Following the introduction of trade tariffs in 2018, continuing trade tensions between the US and China have major implications for global trade. What do treasurers need to be aware of in this challenging new environment?
The significance of trade across Asia Pacific cannot be overstated. As Steven Beck, Head of Trade and Supply Chain Finance at Asian Development Bank (ADB) explains, “We’ve seen trade lift millions out of poverty over the past few decades. People forget the critical role trade played, and continues to play, in Asia’s transformation.”
But the last couple of years have brought considerable uncertainty about trading relationships, not least due to escalating trade tensions between the US and China. In 2018, the US imposed hefty trade tariffs on goods from China, with trade worth over US$250bn already affected – and further tariffs have been threatened. China has already retaliated with tariffs to US$110bn of US goods ranging from soya beans to bourbon. While talks between the two nations are ongoing, the situation is far from resolved – and despite the tariffs introduced last year, the trade deficit grew to record levels in 2018.
“Trade tensions over the past 18-24 months have had an impact on client activity,” observes Ajay Sharma, Regional Head of Global Trade and Receivables Finance, Asia Pacific at HSBC. “Many initially thought it was a storm in a teacup, but they now realise it’s something far more structural. Hong Kong and Singapore, the bellwethers of Asian trade, have reported a fall in trade figures, which in turn has impacted trade finance markets.”
Shifting supply chains
One major consideration is the impact of protectionist measures on supply chains. “Given the interconnectivity of global supply chains, assessing the impact of protectionism is even more complicated than in the past,” comments Sonam Donkar, Group CFO – Commercial Organisation at Vedanta Group. “This puts at risk the real economic gains that have come through closer trade and investment links evolved over decades of partnering.”
Agatha Lee, Head of Global Trade and Loan Products, Asia Pacific at J.P. Morgan, notes that Asian exports are vulnerable to the US-China trade dispute on two fronts: changes to global supply chains and slowing Chinese domestic demand. “The shift in supply chains – away from China – inevitably comes with costs, especially around logistics and expected risks involved with new suppliers,” she says. Lee adds that slowing domestic consumption in China will impact regional neighbours, which have seen direct exports to China rise exponentially in recent years.
Looking further ahead, the implications could be even more significant. “According to views by J.P. Morgan’s research team, the US-China tensions have the potential to trigger the existing manufacturing supply chains to permanently shift out of China,” says Lee, noting that ASEAN countries, which have fairly low-cost wage structures and large, relatively young working populations, stand to benefit the most.
Countries that are heavily dependent on shipments to China may see a negative impact, however. “In Asia, we view Taiwan to be most vulnerable, given both China and US are Taiwan’s top trading partners, and the Taiwanese economy is heavily reliant on global trade,” says Lee. “While South Korea and Japan are also big exporters to China, we view them to be fairly immune.”
Planning for multiple eventualities
Corporates in the region are watching the situation closely. Donkar says organisations are far more exposed to protectionist measures than in the past and are consequently monitoring the impact of these measures closely. She adds that with G20 countries doubling trade restrictions in recent months, “it has become imperative for organisations to have dedicated think tanks to assess the impact of potential scenarios impacting short-term and long-term profitability.” When it comes to engaging with the situation and insulating themselves against a potentially adverse trade environment, Donkar says organisations are focusing on being alert and using advocacy forums to share opinions.
“I am seeing lots of clients focus more time on planning for multiple eventualities so they can position themselves to make changes, should the landscape change,” says Peter Jameson, head of Asia Pacific Trade and Supply Chain Finance, Global Transaction Services at Bank of America Merrill Lynch (BofAML). “For example, we are seeing clients ask more questions around how we could support them in new markets (eg Bangladesh, Vietnam). So they are clearly considering alternative options in terms of where they might source or manufacture for their supply chains.”
Jameson says that this is a logical approach, as the cost implications of shifting supply chains – for example, on-boarding new suppliers or building new production facilities – are significant, and “not something they would seek to do until the long-term outcome of the geopolitical situation is clear.”
This clarity may not be forthcoming, however. Jameson notes that “the only certainty is uncertainty”: with the geopolitical landscape continuing to shift, it is likely that other trade relationships globally will likewise shift in line with domestic/foreign policy agendas. Consequently, “as no set of outcomes can really be predicted we are seeing clients planning for the broadest possible range of eventualities.”
