Importers and exporters have never faced a more hostile and complex international trade market as that facing them in 2021. The COVID-19 pandemic coupled with rising tariff barriers and trade restrictions is forcing businesses to adapt quickly, reflecting radically shifting trade corridors.
How are banks supporting these strategic adjustments and more importantly can they keep ahead of rapidly changing customer behaviour?
Uneasy Trade Relationships
Australian importers and exporters faced critical trade challenges on multiple fronts in the past year in having to adapt to inhibitive Chinese tariffs on certain goods and services such as timber, wine, barley, cotton and even lobsters. Notably no restrictions have been placed by China on iron ore, representing the country’s largest import from Australia.
One fifth of all intermediate global production inputs stem from Mainland China (20 percent) and Australia is not alone in its heavy economic growth reliance on the country, making it a difficult proposition switching supply chain partners to new geographies and trade corridors. Chinese manufacturing is vital to global value chains, particularly technology, machinery, automotive and communication equipment.
China’s position as one of the most powerful global trading powers persisted through Q1 2021 as both exports and imports surged from generational lows in Q2 2020. The figures indicate the Asia-led global COVID-19 recovery is in full swing alongside rapid vaccination programs.
"The Asia Pacific region is still in a pole position as an
anchor for large portions of trade financing globally,
which reflects the fact that major global supply chains
and trade corridors are anchored or linked to the region"
- International Chamber of Commerce (ICC)
The US$710 billion in exports for Q1 2021 was China’s second-highest total ever, narrowly short of the record notched in Q4 2020. Chinese factories are among the top beneficiaries of soaring global demand for medical goods, work-from-home (WFH) electronics and other discretionary goods that are now essential for locked down employees.
Total Chinese shipments abroad increased 31 percent in March 2021 compared to March 2020, with consistent and significant increases with key trading partners, including a 53 percent rise to the United States (USA) and a 46 percent increase to the European Union (EU).
China is anticipated to remain a leading market for global trade flows, alongside growth in South-East Asia based corridors which are expected to significantly outpace growth in North America.
While one in two Australian institutional enterprises nominate China as a key future import / export geography (50 percent), this proportion has fallen steadily by three percent per annum since reaching a record high of 58 percent in H2 2016. The intention to shift away from China as a key import/export market is even more pronounced in the Australian middle market and SME segment, sliding by more than 11 percent year-on-year. As of H1 2021 only 35 percent and 27 percent of Australian trading businesses in the middle and SME segments respectively view Mainland China as a key focus.
Australia vs Asia Institutional Key Import / Export Trade Corridors
% of Total
Source: East & Partners Australian Trade Finance Program & Asia Institutional Trade Finance Program
Institutional enterprises based across Asia display a similar, though not as pronounced, trend, with a slight reduction in the proportion of large corporates based in ten Asia countries citing China as a key export market, dropping from 78.6 percent in H1 2020 to 76.7 percent in H1 2021. Trade tensions, COVID-19 border restrictions and geopolitical concerns are clearly making their mark on which trade corridors CFOs are turning to in future noting the ambitious Belt and Road Initiative is an ever present focus in the region.
While the trade account picture appears solid for China, this belies the fact commodities and raw materials growth is masking pain for many importers and exporters in other key sector verticals such as manufacturing and retail.
Where are corporates now turning to plug the COVID-19 related gaps in their stalled supply chains?
Traditional trade corridors of focus for major global trade banks including Korea to the Association of South East Asian Nations (ASEAN), Korea to China, Australia to China, Korea to India, Japan to ASEAN, Japan to China and China to ASEAN are expected to gradually give way to emergent South East Asian countries such as Vietnam and Thailand.
Ultimately businesses are looking to their Bank for much needed guidance and advice on which markets they must invest their future production needs in alongside targeted new export market opportunities. Where they are not getting the support they desperately need to adapt to the new COVID world, they are turning to friends, colleagues, suppliers and even competitor banks instead.
