. imports from China, 10% tariffs on the rest of the world, and a fairly commensurate level of retaliation by those countries on the U.S. This does not include other economic policies that have been discussed around tax policy, immigration policy, and some other key ones. So focusing mostly on trade here.
but as you can see, if you were to kind of go down this road of a trade war, it would be pretty negative for the overall economy. The U.S. economy would be a full percentage point smaller by the end of President Trump's next term. Consumer spending would take a very large hit. At the same time, inflation would be nearly a full percentage point higher. So you'd almost end up in a stagflation type of scenario where with low growth, high inflation, that puts the Federal Reserve in a really tough bind and how to balance those different tensions and figure out monetary policy over the course of that cycle. Global trade would also take a pretty big hit with U.S. imports and exports falling quite dramatically. China as well would see a big decline in its trade.
Now, it wouldn't necessarily change the U.S. trade balance, but it would shift trade around to other countries as companies look for the best, most economical solution to this problem. So this is just one scenario, but we just wanted to kind of give a sense of the order of magnitude of the challenge and level of uncertainty as we think about the policies and the geopolitical scenarios that Fernanda is going to go into more detail on. So I don't want to end on necessarily too down of a note, but that's a realistic scenario that we need to prepare for. But keep those numbers in mind as Fernanda walks us through the complexities of global trade and geopolitical shocks. So with that, thank you, and I'll hand off to Fernanda. Thanks, Adam.
So we've seen that the global economy, left alone, is coming out of this almost very special moment, very challenging moment with the pandemic and supply and demand shocks. Now, in global trade, it's really the sort of wild card that can actually change this narrative in one way or another. So let's dive into this. So is global trade going to change this narrative? What is our best guess at the moment? Now, if we think about global trade and sort of the key economies involved, right, and this is sort of a group of economies that has been intimately involved in the question of de-risking, the United States, the actual position of the Trump administration is still unclear what will happen on day one or the first month or the first 100 days.
What we're seeing already, and I'll get into this in a second, is a bit of nuance that President-elect Trump has added to the mix. He started with a very clear, very straightforward message during the campaign, 60% on China, 10%-20% on everybody else. Now he's introducing a little bit more nuance. He said 25% on Mexico and Canada because of the border situation until the border situation is solved in one way or another. That points to the direction of a certain differentiation of approaches, especially when it comes to economies beyond China. This idea of introducing the opportunity for a negotiated approach. Mexico has already indicated that it's willing to negotiate and allay some U.S. fears because it is going all in into nearshoring.
What it does, though, is put it a little bit in a collision course with Chinese imports, and we'll get to that in a second. The EU prioritizes the relationship with the United States in a small measure because of the importance of the U.S. economy to its own exports, but also the Ukraine situation, but it has indicated that it is willing to retaliate much more forcefully this time than before. China is retaliating already and seeking diversification, so continuing on the same path that it has for the past eight years or so. Southeast Asia looks a lot more poised to continue to balance between the United States and China, but also the potential for a negotiated approach with the United States.
And India that seems to continue in the course of manufacturing as a priority, but still unclear whether that would mean a pivot towards becoming an export base. A lot of it is still India for India. So a lot of staying the course for a number of these economies, but at the same time, this wild card from the Trump administration and the potential for retaliation in much more forceful ways than before. So let me skip this for a second. When we think about the United States and what President-elect Trump could do on day one or within a short period of time, there are a number of policy tools that he could use. Some of them entail immediate executive action. Some require investigations. Some go through Congress. But they vary in speed and the opportunity for public oversight.
So think about them as tools that President-elect Trump would have. And here, it's important for him to do two things, right? The first is to stay true to his campaign promises around immigration and inflation and also any pressure from stock markets. Here, this idea that he wouldn't want to be pegged as somebody that stokes inflation. He would not want to be pegged as somebody that causes harm to the U.S. economy. But at the same time, he needs to act on immigration, and he needs to be tough on China and everybody else in sort of balancing the scales a little bit. So he has to find a measured approach.