Companies are therefore adopting a wait and see approach. For example, Jameson says that where the US/China discussions are concerned, “rather than react to the latest sound-bite or policy announcement, many clients choose not to react quickly but to wait to see how things play out.” He adds that companies are striking a balance between the fear of not being prepared, and the fear of moving quickly and investing significantly in new infrastructure that might end up not being needed.
HSBC’s Sharma likewise emphasises the impact of uncertainty on clients in the current market. “They like to have stability when they make long-term decisions, so the main impact we’re seeing is a state of inertia among clients – they’re waiting to see how the trade truce pans out,” he says.
Chart 1: US China trade defecit keeps growing
Chinese trade surplus with the US 2004-2018 (in US$bn)
Source: Chinese Customs Administration, National Bureau of Statistics of China
But despite the uncertainty, the current market also has plenty of opportunities. Beck notes that against the headwinds, “we continue to see resilience and growth in developing Asia – truly the engine for global economic growth and trade growth.”
For one thing, he notes that China’s shift to a consumer-led economy is presenting more opportunities for growth and connectivity. “Intra-regional supply chains are strengthening,” he says. “We live in an inter-connected world, where contagion and ‘knock-on’ is real; but the notion of an intra-Asian buffer, with increasingly inter-dependent economies less reliant on the West, is trending. The global financial crisis accelerated this trend, and it continues unabated.”
Free trade deals also have a significant role to play in supporting trade within the region. The Trans-Pacific Partnership (TPP) suffered a setback when the US withdrew from the partnership in early 2017. But the remaining 11 countries went ahead with the agreement, and in March 2018 the TPP’s successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), was signed. The deal is already in force for seven of the participating markets.
“Even without the US, the CPTPP will be among the largest multilateral trade deals enacted, covering 11 economies which constitute 14% of the world GDP,” says J.P. Morgan’s Lee. “Beyond lowering trade barriers and boosting trade flows amongst the countries, the agreement also includes greater protection of intellectual property rights and provisions to increase minimum labour standards for workers in participating countries.” Consequently, she says the deal is broadly “trade positive” – albeit on a smaller scale than the previous TPP agreement.
Beyond the CPTPP, other trade deals are also playing a role in helping trade to become freer across the region. HSBC’s Sharma notes that last year the EU signed agreements with both Japan and Singapore, adding that “the EU-Japan deal is the world’s largest bilateral trade agreement.” Other recent developments include deals signed by Australia with Indonesia and Hong Kong. “It’s encouraging to see all these positive trade developments coming out of Asia which will reduce the friction in trade,” Sharma says.
Meanwhile, China’s Belt and Road Initiative (BRI) continues apace. The initiative, which is expected to cost a total of more than US$1trn, is intended to improve trade routes between China and over 70 countries across Asia, Europe, the Middle East and North Africa. Its wide scope includes road, rail and maritime infrastructure, as well as power projects and manufacturing plants. Lee says that in principle, the initiative “should be a positive sum game for all players along the New Silk Road Economic Belt, which will connect China with Europe through Central and Western Asia, as well as the 21st Century Maritime Silk Road which connects China with Southeast Asian countries, Africa and Europe.”
“Infrastructure investments underway, whether they’re called One Belt or by another name, promise to create stronger links to underpin the trend toward greater intra-regional trade and cooperation,” says Beck. “Asian Development Bank (ADB) is playing an important role in some of these projects, closing the infrastructure financing gap, bringing expertise, project management as well as environmental and social safeguards to many of these projects.”
BofAML’s Jameson points out that while BRI is designed to promote and facilitate trade – as well as being an important foreign policy tool – it is not a new concept. “It has been referred to as the ‘new Silk Road’, which reminds us that trading and creating connectivity between markets is centuries old,” he comments. “It is also a two-way benefit – not just facilitating goods manufactured in China to reach new markets overseas, but with the increasing middle class in China, it aims to facilitate the flow of imports of consumer goods in the other direction, opening up this important new export market to overseas countries.”
Consequently, Jameson says that while the initiative won’t really resolve the issues around protectionism, “it will help China (in particular) diversify its trading hinterland by providing greater connectivity for trade and FDI. This will help diversify its trading partners, in the event any particular relationship becomes increasingly protectionist.”
Nevertheless, the initiative is not without controversy. Lee notes that while the initiative was intended to boost productivity and infrastructure among BRI host countries, “concerns have grown about both corporate and political governance. The initiative is hampered by concerns about debt sustainability of host countries and producing low economic returns to China, even as it pays political dividends.”