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Mounting trade tensions
between U.S. and Chinese administrations in the form
of protectionist rhetoric, tariffs and escalating
retaliatory actions have placed financial markets
firmly on edge. Uncertainty towards the scope of
import taxes on targeted goods and services, pace of
application and intensity of the tariffs by the
world’s largest economies are reverberating up and
down the full length of increasingly complex and
interconnected global supply chains.
Forecasted impacts on revenue for institutional
enterprises and small businesses, credit ratings and
bank balance sheets vary wildly, highlighting the
pervading sense of uncertainty facing CFOs and
corporate treasurers. With the added weight of
Brexit global business’ concerns are well founded,
although British enterprises are already positioning
themselves actively to explore new trade
opportunities as referenced extensively in East &
Partners April Research Note, “UK Trade in the face
of Brexit” and recent
London Private Markets
Briefing – “Trade in 2018”.
How well are corporates prepared and what do they
expect from their bank to guide them through the
undoubtedly turbulent months ahead as markets creep
away from ‘free trade’ promoted by the World Trade
Organisation (WTO)? Can trade finance markets
successfully absorb the rapid shift in volume, cost
and complexity of global merchandise trade?
In response to President Donald Trump instructing
U.S. trade representatives to apply tariffs on US$50
billion worth of Chinese goods across a broad basket
of agriculture, technology and manufacturing
products, China announced similar measures. Notably
the trade war is not limited to goods and services.
In capital markets the U.S plans to limit new
foreign direct investment from China and prevent
corporate mergers and acquisitions, matched by
similar measures to be applied by China. The U.S. is
now planning a further 10 percent tariff on US$200
billion of additional Chinese imports, eclipsing
market expectations and triggering a tit-for-tat
escalation as China responds in kind.
Fortunately trade volumes have been resilient
leading into the onset of trade war hostilities with
most importers and exporters exhibiting positive
sentiment globally according to East & Partners
analytics. Export participation among SMEs is
improving and the vitally important middle market is
seeking to scale up international trade rapidly.
Growing demand for trade financing facilities and
increasing sophistication in use of FX payments is
clear, linked with an equivalent rise in uptake and
demand for currency risk management solutions.
East & Partners has closely tracked growing
competitiveness between domestic and international
banks on Open Account terms, Letter of Credit and
Documentary Bills for Collection for financing
international trade. In the last four years there
has been a discernible jump in customer switching
intentions, or ‘customer churn’, coupled with
heightened competitive pitching in an increasingly
transactional market.
This strengthening trend is a clear illustration of
the rising level of competitiveness trade finance
providers are grappling with. International banks
process of ‘right sizing’ their operations have
resulted in more focused offerings, while domestic
banks in Australia particularly are reaching beyond
the predominantly ‘import only’ trade profile that
characterises SMEs and Lower Corporates.
International banks secure the lion share of primary
trade finance relationship share in Asia and the UK
among institutional enterprises. In Australia, while
domestic banks dominate, HSBC is rapidly closing the
gap and is the most preferred secondary trade
finance provider to the Top 500 enterprises by
revenue.
With the added pressure of adapting to paperless
trade finance process, investment in Blockchain
capability and ongoing digitisation, it can easily
be said banks globally are facing a war on several
fronts with Brexit and trade war uncertainty
looming.
Given the inherent unpredictable nature of trade
wars as experienced by ‘beggar-thy-neighbour’
policies in the lead-up to the Great Depression,
businesses face a difficult task adapting their
strategic planning and corporate treasury policies
to be prepared. By trade profile, two out of three
large corporates in Asia both import and export,
trending higher each round of research conducted
biannually. In comparison the proportion of
Australian trading enterprises who both import and
export is 45 percent in the institutional segment,
trending lower each round.
Asian corporates use of Open Account financing is up
11.5 percent since 2014 with growing momentum in use
of supply chain funding particularly, in addition to
receivables financing and distributor financing.
Australian use of open account financing has grown
by 11.2 percent since 2010 to 82.7 percent as of
2018, reflecting the direct correlation of rising
raw materials exports with higher frequency
execution and limited supplier risk.
Cast against a backdrop of rising customer
expectations on digital capability, pricing
competitiveness and value for money, there is a
sense among a growing number of corporates that
banks simply aren’t delivering. Industry Knowledge
is a key service factor businesses look for from
their bank and as the need to keep pace with
regulation and adapt to change becomes more
important, corporates will ‘shop around’ for a
provider that can meet their needs.
While larger enterprises have more resources and
capability to adapt to changing corporate treasury
conditions, small to medium sized enterprises (SMEs)
do not enjoy the same level of support and arguably
will bear the brunt of lost revenue and
unemployment. This converts directly into slowing
economic growth given small businesses represent a
high proportion of employment and activity.
The European Commission forecast that growth in the
European Union (EU) for 2018 will drop from 2.3
percent to 2.1 percent as a direct result of trade
tensions, with Pierre Moscovici, Commissioner for
Economic and Financial Affairs, Taxation and Customs
stating that the downward revision "reflects the
impact on confidence of trade tensions and policy
uncertainty, as well as rising energy prices.
European growth is set to remain resilient, as
monetary policies stay accommodative and
unemployment continues to fall however a further
escalation of protectionist measures is a clear
downside risk.”
Bank of England Governor Mark Carney went a step
further, warning the U.S. that a further escalation
would have “serious and damaging consequences for
global GDP” and economic growth in fact would be
curtailed the most in the U.S. itself, contracting
by as much as 5 percent compared to a hit to global
growth of closer to 2.5 percent.
When it comes to sourcing Trade Finance advice, over
nine out of ten corporates seek out friends or
colleagues ahead of other channels, even approaching
competitor banks in preference to their own
relationship manager. The need to benchmark their
performance against fellow competitors often drives
this impulse however banks must do more to provide
dedicated industry knowledge and advice at a time
when the impact of trade wars is difficult to
ascertain. Closely supporting customers who are
increasingly seeking dedicated support by placing an
emphasis on specific industry knowledge and
expertise to navigate the challenging trade war
environment has never been more important. |