If I were to speculate at this point, and we don't have a lot of data points yet, we don't have a lot of clarity. A lot of this will happen in the next months, and it's a hallmark of the first Trump administration and will continue to be so. If I were to speculate here, a nuanced approach that's still forceful, but is not sweeping and on day one is probably the most likely. We'll see some things in the first few days, but not an entire 60% on China and 10%-20% on everybody else. Hard to say at this point, but that's where the sort of political signals coming from the President-elect Trump and his advisors are pointing into. Now, there are many possible tactics as well over time.
You could have maximum pressure on China, 10% to 20% to 60% depending on the category. For everybody else, a slow ramp-up. At the same time, the White House will need to contend with a number of milestones on budget confirmations, tax reform, and the USMCA. So a lot to chew here and also for Congress. So there's a range of potential tactics, which leads me to look at these as wild cards, right? So what are the sort of points of attention that we should be paying attention to over time and in the next few weeks, especially? What is the intensity and timeliness of retaliation? How are especially China and the EU calibrating their responses? What is the timing of tariff increases? Is it immediate, or is it over time? What is the nature of those tariff increases?
Is it temporary or permanent or conditional on behavior? Taking Mexico and Canada as examples, right, so temporary tariffs, 25% until the border situation is fixed in one way or another. What is the breadth of those tariff increases in terms of categories and countries? Are we going to differentiate between different countries in Southeast Asia? Are we going to differentiate between Europe and Southeast Asia, Mexico and Canada, and let us also add that we're also looking at a mix of industrial policy proposals. The whole point is to bring jobs back to the United States, right, as stated on the campaign trail. Here, we're looking at tax incentives, but also certain rollbacks, especially in an environment of signature Biden-era initiatives, but the intensity of the pushback in keeping those. For example, some in the auto industry have already said that EVs are our future here.
We don't want a rollback of incentives for EV production. A number of questions there. Again, we believe that a more measured approach over time seems more likely today given the signals from President-elect Trump. Now, January 20th will be an important day, of course. A number of things can happen. We don't have a lot of data points, but if that's the case, then that base case for the world economy that Adam was talking about looks much more likely. That the marginal impact of these tariffs over time, if calibrated and leading to a negotiated approach, will have a much more measured impact on the U.S. economy, especially inflation, and then on the global economy as a whole. Now, the U.S. is seeking to maximize pressure, particularly on Mexico. Here, the border situation is incredibly important, but also trade diversion from China.
And sort of a question that's lingering there but hasn't been directly addressed in any sort of explicit way is the question of Chinese investments in Mexico. So when we come to the USMCA, throughout 2025 into 2026, we will see this confirmation process, right? And here you see the key positions and goals of the U.S., Canada, and Mexico, some of them long-standing around Canadian dairy, around labor standards in Mexico. But this new question of trade diversion from China is also likely to feature prominently. Now, the border situation, the pressure will begin even before the USMCA confirmation process begins in earnest. And so we see a lot of room for negotiation and convergence, particularly between the United States and Mexico. Because as much as the United States is concerned about Chinese trade diversion, Mexico is also keen on moving upstream in manufacturing.
This means replacing Chinese imports with domestic production. Now, for Mexico, as I said, this going all in and upstream on nearshoring is extremely important. If you're producing in Mexico and you have Chinese suppliers, machinery, equipment are real points of attention here. The auto industry is always a point of attention. Now, the reforms and the priorities of the new Mexican or relatively new Mexican administration really do fall into making the best out of this nearshoring moment. They also need to be balanced with the need to or perceived need to develop certain parts of Mexico that don't necessarily coincide with where companies are investing. When we see industrial corridor developments and sort of infrastructure developments, we're not seeing yet specific plans to improve infrastructure where it matters most. It's mostly towards the south.
Now, there is an intention to modernize customs, simplify compliance, and provide for energy transition, which are new. But we're still at a point of sort of statements of intent right now. But that is sort of a starting point, but we do need to see much more in terms of political capital being employed to make sure that these things happen. For the EU, we have a number of scenarios here, right? And they all hinge on whether President Trump will target the EU directly or not. The EU and the United States do share a lot of concerns in the interests in containing China. The EU has been a lot more forceful in the past few years, and also in terms of managing the situation in Ukraine.
