THE SHIFTING TIDES OF ASIAN TRADE

Dominic Broom, member of the International Chamber of Commerce (ICC) Banking Commission’s Executive Committee, and Global Head of Trade Business Development at BNY Mellon, discusses the changes occurring across Asia, and how collaboration could be the key to success – a preview of a panel discussion to be held at the ICC Banking Commission’s Annual Meeting on 3-4 April

Dominic Broom

The economic power and potential of Asia is both great and varied. Global trade growth in recent years has been buoyed by trade activity in the region, despite relatively sluggish trade growth in China. Yet, as a fragmented region with a heavy reliance on China, commodities and manual labour, Asia is facing a period of significant change.Not only will Asia face the impact of the political and economic pressures present across the global trade landscape as a whole, it  has its own economic shifts (to consumerism and digitization, for instance) to manage – tackling challenges and seizing opportunities. For a fragmented region to be able to adapt to change successfully, collaboration is crucial.

Asia and the superpower

Consider Asia’s relationship with the US. Looking at the figures alone, the relationship between Asia and the world’s economic superpower appears fairly sturdy. For example, 2016 figures demonstrating US imports from Southeast Asia – its fourth-largest export market – increased by 0.88% year-on-year in 2016[1], and the region as a whole has become a larger source for lower-value US imports in recent years. Looking specifically at goods exported to the US from ASEAN countries in 2016, these totalled over US$150 billion[2] – with Vietnam, Thailand, Indonesia, Malaysia, and Singapore accounting for most of these exports. Figures on Indonesia’s (hosts of this year’s ICC Banking Commission annual meeting) exports to the US in 2016 indicated a growth by 8.8% compared to the previous month[3].

Looking at the whole picture, however, these strong trading relationships – on which many Asian businesses thrive – look less secure. A shift in the West towards protectionism raises concerns that, instead of creating trade relationships, governments around the world (including and perhaps even led by the US) will instead opt for trade barriers, jeopardising the potential growth and success of countless Asian companies.

Asia has already felt the first blow of protectionism, with the US pulling out of the Trans-Pacific Partnership (TPP). While the TPP may well go ahead without the US, the impact if it does not, could be significant. Vietnam, for example, which stands to benefit from an 11% rise in GDP by 2025 as a result of the TPP[4],could lose out on a significant opportunity.

Changes from China

The economic slowdown and shift in focus away from commodity consumption by China is also of concern. China needs to ensure that the growth of its consumer-driven economy is able to address the gap left by less skilled manufacturing moving to lower-cost locations such as Vietnam and Bangladesh. Further, it is feared that the reduced appetite for commodities will have a significant impact on Asian trade.

The reality of Asian trade, however, is far more positive, with the region as a whole – particularly ASEAN markets – proving to be relatively robust. In 2016 ASEAN markets observed an increase in GDP growth to 4.7% from 4.5% the previous year[5]. And it is expected that the combined GDP of five of the ASEAN nations – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam – could rise to US$3 trillion by 2020[6].

Part of this is that, while China has dropped its commodity demand, ASEAN markets have increased commodity consumption,creating robust levels of intra-regional trade. As ASEAN markets – particularly Indonesia, Malaysia, the Philippines, Thailand and Vietnam – grow their economies and populations (with populations predicted to reach 700 million by 2030[7]), the need for infrastructure, and therefore commodities, grows in kind.

                A region of opportunity

China does still play a role in supporting Asian economies. Economic relations between China and the ASEAN economies have been growing, with Chinese foreign direct investment (FDI)in the six largest economies of ASEAN expected to nearly double year-on-year to reach US$16 billion[8]. Indonesia alone observed an increase in FDI from China by a staggering 291% (to US$1.5 billion) in 2016[9]. As far as trade is concerned, ASEAN markets are ambitious: setting a target of US$1 trillion in trade flows with China by the end of 2020[10].

China is also keen to maintain its economic influence on the region. The China-led Regional Comprehensive Economic Partnership (RCEP) – a 16-member bloc that includes all 10 members of the ASEAN, as well as Australia, New Zealand, Japan, Korea, India, and China – will act to lower barriers to trade, and importantly, could provide an alternative to the TPP, should the latter come apart.

Furthermore, China’s One Belt, One Road project – representing the physical path from Hong Kong, through Europe, to Scandinavia; and the maritime Silk Road from Hong Kong to Venice – could cover 65% of the world’s population, a third of the world’s GDP, and approximately one quarter of all global goods and services, presenting significant opportunities for Asian markets[11].

Finally, opportunities exist across the whole of Asia in the form of digitization. The rise of fintechs, paperless trade, and the use of distributed ledger technology – such as blockchain – could significantly change the way Asian companies trade, making transactions faster, more efficient, more secure, and less expensive.

Seizing opportunities

        For a region facing such change – both challenging and exciting – a major question will be whether or not Asian companies are able to seize the opportunities available. Part of this comes down to the trade and business landscapes in which they operate.

