Shifting corridors – can banks keep up?

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.

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So how are banks supporting these strategic adjustments and, more importantly, can they keep ahead of rapidly changing customer behaviour?

"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

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 per cent) 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 Asia-led global COVID-19 recovery is in full swing alongside rapid vaccination programs.

The $US710 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 now essential for locked down employees.

Total Chinese shipments abroad increased 31 per cent in March 2021 compared to March 2020, with consistent and significant increases with key trading partners, including a 53 per cent rise to the United States and a 46 per cent increase to the European Union.

China is anticipated to remain a leading market for global trade flows, alongside growth in Southeast 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, this proportion has fallen steadily by three per cent per annum since reaching a record high of 58 per cent 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 small-to-medium enterprise (SME) segment, sliding by more than 11 per cent year-on-year. As of H1 2021 only 35 per cent and 27 per cent of Australian trading businesses in the middle and SME segments respectively view Mainland China as a key focus.

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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 1.9 percentage points to 76.7 per cent in H1 2021. Trade tensions, COVID-19 border restrictions and geopolitical concerns are clearly making their mark on which trade corridors Chief Financial Officers are turning to in future noting the ambitious Belt and Road Initiative is an ever present focus in the region.

Minding the gaps

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.

So 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 waves of COVID-19 infections 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.

Professor of International Trade at Melbourne Business School, Gary P. Sampson, says 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"

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 per cent to 60 per cent of global economic activity, retracted in global output terms by 13 per cent to as much as 32 per cent, 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.

East & Partners Head of Markets Analysis, Martin Smith explains that shifting trade corridors radically upend 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,” he says.

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Preceding the coronavirus pandemic, CFOs forecast modest trade finance growth of 1 per cent. Distinctly open markets such as Hong Kong and Singapore are each characterised by over 90 per cent of their supply chain volumes linked to cross border sales, closely followed by Germany and the UK each with over 70 per cent. China on the other hand has the smallest volume with 36.1 per cent 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.

Boston Consulting Group (BCG) forecasts global trade to recuperate to 2019 volumes of $US18 trillion by as late as 2023 following a protracted “U” shaped recovery.

According to BCG’s Redrawing the Map of Global Trade report, 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, BCG expects flows between blocs to shift dramatically.

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.

Martin Smith is Head of Markets Analysis at East & Partners

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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