Now, the new administration in the United States will have a different take on this, pushing for a negotiation, which for the Europeans also seems to be the logical outcome, but it won't be peace at any cost. A long-lasting peace that means that Russia won't feel encouraged to increase its territorial gains or to continue to pose, in the eyes of folks in Brussels, a security challenge to NATO and to the EU. That's the question here, right? Now, if the EU is targeted, it might as well retaliate much more forcefully than before and look at a tit-for-tat treaty form. It is a possibility in a scenario that wasn't there not four years ago, and balancing against the potential for a flood of imports from China is a critical question.
For China, though, retaliation is explicitly a possible measure against the United States, much more than the first time around. So if I were to say, what are the things that are different between the first Trump administration and now that sort of constrain President-elect Trump a little bit more? The first is that the U.S. consumer now knows what inflation looks like and can connect the dots between price increases and goods coming from China and elsewhere. The second is that China is much more willing to retaliate and much less willing to negotiate. Now, the negotiations are still a possibility, but there was a feeling in Beijing before that, rightly or wrongly, that they were making efforts to negotiate in good faith with the Phase One and Phase Two deals, but that they weren't given a chance and that really this is not about negotiation.
This is about containing China outright. China will be looking at its domestic market much more than it was before. There's a question there whether it will be too little, too late, as Adam was talking about. A lot of encouraging of local production and spending, but a continuing pursuit of strategic emerging industries, a continuing view of the installed manufacturing base as a national security and economic security issue, which also puts China in a collision course not just with the United States and Europe, but with the rest of the world and a lot of the emerging markets that it has been courting so far. So we've seen an uptick in measures from other countries against China and this feeling that China may have overreached a little bit with the excess capacity issue, which was a little bit unprecedented.
It's not just the United States that might alienate some of its allies, but also China. You're looking at a much more fragmented geopolitical landscape here. For Southeast Asia, balancing between the United States and China is and will continue to be a priority. The scope for that balancing will be much more reduced right now. But for now, much like Mexico, they continue to go all into being a de-risking destination. Vietnam, in particular, will be investing a lot more forcefully in improving power generation and distribution and also logistics. A number of these countries are really looking at this as a competitive differentiation and trying to attract investments. But they do depend on China a lot, especially for intermediates. Now, a lot of China represents around 40% of Vietnam's imports or, sorry, Vietnam represents around 40% of regional imports from China.
Now, but also a large share of U.S. trade deficit, and so there are a few questions here as to how best this could be balanced, which point us into the direction of a much more negotiated approach being much more amenable, potentially, especially to Vietnam as a way to deal with pressure from both China and the United States, and as I was saying before, in India, we still have a question mark here because there is definitely a push from the central government to incentivize manufacturing in India, but when we get a lot of questions also from companies, from clients around how to think about India, we don't see a fundamental change here in terms of the stance towards developing India for India.
Whether it becomes a manufacturing base, we haven't seen clear steps there, for example, in simplifying customs, improving sort of how predictive customs processes can be, the variation across ports and airports to the point that exports were 20% of India's GDP in 2018, 21% in 2024, right? India's share of global exports was 2% in 2018, and it is 3% now. So you're not seeing growth like of the external sector, if you will, like you're seeing in Southeast Asia. So a little bit of a question mark still there, even though there are steps being taken to improve logistics infrastructure in particular to offer incentives for production, but they seem very much still India for India. Now, let me pivot a little bit to the geopolitical side here. So with global trade, we're seeing a lot of pressure, right? We're seeing a trade war in the offing.
But we do believe that there's some likelihood of an off-ramp here through a negotiated and more nuanced approach from the United States. Still, that's more speculative than anything, but a plausible scenario. On the geopolitical side, though, we're seeing that the world's most important crises are pointing towards escalation. So we look at Russia-Ukraine, definitely a military tilt towards Russia right now. It's been going for a few months now. Russia is escalating within Ukraine. There's a question whether it spills over into the rest of Europe. We haven't seen concrete signs yet, but Ukraine is taking the fight towards into Russia itself. It just this morning announced that it had successfully assassinated a Russian general in Moscow. Now, is a negotiated approach possible in Russia-Ukraine? It is. Is it going to be a long-lasting peace? That's the big question. President Trump will push for a negotiated approach.
