Shifting Sands of International Trade

Published: February 01, 2013

Shifting Sands of International Trade

by Helen Sanders, Editor

One topic we have been exploring recently in TMI is the shift in trading routes between western economies to north-south trade and latterly south-south trade i.e., trade across countries in Asia, Latin America and Africa. As is commonly discussed, growth in China and other ‘emerging’ economies, the more extensive effects of the global financial crisis on western economies, and ongoing volatility in the Eurozone have all contributed to this shift. However, it is not only companies headquartered in southern economies that are benefiting from changing trade patterns. Instead, the distinction between North American and European multinationals and those headquartered in Asia or Latin America is becoming more blurred, and all companies should be leveraging these opportunities.

“Nothing new under the sun”

International trade patterns are in a constant state of flux as companies seek new opportunities for growth. After all, if you’d told a Chinese trader in 100BC that 2,100 years later, there would be significant trade between Asia and Europe, he or she would have nodded sagely and said something like, “Much like today, you mean”. Now, once again, south-south trade routes are strengthening, driven by multinational corporations headquartered in every part of the world. Shivkumar Seerapu, Regional Product Head, Trade & Supply Chain, Asia, Deutsche Bank discusses,

“A clear trend that started before the global financial crisis, but has been accelerated as a result, was a shift in trade to Asia and for Asian corporations to expand into other regions. Multinational corporations headquartered in all regions continue to look beyond their home markets for growth opportunities, particularly in emerging markets as stagnation continues in many western economies.”

He continues,

“While corporates headquartered in Latin America and Asia sought to export to Europe and North America initially, they have looked towards the emerging markets as demand from the West has declined, resulting in strengthening south-south trade corridors.”

George Fong, Head of Trade Product Management & Financial Institution Trade Advisory, Asia Pacific, J.P. Morgan also comments,

George Fong“South-south trade (i.e., trade between Asia, Latin America and Africa) represents a growing share of the world’s trade market. In 2008, developing countries exported more to the south than to the north for the first time, and by 2010, south-south trade reached 23% of world trade (UN South-South Trade Monitor, June 2012). Despite ongoing economic volatility in many countries in the northern hemisphere, exports from emerging markets continue to rise, at the expense of north-south trade.

There are a number of reasons for this:

  • Consumption in developed countries is slowing, pushing trade to new export markets
  • Many Asian countries continue to depend on export-led growth to drive the economy
  • Markets such as China continue to be manufacturing-driven, which in turn drives the demand for commodities. Such commodities and other raw materials are typically sourced from Latin America, Africa and other parts of Asia.

These changing supply and demand patterns as well as the development of FDI flows (e.g., between China and Africa) have led to commodities continuing to dominate south-south trade flows.” [[[PAGE]]]

Links and synergies

It would be inaccurate, however, to assume that south-south trade flows are solely comprised of commodity exports from Latin America and Africa to a resource-hungry Asia. As Shivkumar Seerapu, Deutsche Bank explains,

“South-south trade flows are not exclusively commodities, natural resources or energy-related. Symbiotic relationships are being created across countries and regions. For example, while the Middle East is exporting oil to China, China is exporting essential machinery for construction to the Middle East.”

JP Cuevas, Head of Global Transaction Services, Latin America and Caribbean, Bank of America Merrill Lynch also comments,

JP Cuevas“There is a frequent misconception that Latin America is only an exporter, primarily of commodities. In reality, fuelled by rising income levels, many areas such as Brazil for example, are becoming increasingly significant importers of goods and services from other regions.”

