Regional and domestic trade growth prompted by more than protectionism

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By:
Kimberley Long
Published on:

The threatened imposition of US-China trade tariffs this week is the most obvious sign of increasing protectionism, resulting in a push towards regional trade, but with consumers prioritizing speedy delivery, the move to source locally has other drivers.

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The HSBC Navigator: Now, Next and How for Business report surveyed more than 6,000 companies internationally on the trade environment.

Asked for their views on the state of the current market, 61% of respondents thought countries were becoming more protectionist. Companies are looking towards their close neighbours to forge trade partnerships, with 74% of trade in Asia-Pacific and Europe being conducted within the region.

However, the view that protectionism might be disastrous for trade seems to be overstated.

The HSBC study quotes World Trade Organization (WTO) figures, which show its members are putting in place fewer trade-restrictive measures than in previous years. There were an average of 20 restrictive measures implemented each month in 2015 across WTO members, compared with nine measures per month in the year to October 2017.

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Vinay Mendonca,
HSBC

Vinay Mendonca, head of global traditional trade product at HSBC, says there is still considerable optimism about the prospects for trade.

“Companies are concerned about the potential impact of protectionism, but are still bullish on the potential of trade, with 77% of those polled globally forecasting growth,” he says. “This is driven in part by growing consumer demand, with 82% of companies in Apac forecasting growth.”

Strong growth in these regions comes directly off the back of rising trade with their near neighbours.

Mendonca says: “The bullishness is also a result of the increase in intra-regional and domestic trade. Firms have started transforming their supply chains, by often sourcing or manufacturing locally, close to their consumers or considering joint ventures and local acquisitions in such markets.

“While in some cases this has been triggered by protectionist concerns, in many instances this transformation was driven by growing e-commerce flows and the need for flexibility and customization for the end-consumer.”

As the expectations of customers and the models of companies change, the way they are sourcing products and parts also has to be adapted.

Mendonca says: “E-commerce customers are expecting a next-day and even a same-day delivery service. The product and the underlying supply chain has to be close by to guarantee this. This speed of delivery of goods is becoming more important than finding the most cost-effective location for production.”

The size of some of the Asian countries, both in terms of geography and population, also makes shifting trade locally beneficial.

Says Mendonca: “Domestic trade driven by strong consumer demand is gaining importance in India and China in particular. These countries are able to support local supply chains that crosses the whole of their vast and diverse markets.”

Eager

The possibilities for boosting growth from focusing attention on their home markets is something governments have been eager to tap into.

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Anand Pande,
Intellect

Anand Pande, global product chair of trade and supply chain finance at transaction banking platform provider Intellect, says: “China, after shifting its focus from investment-led growth to domestic consumption, is seeing a huge demand for domestic trade. So are the countries located in the south-to-south trade belt, which as now constitute about 30% of world trade.”

Pande says the push to domestic trade is coming from governments as a method of improving the lives of its inhabitants.

“The move towards domestic trade in emerging and growth markets is driven by urbanization and the intense desire of governments to raise the standard of living of its population,” he says.

However, the arrival of new counterparties within the supply chain also brings along new concerns to address, even if issues such as FX fluctuations are reduced.

HSBC’s Mendonca says: “Companies are always looking to diversify the supply chains to avoid concentration and this is something we see more of when there are protectionist concerns. With this they do need suitable risk-mitigating solutions as they initiate trade with new counterparties and markets.”

Facilitating this trade still requires financing, and risk-mitigating solutions still need to be used.

However, existing trade products can be repurposed, explains Mendonca, adding: “Traditional products like letters of credit are often thought of in the cross-border trade context, but they can be adapted for domestic, single-currency use for financing and risk mitigation purposes.

“Instead of calling for a bill of lading, which is the usual instrument involved in maritime trade, other documents to evidence movement of goods overland can be stipulated.”

China has been developing methods to finance domestic trade transactions with the bank acceptance draft discounting (BADD) instrument.

The BADD is a working capital tool, which is used to assure suppliers of payments. Suppliers can then obtain up to full financing with BADD, and offer discounts. The amounts and terms of the product can be set at either six months for paper drafts or one year for those issued electronically.

The People’s Bank of China requires all commercial drafts of RMB3 million and above to be transacted electronically, and all transactions of RMB1 million and above should be done so in principle.

Digital

Mendonca says the move towards requiring digital transactions is part of a wider trend.

“Both China and India have invested in digital solutions for domestic trade finance which will improve efficiencies and the underlying risk controls,” he says. “India is even considering a blockchain-based solution for this purpose.”

Although existing trade products are still relevant, banks should be looking to expand their product suite to meet the specific needs of the new domestic supply chain.

Intellect’s Pande says: “Banks also need to understand the end-to-end value chain and design products and solutions, which help small-scale manufactures to support their working capital production requirements as well as post-sales inventory financing of finished goods.

“This would then enable local manufacturers to run their business on an adequate capital sufficiency basis rather than operating on a constantly capital-starved basis.”