Whether that means a diffusion of these long-standing tensions between Europe and Russia and NATO and Russia. Unlikely. Russia does see a need to create a security buffer zone around itself. It's always been the goal of Russian foreign and security policy that harks back to the Soviet Union days, and it's unlikely to go anywhere. South China Sea and China and Taiwan are two interlinked potential crises, both pointing towards escalation, especially if the U.S. security umbrella falters. There is cause for hope here because already in the first Trump administration, you had a ramp-up of U.S. military presence. But the question is perhaps less 2025, but more into 2026 and 2027 when most military experts expect China's military capabilities left alone to reach sort of a tipping point. So the question is whether, and the critical signpost is whether anybody believes that it can win a war here.
You're seeing a lot of tensions increasing between China, particularly, and the Philippines. A lot of unresolved questions in the South China Sea around the claims of not just China or the Philippines, but also Vietnam in particular, with Malaysia and Indonesia on the side. Now, is a simple accident going to lead to war? Not necessarily. But could it be a major impediment to trade going through the South China Sea? Absolutely. We do see, though, sort of a rapprochement between the Philippines and Vietnam in particular in terms of understanding that China may need to be contained here. There are initiatives to bring ASEAN closer together, which is not China's preference. China has always preferred to negotiate with them separately for obvious reasons, so a number of questions here. We don't think that there will be a war necessarily in 2025, though that's still a scenario.
But we do believe that these tensions will increase significantly throughout 2025 and 2026. And then in the Middle East, lots of questions around Syria. Definitely bad news for Russia and for Iran in the fall of the Assad government in Syria. What does that mean for supply chains? We do believe that a lot of the potential downside is already priced in with the Red Sea and the Suez Canal being blocked for so many months. We do believe that that's sort of the new normal. We don't see a fundamental resolution of the political issues underlying this conflict anytime soon. So we don't expect a reopening of the Suez Canal anytime soon either.
The only wild card here for supply chains, or perhaps the most significant one at a global scale, is if this conflict escalates and leads to a closure of the Strait of Hormuz, through which about 15% of the world's oil supply goes, and that might send oil prices to the $150 level, but that is a big if because nobody wants a war here, least of all Iran. For now, what we're seeing is Israel trying to understand and force Iran to show its hand and also take out critical military assets in Syria. The fall of the Assad regime was good news in some ways, but what comes next is a critical question for Israel, for Lebanon, and for others in the region with strong involvement from Turkey because of the Kurdish situation in the north, so a lot to chew on.
We do believe, though, that on the whole, geopolitical tensions are increasing, so we expect flare-ups to continue, and so these pain points around global supply chains to continue, so a bit of the new normal here. You see how this geopolitical fragmentation on the trade side, these tensions also on the geopolitical side, they sort of converge, right? They are a hallmark of today, and that's why we decided to call this sort of no turning point, right? The choices that are going to be made in 2025 will be critical for the years ahead. Now, so how do we think about beyond 2025 then? The first question is, we're really pushing in terms of global supply chains towards de-risking, but is it really de-risked, right, in light of everything that we've seen?
So if we think about supply chains in the 1990s, a lot more concentrated, of course, in North America and Western Europe. Fast forward to 2023, if you look at China and Southeast Asia, a lot more participation there. This move towards Eastern Europe with the relative positioning of, say, Canada, for example, being diluted in medium and high-tech merchandise exports. So production has definitely moved now from China into Southeast Asia and then from Western Europe into Eastern Europe, a lot of budding participation also in North Africa. But if we overlay all of those geopolitical hotspots that I was talking about, they coincide with where our manufacturing base at a global scale is going. Looking at South China Sea and Taiwan, India and China, Russia, and EU/NATO.