The growth in consumer demand in southern economies resulting from an expansion in trade is significant in that it is encouraging new investment in these countries. Countries in Asia and Central and Latin America are also prioritising investment in physical and communication infrastructure to fuel further growth, which creates a virtuous cycle of FDI. The effects of this cycle of investment can be far-reaching as JP Cuevas, Bank of America Merrill Lynch outlines,

“As a consequence [of expanding trade], we are seeing a growing number of multinational corporations establishing a presence in Latin America. This includes not only the large companies but also the mid-cap/commercial corporations that supply them. It is not cost-effective to import production inputs from other regions, so these companies are establishing a presence in Latin America to supply their local customers. As infrastructure develops further, local production and distribution is becoming even more attractive. This in turn creates wealth through taxes and jobs, and fuels education and consumer demand.”

Consequently, it is not only large companies that need to deal with the cash and treasury management complexities of a multinational business. JP Cuevas, Bank of America Merrill Lynch comments, referring to Latin America but the same applies to other regions,

“Companies headquartered in Latin America have a business imperative to ‘go global’ just as their peers in other parts of the world are demonstrating. They are taking advantage of new business models such as eCommerce, and leveraging the transformational potential of social media for communication. Over the past five years, we have seen major developments in the way that our clients do business, and expect this to continue for the foreseeable future. Consequently, we are adapting our business model, solutions and services to support their evolving requirements.”

New business models, changing economic fortunes in different regions and evolving regulatory developments in countries such as China create a new landscape for companies that have previously relied on north-north and north-south trade routes to fuel expansion. While the strengthening of south-south trade routes is frequently an opportunity for expansion for Asian and Latin American-headquartered corporations, multinationals headquartered in North America and Europe are by no means excluded. Indeed, there are considerable opportunities, as George Fong, J.P. Morgan explains,

“The competitive landscape is changing dramatically as trade patterns evolve and new multinational corporations emerge from developing countries. However, this shifting environment presents opportunities, not barriers for US and European corporations with operations in developing markets. These companies have the advantage of a home market, together with experience in developing an international sales network in new locations, which new competitors may lack.”

Daniel Schmand, Head of Trade Finance & Cash Management Corporates EMEA, Deutsche Bank concurs,

Daniel Schmand“Western corporations have the ability to benefit from changing global trade patterns. Many corporations from North America and Europe have invested significantly in operations in Asia and Latin America. Volkswagen, for example, set up one of the first joint ventures in China, whilst Latin America has had a long history of truck manufacturing. Companies that have, and are continuing to invest directly in these markets are benefiting from south-south trade corridors in the same way, and potentially even more than companies headquartered in these regions as a result of their experience with operating in geographically diverse locations. Other companies worried about the growth of south-south trade and the potential negative impact on their business will probably find that making an investment in these markets now may already be too late.” [[[PAGE]]]

Responding to the global challenge

Continued globalisation across a wider spectrum of multinational companies means that foreign exchange risk, cross-border cash management, local payment and collection requirements, and compliance with local regulatory requirements are increasingly priorities for companies of a variety of sizes and profiles. JP Cuevas, Bank of America Merrill Lynch continues,

“Companies of all sizes establishing themselves in Latin America have diverse requirements to manage cash and risk within a complex and diverse tax and regulatory environment. Consequently, they rely heavily on their global banking partners for information and advice from other regions on how to replicate structures designed to optimise operational and financial efficiency. This is particularly the case amongst our mid-cap corporate clients. We help them to achieve these objectives by leveraging the various tools available, which can often bring advantages over techniques used in other regions, such as the use of Boleto [a payment method in use in Brazil].”

Again, similar issues apply to companies establishing in regions such as Asia and Africa. It is not just corporations that are adapting to changing business models. The banks are doing so, as are the entities that support global trade. For example, one of the key issues faced by mid-cap and smaller multinational corporations in particular is liquidity, as Daniel Schmand, Deutsche Bank describes,

“Liquidity is an essential requirement for companies operating internationally, regardless of where they are headquartered, which has prompted a change in the way that imports and exports are conducted. For example, export credit agencies (ECAs) are changing their business models - from simply being providers of guarantees against events such as non-payment, they are now adding liquidity or funding to their offerings. This is particularly important for the upper mid-cap sector, which is an important employer in emerging markets, but may be experiencing funding constraints from their banks, as well as mid-cap firms that have arm’s length manufacturing that are key to emerging market economies."