This requires political stability – something that is currently relatively fragile following an election in the Philippines, leadership transition in Vietnam, and a cabinet reshuffle in Indonesia.

Secondly, it means adequate access to trade finance. The trade finance gap currently estimated at US$1.6 trillion globally – and US$692 billion in developing Asia alone[12] – is leaving companies without the vital injections of capital they require for business sustainability and growth.

Finally, it means jettisoning inefficient and less secure manual trade processes, in favour of faster and safer digital systems – something trade finance has so far been slow to accept.

The solution is collaboration: between global and local banks, and also within the trade finance industry as a whole. Banks have a significant role to play in guiding companies through the coming changes in Asia. While certainly a challenge – in an increasingly complex trade, regulatory, political, and financial landscape – through collaboration, increased focus on digital techniques, and strong correspondent relationships, there is great potential for success.

This article provides a preview of one of the discussions that will take place at the ICC Banking Commission’s 2017 Annual Meeting – taking place on 3-4 April in Jakarta. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape. https://en.xing-events.com/JKT-ICCBCAM.html?page=1383394 

The views expressed herein are those of the author only and do not reflect the views of BNY Mellon or any of its subsidiaries or affiliates. This does not constitute treasury services advice, or any other business or legal advice, and it should not be used or relied upon as such. 

[1][1] http://www.joc.com/economy-watch/us-economy-news/us-imports-rose-2016-despite-adversity_20170107.html

[2] https://www.census.gov/foreign-trade/balance/index.html

[3] http://www.tradingeconomics.com/indonesia/exports

[4] http://www.forbes.com/sites/fannypotkin/2016/12/08/what-trumps-presidency-will-mean-for-southeast-asia-in-2017/#4e25ceef5dd5

[5]http://www.focus-economics.com/regions/asean

[6]http://thediplomat.com/2016/08/asias-emerging-markets-from-bust-to-boom/

[7]http://www.infodent.com/arcdoc/obj/markets_124.pdf

[8]http://www.scmp.com/news/china/diplomacy-defence/article/2053920/china-embraces-southeast-asia-renewed-trade-investment

[9]https://www.aseantoday.com/2017/01/can-asean-trust-chinas-promises/

[10]http://www.scmp.com/comment/insight-opinion/article/2059916/how-chinas-belt-and-road-transforming-asean

[11]http://www.mckinsey.com/global-themes/china/chinas-one-belt-one-road-will-it-reshape-global-trade

[12]https://www.adb.org/sites/default/files/publication/190631/trade-finance-gaps.pdf

Dominic Broom, member of the International Chamber of Commerce (ICC) Banking Commission’s Executive Committee, and Global Head of Trade Business Development at BNY Mellon, discusses the changes occurring across Asia, and how collaboration could be the key to success – a preview of a panel discussion to be held at the ICC Banking Commission’s Annual Meeting on 3-4 April

Dominic Broom

The economic power and potential of Asia is both great and varied. Global trade growth in recent years has been buoyed by trade activity in the region, despite relatively sluggish trade growth in China. Yet, as a fragmented region with a heavy reliance on China, commodities and manual labour, Asia is facing a period of significant change.Not only will Asia face the impact of the political and economic pressures present across the global trade landscape as a whole, it  has its own economic shifts (to consumerism and digitization, for instance) to manage – tackling challenges and seizing opportunities. For a fragmented region to be able to adapt to change successfully, collaboration is crucial.

Asia and the superpower

Consider Asia’s relationship with the US. Looking at the figures alone, the relationship between Asia and the world’s economic superpower appears fairly sturdy. For example, 2016 figures demonstrating US imports from Southeast Asia – its fourth-largest export market – increased by 0.88% year-on-year in 2016[1], and the region as a whole has become a larger source for lower-value US imports in recent years. Looking specifically at goods exported to the US from ASEAN countries in 2016, these totalled over US$150 billion[2] – with Vietnam, Thailand, Indonesia, Malaysia, and Singapore accounting for most of these exports. Figures on Indonesia’s (hosts of this year’s ICC Banking Commission annual meeting) exports to the US in 2016 indicated a growth by 8.8% compared to the previous month[3].

Looking at the whole picture, however, these strong trading relationships – on which many Asian businesses thrive – look less secure. A shift in the West towards protectionism raises concerns that, instead of creating trade relationships, governments around the world (including and perhaps even led by the US) will instead opt for trade barriers, jeopardising the potential growth and success of countless Asian companies.

Asia has already felt the first blow of protectionism, with the US pulling out of the Trans-Pacific Partnership (TPP). While the TPP may well go ahead without the US, the impact if it does not, could be significant. Vietnam, for example, which stands to benefit from an 11% rise in GDP by 2025 as a result of the TPP[4],could lose out on a significant opportunity.

Changes from China

The economic slowdown and shift in focus away from commodity consumption by China is also of concern. China needs to ensure that the growth of its consumer-driven economy is able to address the gap left by less skilled manufacturing moving to lower-cost locations such as Vietnam and Bangladesh. Further, it is feared that the reduced appetite for commodities will have a significant impact on Asian trade.