So we're not necessarily de-risking from some kinds of risks, but we're jumping into other kinds of risks or not really de-risking from them, especially when it comes to geopolitical risks. And that means that our supply chains or sort of global supply chains in the next few years will be under continuous strain. And if you take that process, if it continues in the way that it is, it really begs the question as to whether we're really talking about a push towards completely regionalized supply chains and also to some extent reshoring. Now, let me add a couple more variables to this. Global production costs are increasing. We've seen this when Adam was talking about cost inflation in a lot of the countries that are destinations for de-risking.
We all know that the world is going a little bit grayer, and it's not just the U.S., Japan, or Europe. It's across the board, including China, South America, perhaps with the exception of India and Sub-Saharan Africa, if you will. So merchandise trade has sort of stabilized as a percentage of global GDP. But what has increased is the installation of industrial robots. So perhaps we're moving towards a world where reshoring is a necessity and with it increasing automation of manufacturing and supply chains in general. So with that, I thank you for joining us today. Nick, perhaps over to you for any questions that folks might have.
Yeah. Thanks, Fernanda. Yeah, we still have time for questions. I see a few that have come in. For everyone else in the audience, you still have time, so go ahead and submit that while we're talking.
Maybe we'll just start kind of early on. We had a question. I think, Adam, you'd like to answer. It's around the strong dollar and sort of, excuse me, the dynamic with lower interest rates, and kind of does that sort of the balance of the two things sort of equal out or maybe speak to that? Yeah, sure. That's a great question. I mean, I'll caveat this by saying forecasting exchange rates is extremely difficult. There are a lot of moving parts, and not all of the effects are necessarily straightforward. Yeah, I mean, I think implicit in this question is, to be fair, we've already seen a run-up in the dollar, and I want to acknowledge that.
I think as the U.S. thinks about cutting interest rates, all else equal, that would have a downward pressure on the dollar, but keep in mind that a lot of other markets are also cutting rates. With the level of uncertainty right now, flight to safety is potentially an issue, and even if the U.S. is sort of the cause of some of the uncertainty, recent history suggests that capital would still flow into U.S. assets. Then this added pressure from tariffs. Typically what happens when a country's exports are facing tariffs, so for example, if the U.S. puts tariffs on Vietnamese imports, then the Vietnamese dong would all else equal would depreciate. That would, again, point towards a stronger dollar.
So yeah, the dollar's run up and may not have a ton of room to go from here, but I think that there are multiple kind of things suggesting that the dollar could at least maintain its strength, if not appreciate a little bit more next year.
Okay. Thanks, Adam. Just a general question. Just I know we've talked about inflation and growth. How much do you think the U.S. the expected U.S. tariffs, let's just say, will impact the baseline growth projections? Yeah. It's a good question. It really depends on the magnitude. It depends on, well, I think three big variables among others. One is the order of magnitude of the U.S. tariffs. Second, how long those tariffs are in place. And then third, the level of retaliation by other countries.
So we have one scenario in this outlook where U.S. GDP is a full percentage point smaller at the end of four years. And so that gives you at least one stake in the ground of a pretty bad kind of trade war that ramps up over the course of two, three years. It could be worse than that. It could be not as bad. It just really depends on the order of magnitude. Okay. Thanks. We have a question about South America and Chinese port investments and whether we'll see any large changes in that dynamic. So you could kind of take that maybe a few different ways, but any initial thoughts from either of you on that?
Yeah, sure. There is a push to change the geopolitical equation in South America through investments by China.
I mean, it's both securing a market for its exports, but also a classic theme in Chinese foreign policy and economic policy, which is to secure raw materials for its manufacturing base. You're seeing a large investment in Peru, for example. Now, is this enough to change a balancing act that you're likely to see over time in the long run in South America? Not necessarily. You do have a collection of governments that are more amenable to China in some respects. And you do see sort of a level of pragmatism that has always been there in South America. It's not new necessarily. But it does increase the relative weight of Chinese influence in South America, but not necessarily enough to tip the scales in one way or another or create client states or anything like that. Gotcha. Okay. Thank you. A couple more minutes.
We talked about, I think, USMCA a little bit today. Do we have any sort of forecasts or expectations on what we think is going to happen with USMCA? The question is rule changes. So any thoughts on that?