Companies are also using a range of techniques to manage risk in their trading process. George Fong, J.P. Morgan illustrates,

“We continue to see demand for both traditional trade finance instruments and open account solutions to meet the diversity of customers’ financing and risk management requirements. For example, while trade in commodities often uses traditional trade finance solutions, trade flows involving manufactured goods have gradually shifted to open account terms.”

Changing trade patterns also mean a shift in traditional trade practices, particularly as multinational corporations from emerging regions expand their business. For example, as George Fong, J.P. Morgan discusses, RMB has a growing role in international trade.

“While USD is traditionally the currency of choice in international trade, the growth of south-south trade is also driving a pick-up in trading across other currencies. In particular, we are seeing the steady growth of RMB as a settlement currency for cross-border trade, on the back of continued liberalisation of the currency by the Chinese government.”

Recent measures to simplify the RMB cross-border trade settlement scheme are likely to fuel an increase in RMB-denominated and settled trade involving counterparties in China. In addition, as the offshore RMB market continues to mature, it is also likely that south-south trade where neither trade partner is located in China will use RMB as a settlement currency.[[[PAGE]]]

While many multinationals are experienced in expanding their business into new regions that have a diverse regulatory, cultural and infrastructure environment, few companies are in a position to increase their treasury staffing to manage the associated liquidity, risk and operational requirements. Furthermore, smaller companies will typically have less of a track record in operating in emerging markets. Consequently, companies of all sizes are looking to their banks and vendors for advice, standardised and streamlined processes, and global visibility of cash and risk. As George Fong, J.P. Morgan outlines,

“Some of the most important trade finance trends we are seeing amongst our customers include the following:

  • The need for enhanced management information
  • A demand for richer front-end platforms and processing capabilities, driven by an ongoing evolution in technology
  • Integration between trade and cash, including a trend towards regional treasury or shared service centres becoming centralised trading hubs to enable a holistic approach to working capital
  • A demand for excellence in customer service.”

The banking relationships themselves that underpin a global trade and cash management strategy may also need to shift to support an evolving business strategy. While existing domestic and international banking partners may be well-suited to supporting familiar cross-border trading patterns, new partners may be required to meet changing south-south needs. As Shivkumar Seerapu, Deutsche Bank exemplifies,

Shivkumar Seerapu“Large multinationals from around the world are approaching Deutsche Bank to understand how we can support their business within and outside their home markets. For example, a Chinese multinational may work with local banks in China, but work with Deutsche Bank in other parts of the world, while a European corporation may have a global relationship with the bank. We are well-equipped to meet these needs with the broad range of our solutions offering, our global network and understanding of the local markets, therefore providing support for all the major trade corridors globally.”

Diversification of global risk

Global trade is not migrating to the southern continents, but trading networks are becoming more complex and more geographically diverse. As the US economy recovers and, one must assume, Europe follows at some stage, the growth potential in these economies will resume. This is unlikely to mean that companies will abandon their Asian, Latin American and African business; indeed, the global financial crisis and Eurozone crisis have illustrated the importance of diversification, not least in trading partners and regions. As George Fong, J.P. Morgan suggests, however, strategies for how to optimise production and sales in each market whilst managing costs could change,

“Interestingly, the development of new trade patterns has not been in one single direction. As manufacturing costs increase in emerging economies, some companies are redirecting their manufacturing supply chain towards their home markets, resulting in lower transport and logistics costs. Others that remain proactively engaged in operating in new markets may choose to do so through local partners.”

However the ebb and flow of trading tides continues, what is certain is that the inherent complexity in global trade will remain, and treasurers will be tasked to manage the associated risk, cash, liquidity implications, wherever in the world they occur.

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Article Last Updated: May 07, 2024

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