Treasury Today Country Profiles in association with Citi

Building bridges

Rainbow lights reflecting in the water off of bridge

While protectionist sentiment continues to shape the economic policies of some western markets, initiatives currently gaining momentum in Asia could lead to the development of new trade corridors and opportunities, both within the region and with trading partners further afield.

In President Trump’s inaugural speech, he declared, “From this day forward, a new vision will govern our land. From this day forward, it’s going to be – only – America First. America First.”

The phrase ‘America First’ has a long history: Woodrow Wilson used the same words during the 1916 presidential election, while the America First Committee was set up in the 1940s to oppose US involvement in World War II. More recently, evidence of the protectionist sentiment evoked by this phrase has not been hard to find. In January 2017, Trump withdrew from the Trans-Pacific Partnership (TPP), a free trade agreement which was also to include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Likewise, Trump’s administration is currently renegotiating the North American Free Trade Agreement (NAFTA), a pact being drawn up by the US, Canada and Mexico.

These developments have considerable implications for world trade. Natalie Blyth, Global Head of Trade and Receivables Finance at HSBC, says that trade “is more contentious now than it has been for decades”, noting that from the US’ decision to pull out of the TPP to negotiations over Britain’s future relationship with the EU, “trade is at the heart of public discourse and it’s proving divisive”. Meanwhile, the pattern of trade growth has shifted over the last few years. “Before the global economic crisis trade consistently grew faster than GDP. Since 2009, we have seen a dislocation of trade, as values collapse compared to volumes, and trade growing below the rate of GDP,” notes Blyth.

Indeed, since 2009 the US has passed 1,297 economic or trade measures deemed ‘harmful’ to global trade, according to research published by Gowling WLG – compared to 206 measures deemed to be liberalising. The survey also noted that 5,657 measures have been introduced by the EU which can be seen as actively restrictive for trade. Overall, the report noted that the number of trade measures considered to be harmful rose by over 6,000 between 2009 and 2015, whereas the number of trade measures considered liberalising rose by over 2,500.

The rise of protectionism

The roots of the current wave of protectionist sentiment can be traced back a number of years, as Damian Glendinning, Treasurer at Lenovo, explains. “The past 60 years have seen a significant increase in global trade, as emerging countries, especially in Asia, have undergone rapid economic development,” says Glendinning. “In many cases, this consisted in providing cheap labour for products assembled in the emerging market, and then exported to developed countries for consumption. Inevitably, this has led to job losses and an element of ‘hollowing out’ in the developed markets.”

Glendinning notes that until now, this process has brought relatively little friction: “The mature market economies have focused on higher value-added manufacturing and services, while global supply chains have become the norm in many industries.”

More recently, however, Glendinning explains that political events in several mature economies have started to call this process into question, with populist movements either being elected, or becoming a major political force. “The main promise is usually to take back control, and it often involves promoting the home economy by introducing protectionist barriers,” he says. “The promise is usually to bring back jobs which have been ‘stolen’ by the emerging market countries, who are accused of not ‘playing fair’ by maintaining barriers to entry to their own domestic markets.”

Glendinning says it should come as no surprise that this has happened: “It would have been truly exceptional if such a major shift in manufacturing presence and wealth distribution had happened without any tension or resistance at all.” But the key question is how far this trend will go, and whether protectionists will be successful in reversing the movement of economic activity towards emerging markets.

“In the long run, I suspect most people will agree that protectionism is unlikely to work,” comments Glendinning. “It tends to lock in uncompetitive structures and practices, and puts a stop to further innovation and development, meaning the protectionist countries simply fall further behind. Today, several emerging market economies – China and India in particular – have reached the point where the size of their domestic economies and financial reserves mean that countries initiating a trade war with them are likely to lose more than they will gain.”

That doesn’t mean that there will not be efforts to bring in protectionism by some countries, notes Glendinning – “particularly those where fractious domestic politics can result in impulsive actions”. He also says that retaliation against protectionist moves by some countries could lead to potential trade wars, which could be ‘very disruptive’ to today’s highly integrated global economy. “At the moment, it is difficult to assess the likelihood that this will happen – most people in global businesses hope it does not,” he observes. “It is very difficult to stop progress – but progress rarely happens in a smooth, straight line.”

Impact on Asia

As Blyth points out, trade is essential for prosperity, stability and security. “According to the OECD, manufacturing workers in countries that are relatively open to trade earn between three and nine times more than their peers in closed economies,” she comments. And Asia has seen the benefits of greater collaboration: “Half a century ago Southeast Asia was tearing itself apart, but this year the ASEAN bloc celebrates its 50th anniversary. Through cooperation and commerce, the member states have collectively built the world’s seventh-biggest economy.”

“It would be hard for me to think of any region that’s benefited more from free trade than Asia,” comments Atul Jain, Head of Trade Finance – Asia Pacific at Deutsche Bank. “The reality is that most nations in the region – with perhaps the exception of India – have really defined their strategies as export-led over the last few decades.” Jain points out that almost 40% of global trade cuts through the region, with intra-Asia trade constituting about a third of that volume.

Jain says that rhetoric around protectionism “certainly has people worried”, noting that it is becoming very much a western world phenomenon – “which is interesting, because over the last few years, these are the markets that have been promoting an open trade environment and really championing the WTO”.