The reality of Asian trade, however, is far more positive, with the region as a whole – particularly ASEAN markets – proving to be relatively robust. In 2016 ASEAN markets observed an increase in GDP growth to 4.7% from 4.5% the previous year[5]. And it is expected that the combined GDP of five of the ASEAN nations – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam – could rise to US$3 trillion by 2020[6].

Part of this is that, while China has dropped its commodity demand, ASEAN markets have increased commodity consumption,creating robust levels of intra-regional trade. As ASEAN markets – particularly Indonesia, Malaysia, the Philippines, Thailand and Vietnam – grow their economies and populations (with populations predicted to reach 700 million by 2030[7]), the need for infrastructure, and therefore commodities, grows in kind.

                A region of opportunity

China does still play a role in supporting Asian economies. Economic relations between China and the ASEAN economies have been growing, with Chinese foreign direct investment (FDI)in the six largest economies of ASEAN expected to nearly double year-on-year to reach US$16 billion[8]. Indonesia alone observed an increase in FDI from China by a staggering 291% (to US$1.5 billion) in 2016[9]. As far as trade is concerned, ASEAN markets are ambitious: setting a target of US$1 trillion in trade flows with China by the end of 2020[10].

China is also keen to maintain its economic influence on the region. The China-led Regional Comprehensive Economic Partnership (RCEP) – a 16-member bloc that includes all 10 members of the ASEAN, as well as Australia, New Zealand, Japan, Korea, India, and China – will act to lower barriers to trade, and importantly, could provide an alternative to the TPP, should the latter come apart.

Furthermore, China’s One Belt, One Road project – representing the physical path from Hong Kong, through Europe, to Scandinavia; and the maritime Silk Road from Hong Kong to Venice – could cover 65% of the world’s population, a third of the world’s GDP, and approximately one quarter of all global goods and services, presenting significant opportunities for Asian markets[11].

Finally, opportunities exist across the whole of Asia in the form of digitization. The rise of fintechs, paperless trade, and the use of distributed ledger technology – such as blockchain – could significantly change the way Asian companies trade, making transactions faster, more efficient, more secure, and less expensive.

Seizing opportunities

        For a region facing such change – both challenging and exciting – a major question will be whether or not Asian companies are able to seize the opportunities available. Part of this comes down to the trade and business landscapes in which they operate.

This requires political stability – something that is currently relatively fragile following an election in the Philippines, leadership transition in Vietnam, and a cabinet reshuffle in Indonesia.

Secondly, it means adequate access to trade finance. The trade finance gap currently estimated at US$1.6 trillion globally – and US$692 billion in developing Asia alone[12] – is leaving companies without the vital injections of capital they require for business sustainability and growth.

Finally, it means jettisoning inefficient and less secure manual trade processes, in favour of faster and safer digital systems – something trade finance has so far been slow to accept.

The solution is collaboration: between global and local banks, and also within the trade finance industry as a whole. Banks have a significant role to play in guiding companies through the coming changes in Asia. While certainly a challenge – in an increasingly complex trade, regulatory, political, and financial landscape – through collaboration, increased focus on digital techniques, and strong correspondent relationships, there is great potential for success.

This article provides a preview of one of the discussions that will take place at the ICC Banking Commission’s 2017 Annual Meeting – taking place on 3-4 April in Jakarta. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape. https://en.xing-events.com/JKT-ICCBCAM.html?page=1383394 

The views expressed herein are those of the author only and do not reflect the views of BNY Mellon or any of its subsidiaries or affiliates. This does not constitute treasury services advice, or any other business or legal advice, and it should not be used or relied upon as such. 

[1][1] http://www.joc.com/economy-watch/us-economy-news/us-imports-rose-2016-despite-adversity_20170107.html

[2] https://www.census.gov/foreign-trade/balance/index.html

[3] http://www.tradingeconomics.com/indonesia/exports

[4] http://www.forbes.com/sites/fannypotkin/2016/12/08/what-trumps-presidency-will-mean-for-southeast-asia-in-2017/#4e25ceef5dd5

[5]http://www.focus-economics.com/regions/asean

[6]http://thediplomat.com/2016/08/asias-emerging-markets-from-bust-to-boom/

[7]http://www.infodent.com/arcdoc/obj/markets_124.pdf

[8]http://www.scmp.com/news/china/diplomacy-defence/article/2053920/china-embraces-southeast-asia-renewed-trade-investment

[9]https://www.aseantoday.com/2017/01/can-asean-trust-chinas-promises/

[10]http://www.scmp.com/comment/insight-opinion/article/2059916/how-chinas-belt-and-road-transforming-asean

[11]http://www.mckinsey.com/global-themes/china/chinas-one-belt-one-road-will-it-reshape-global-trade

[12]https://www.adb.org/sites/default/files/publication/190631/trade-finance-gaps.pdf