We believe that, so ultimately, the USMCA will be confirmed, right? This is not a process that leads to withdrawal necessarily, right? If the agreement is not confirmed, it doesn't necessarily mean that folks will withdraw. It means that it will be under regular review. Though withdrawal is always I mean, the Trump administration is likely to put every potential option on the table. But we don't believe ultimately that it will lead to that. But we do believe that the issue du jour for next year is rules of origin, right, and how to control that.
Now, part of it is to push for a lot more manufacturing in the United States, but also to control and contain Chinese trade diversion. So yeah, rules of origin are critical here. Auto is the most important sector in this for classic reasons, right? But also because it is so very much identified with U.S. manufacturing. But that doesn't mean that other sectors won't be caught in the crossfire.
Okay. And I think we're just another minute or so. Let me know if there's any questions you want to grab from if you can see those. Or I can ask. There was one other question on commodity prices that I'll just touch on real quick. The question was around if we have deflationary commodity prices, would we get lower inflation? For sure. But I think our view on commodity prices is, I think, pretty mixed.
It depends on which. I'm sorry, my camera's blurry there, but it depends on which market you're talking about. We're relatively bearish on oil prices for next year, but more bullish on natural gas, relatively bullish on copper, and some other metals. But then when you look at metals that are more for building like steel, iron, a little bearish there. So I think it's, to be fair, our view on commodities is pretty mixed. So it kind of depends on what markets you're in to understand whether or not those pressures are going to be deflationary or inflationary. And let me take a question here on given the lower cost of manufacturing in Asia, how feasible is nearshoring and reshoring to Europe or the U.S.? And how long would it take for an organization to implement such a significant change?
That's exactly the million-dollar question, if you will. Is it feasible? Perhaps not without a significant amount of automation. And that was the last point that we were driving towards, right? That if you do have pressure to reshore, either from tariffs or from geopolitical crisis, that means that you're going to need to significantly automate. And as everybody knows here, this takes years, right? And so in the meantime, what you're likely to see is a shock, right? Is an economic shock of the kind that Adam was talking about, right? Where you have to raise prices, right? Because it takes you longer to replenish your inventory because it takes you a lot more it costs you a lot more to produce in certain places. It's already costing a lot more to produce, even if you stay in Southeast Asia or Mexico.
And so there will be. It's the transition towards this sort of more reshored or nearshored or regionalized model through automation that will mean a lot more costly production and logistics for everybody.
Okay. Great. Thank you. Yeah. Big question there. You're right. Million-dollar question. Okay. The only thing, there's a last question about the ocean market with the new alliances, Maersk, HPL. I don't know if we have any strong opinions yet on that, or it's a bit wait and see to see how that plays out. Any initial thoughts?
I think there are the sort of stated benefits of those new alliances around increased efficiency, hopefully some increased reliability and pricing. But I think it remains to be seen. I think there's been interesting comparisons to I think it was 2017, the prior kind of realignment and some volatility around prices pre and post new alignment.
The reshuffling can cause a little bit of uncertainty or, I guess, unpredictability on performance in the short term. But I think it remains to be seen on how realigning carriers, concentration of market share, where do the net benefits kind of fall out of that. I think it remains to be seen. And then final question for 10 seconds. Will BRICS Pay have any significant impact on the dollar? I don't think so. The dollar remains the dominant currency, more than settling more than half of global trade, half of global reserves are in the dollar. There's no viable alternative to that. Some groups may get together and have a little pact to settle some trade outside of the dollar to maybe mitigate some of their geopolitical risk there. But in terms of global dynamics, marginal, if any, impact.
Great. Yeah! So thanks Adam. Thanks Fernanda. We went a few minutes over. Thanks everyone who hung around to hear the answers to those questions. Just final reminder, if you want to get a copy of this presentation deck and also a link to the recording, look for a survey in the next couple of hours, and filling that out, you'll get a link to a page that has access to both of those materials, so thank you, everyone, for attending. Best holiday wishes to all. Thanks, Adam. Thanks, Fernanda, and everyone, have a great rest of your day. Take care. Thanks. Bye.