Resurgence of the TPP

Protectionist sentiment has certainly made its mark in the last year – and the withdrawal of the US from the TPP was particularly significant. But while the success of the TPP will obviously be tempered by the withdrawal of the US, it may not all be bad news. “There was a concern that this would have a significant impact on overall trade business – that the agreement would be dead, and every country would have to go through bilateral agreements with the others,” explains Aziz Parvez, Managing Director, Head of Asia Pacific Trade & Supply Chain Finance at Bank of America Merrill Lynch. “But that doesn’t seem to be the case. All of the other countries have come together, under the new name of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).”

Parvez says that while the value of the agreement would have been even greater if the US had been included, it is still meaningful. “The markets we’re talking about include 500m people, with a combined GDP of US$10trn,” he notes. “The agreement could potentially allow companies to move goods, services and investment between member markets seamlessly. As well as benefiting large companies, this may also benefit smaller companies which may have found it harder to navigate all the different trade rules in the past.”

Likewise, the agreement may open up new markets for some countries. “For example, Singapore could gain access to markets like Canada and Mexico, when Singapore hasn’t had any such trade agreement before,” comments Parvez.

One Belt, One Road

Alongside the nationalistic sentiment arising in some western markets, a number of developments in Asia are adding some different dynamics to the evolving trade landscape. Jain says that with China taking a stronger role, the balance of power in the region is shifting – and that this is giving rise to the idea of an Indo-Pacific trading bloc, including the United States, India, Japan and Australia. He points out that this would allow the relevant countries to establish a counterweight to China’s growing strategic relevance.

Meanwhile, China’s ambitious ‘One Belt, One Road’ initiative – also known as the Belt and Road initiative – is also attracting considerable attention. One Belt, One Road is a development strategy which aims to create new economic corridors spanning more than 60 countries across Asia, Europe, the Middle East and Africa, and covering 60% of the world’s population. The ‘belt’ is a reference to the Silk Road Economic Belt, a land-based network connecting China to Europe. The ‘road’ refers to a modern maritime Silk Road connecting China to east Africa and the Mediterranean.

First announced by President Xi in September 2013, the initiative could see China injecting as much as US$150bn per year into a wide range of infrastructure projects connecting China to other countries. Specific projects include the 850km long Bangkok to Nong Khai railway in Thailand, the East Coast Rail Line in Malaysia and Gwadar port in Pakistan.

“Both the TPP and One Belt, One Road could seriously help drive trade across the globe, opening up a lot of opportunities in the countries that are participating.”

Aziz Parvez, Managing Director, Head of Asia Pacific Trade & Supply Chain Finance, Bank of America Merrill Lynch

“This plays to the interests of a lot of parties, and not China alone,” says Jain. “If you look at China building roads into Kazakhstan, the benefit for China is clear – they increase their influence into Kazakhstan, they improve their access and ability to source oil and other commodities. But at the same time, the infrastructure that gets left behind from that is obviously a massive benefit to the local economy and the movement of goods.”

Jain adds that another aspect of this initiative is that many of the capital goods being used to build the new infrastructure are coming from developed markets such as Germany, which are consequently benefiting from job creation. “What’s very clear is that China, the markets impacted and the developed markets supplying equipment into these corridors, all win,” he comments. “And that’s fairly rare.”

It’s also important to note that this initiative is not happening in isolation. Parvez says that in combination, developments like One Belt, One Road and the CPTPP bode well for the future of global trade. “For me, both of these initiatives are a reason for optimism,” he says. “I believe they will help drive trade growth across the globe, opening up a lot of opportunities for the participating countries.” Parvez notes that the initiative is already proving relevant to the commodity space – particularly non-agricultural commodities, where these are being used to build infrastructure.

What are businesses doing?

Jain points out that the last few years have seen a number of pressures affecting trade, from the bursting of the commodities bubble to the stresses arising from AML and KYC requirements. These factors have led to a subdued environment for most economies in terms of their capex investment – and as a result, there is little evidence of companies taking a knee-jerk reaction to current developments.

“There’s definitely a wait and watch approach, but also a very constructive, positive attitude, and a willingness to get into the spaces where they see the opportunity today,” Jain explains. “So rather than viewing these developments as something to be cautious of, I see many clients looking at One Belt, One Road and thinking about how they can capture part of that value chain and participate in those corridors.” He adds that many clients are asking about these opportunities, “even in the less obvious sectors that don’t immediately make you think of infrastructure”.

Jain says that one of the messages the bank is giving clients is to start looking at ASEAN as a destination for goods and services, rather than just a source. “Over the last few years, there’s been a big focus on how to take advantage of the young population, urbanisation and low labour costs in order to get more production out of ASEAN,” he explains. “But with rising consumerism and the growing middle class, the question is how companies can start to play on that.”

That said, Jain points out that intra-ASEAN trade is still challenging: many clients have to deal with over 30 documents in order to trade within the ASEAN corridor. As a result, other developments may be needed in order to facilitate trade, from the removal of tariff barriers to the free flow of labour.

Meanwhile, Jain says another message for corporates is to centralise their treasuries. “It’s difficult to predict when significant currency volatility is going to take place, and it’s difficult to predict how and when capital controls will materialise. So having the flexibility to really think through that and be dynamic about how they manage treasury is critically important for our clients.”

Conclusion

While the world trade arena is fraught with challenges, there are plenty of positive developments which may bring opportunities for companies in the coming years. “For me, there are considerable grounds for optimism,” concludes Parvez. “Both the TPP and One Belt, One Road could seriously help drive trade across the globe, opening up a lot of opportunities in the countries that are participating. This could lead to new trade flows, auguring well for the world economy in general.”

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