Shaping the future of global trade

Globalisation is under pressure. A shift in the political environment has created scrutiny towards the trend that has supported international trade for decades. For businesses, perhaps the most pressing issue is the growing tensions between China and the US, as rising protectionism makes it difficult for a company’s management to plan for the future.

How corporate leaders in Asia can navigate these uncertain times was the subject of discussion at HSBC’s Asia Day in Singapore. The assembled experts shared their views on the nature of the challenge, the opportunities in the region, as well as the role that technology can play in smoothening global trade.

Global commerce will be shaky in the coming years, said Chris Clague, Managing Editor, Asia, and Global Editorial Lead for Trade and Globalisation at The Economist Intelligence Unit. For a start, the era of exceptional growth in trade has likely passed. Although the trade of goods has risen by a respectable 28 per cent in the period from 2010 to 2018, it is not as fast as the rate seen in the decade before the 2008 Global Financial Crisis.

“Part of the reason for this is that some global value chains have already reached their natural limit,” said Mr. Clague. “The ICT industry is a good example of a value chain that probably cannot expand any further.”

Another cause for the slowdown in trade in goods is the rise of protectionism. Tariffs, however, do not always have a large impact on trade, he said, adding that, unless the tariffs are very high, other factors such as economic growth, exchange rates and consumption levels tend to have a much larger impact on how much a country imports. Adding a small duty on a country’s goods, for example, could cause the exporter’s currency to fall, which, to varying degrees, can negate the effect of the tariff.

“Before three years ago, I never heard people talk about global politics in the context of an M&A deal,” said Andrew Thompson, Asia Pacific Head of Private Equity and Deal Advisory at KPMG. “Now it is rare if we don’t talk about it.”

The risks to trade are more than just the trade war between China and the US, as many of the institutions that govern international commerce are losing authority they once enjoyed. Mr. Thompson cited weakness in the World Trade Organisation, Brexit and a broader discontent towards the European Union, as well as the ongoing relevance of the G20.

“Because we are thinking about the immediate situation relating to tariffs, the thinking relating to these longer-term strategic issues is missing,” he said.

Thales is one company that is feeling the impact of economic nationalism. This multinational provider of security and defence equipment has a longstanding business producing high-end products in Europe and exporting them to Southeast Asian countries. But in a political environment that favours domestic companies, Thales is facing more tenders that are only open to local firms.

“We therefore need to change our strategy, which involves working with local partners,” said Martin van Leeuwen, Director Dafi Asia at Thales NSEA.

Instead of moving its manufacturing capabilities to Asia, Thales provides its products to a local partner which then resells it to the end user. There are financial risks that arise from this business model, said Mr. Leeuwen. For example, Thales’ products are expensive and one order might be worth several times a partner’s annual revenues.

Despite the global headwinds, there was a general consensus among the panel that Asia remains a bright spot, due to several positive economic trends – such as the rise of the middle class and ongoing urbanisation. “We are focused on the medium and long-term demand drivers in end use sectors,” said Juliet Taylor, Head of Credit and Market Risk at BHP.

She pointed to an annual infrastructure gap in Asia, estimated to be USD459 billion by the Asian Development Bank in 2017¹. This means Asia remain a key market for mining companies in the years to come as infrastructure investment drives a demand for commodities, such as steel and copper.

The healthcare sector is another beneficiary of rising affluence among Asia’s population. “It doesn’t matter which sector you’re in, the macroeconomic indicators make the region very exciting, and that is especially true for healthcare,” said Munish Kaushal, Area Finance Director, GSK South East Asia.

He said that “the region’s middle class is so large now that it can be stratified into different wealth groups, each with their own needs. Furthermore, there is a change in consumer behaviours as the region’s population starts to take a more preventative approach towards healthcare, as opposed to a reactive one. Organisations really have to make sure that they have the right range of products to meet everyone’s different requirements.”

The panel also discussed how technology plays an important role in facilitating trade. In particular, they spoke about the importance of data – its availability and the ways that a company can analyse it to drive business outcome and decisions making.

“Data is the crown jewel in part of a company’s infrastructure,” said Don Ri Yuen, Business Development and Channel Financing Director at Dell Technologies. “As companies embark into the digital transformation journey, one is able to retrieve data and process it to come up with an analysis that can drive useful insight to your business.” Greater efficiency, reduced costs, and more accurate processes were some of the benefits he cited.

When talking about technologies that have the potential to disrupt global trade, Mr. Yuen highlighted 3D printing, which allows components to be manufactured almost instantaneously at anywhere. The impact on supply chains could be immense, he said, as it would allow for the entire production process to take place closer to the point of use, which would reduce the costs associated with cross country shipments.

But in the present, there are still areas of technology where Asia needs to catch up with other parts of the world. “When we look at Asia, it is a region that is still doing a huge volume of its trade finance using hard copy documentation,” said BHP’s Ms. Taylor. “We believe that both international and local banks can play a major role in increasing the digitisation of trade finance in the region.”