Shifting corridors – can banks keep up?

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.

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