As second and third COVID-19 waves force borders to close and push back reopening timelines, the march of free trade and globalisation will inevitably slow, replaced by a distinctive regional flavour for global trade.
"The world economy will require more, not less,
global trade cooperation after COVID-19. The G20 countries
have allowed international collaboration on trade to unravel.
They now have a chance to seize on the crisis to sow the
seeds for renewed global trade cooperation"
- CEDA Analysis, Professor of International Trade at
Melbourne Business School, Gary P. Sampson
A likely outcome from the crisis will be supply chains snapping back to more simplified structures that are shorter, less vulnerable and more focused on risk management.
Businesses go local for global trade
Notwithstanding this exceptional Asia led trade resurgence, the COVID-19 pandemic has upended supply chains, disrupted container shipping and congested international trade routes for many sectors, including semiconductors and more recently lumber encountering bottle necks and damaging trade dispute spats. Trade in many key sectors, which in recent years accounted for 54 percent to 60 percent of global economic activity, retracted in global output terms by 13 percent to as much as 32 percent, according to the World Trade Organisation (WTO).
International banks with large global footprints are often assumed to have the upper hand in financing trade and cross border supply chains however East & Partners research indicates the top 100 enterprises by revenue globally use 1.8 international banks for every 12.4 domestic banks on their panel. These figures illustrate strong market share for incumbent domestic bank majors such as the Big Four in Australia consisting of ANZ, CBA, NAB and Westpac.
Supply Chain Financing Provider Count
Total Number of Financers
Source: East & Partners Global Supply Chain Financing Insight Report – 2017
"Shifting trade corridors radically upends
the playing field. Incumbent global majors with
extensive reach do not necessarily take advantage
automatically. Vast time and resources are required
to develop a presence in newly prioritised import
and export markets"
- East & Partners Head of Markets Analysis, Martin Smith
Preceding the coronavirus pandemic, CFOs forecast modest trade finance growth of one percent. Distinctly open markets such as Hong Kong and Singapore are each characterised by over 90 percent of their supply chain volumes linked to cross border sales, closely followed by Germany and the UK each with over 70 percent. China on the other hand has the smallest volume with 36.1 percent sourced internationally, indicating its closeted approach to global trade.
What's Next for Trade Financiers?
In the wake of the Global Financial Crisis (GFC) in 2008 it took two years for trade volumes to recuperate. Following the coronavirus pandemic, it has taken a mere eleven months, with much of that impetus driven by the Asian tiger economies.
BCG forecasts global trade to recuperate to 2019 volumes of US$18 trillion by as late as 2023 following a protracted “U” shaped recovery.
"After a steep decline, economic activity will remain low
and then rebound, presumably when some combination
of mass testing, viable treatments, and an effective
vaccine is available. Even if trade recovers by 2023,
expect flows between blocs to shift dramatically"
- BCG, Redrawing the Map of Global Trade
In this instance, corporates simply cannot afford to carry the risk of delayed and more costly freight. It is highly likely the rush to offshoring production will be reversed, with many corporates plugging gaps in their supply chain with domestic producers in preference to long held international suppliers, incurring a premium for much needed peace of mind and supply chain resilience.
CFOs and corporate treasurers, whether they like it or not, must adapt complex supply chains to withstand the impact of a future ‘black swan’ unpredictable economic crisis event. Where Banks can stand apart from their competition is through the rigour and granular detail of their supply chain insights and finance solutions, expressing a distinct knowledge of their customer’s industry and individual business itself.
Ultimately the speed at which governments can overcome the COVID-19 pandemic will determine the relative success these ambitious export partners have in unseating current trade partners crippled by supply chain disruptions and rising tariff barriers.
Banks are tasked with the unenviable job of anticipating customer shifts to new trade corridors, requiring a fit for purpose, flexible trade finance platform coupled with on the ground support and guidance. While the drive for long overdue digitisation of trade finance processes continues, success hinges on old fashioned relationship management helping CFOs identify and scale up the most efficient, secure and cost effective trade corridors suited to their own supply chain needs.