How might the ebb and flow of nearshoring plans in a turbulent market impact corporate treasuries and cross-border payments? Pierre-Antoine Dusoulier, Founder and CEO at cross-border payments solution, iBanFirst, suggests possible outcomes as zero growth is predicted in international trade in 2023 and 2024.
Following the twofold shock of the pandemic and war in Ukraine, we now find ourselves amid an escalating wave of protectionism. The signs pointing towards the return of protectionism are undeniable as the world experiences a record number of economic barriers.
According to a report by the International Monetary Fund on geoeconomic fragmentation published on the eve of the World Economic Forum in Davos on 15 January this year, 2,500 restriction measures were identified in 2022, compared with fewer than 500 in 2009 in the wake of the global financial crisis.
With the additional complexities of unrelenting inflation and a push for strategic autonomy in the West, global trade is in a precarious position. It’s no surprise that the most recent United Nations Conference on Trade and Development (UNCTAD) Global Trade Update forecasts a slowdown throughout H2 of 2023. An economic crash remains an unlikely scenario and we forecast a soft landing for 2023 and 2024. Under the current conditions, we may well experience zero global growth across the next 18 months.
Despite this, during a period of decelerated global trade, the economic environment can adapt through ‘deglobalisation.’ Over the next two years we’re set to see a controlled landing of global trade with two key factors at play: nearshoring over relocation and the spending crisis in the West taking precedence over the return of local sourcing.
Nearshoring is the act of outsourcing business processes to a neighbouring country or nearby territory and is quickly becoming a popular alternative to international relocation. The current global socioeconomic environment has led to a reappraisal of global outsourcing, and for many, the subsequent reshuffle includes the introduction of nearshoring. In Europe, a remarkable 60% of companies are seeking to relocate their production to their home country or a neighbouring country by 2025, according to a report by BCI Global.
The international business withdrawal in favour of nearshore alternatives should come as no surprise in such a turbulent landscape. The worldwide surge in transport prices, continued supply chain concerns, and political upset in partner countries have resulted in many firms reaching for a closer, more controlled production arrangement.
Nearshoring reconsidered
Closer geographical proximity can offer a cost-effective approach, improved control over supply chains and lower fees. Less geographical distance can also lead to faster processing times – a common pain point for corporate treasuries conducting cross-border payments given the slow processing times associated with international transactions. Shortened processing times can also lead to improved cash flow management, which can be highly advantageous to many corporate treasuries given that limited spending power is a central concern for the near future.
During a period of global constraint in terms of spending power, corporate treasuries can utilise nearshoring to their advantage when conducting cross-border payments.
Nearshoring may help corporate treasuries navigate cross-border payments more efficiently. When dealing with traditional banks, corporate treasuries face a number of roadblocks when processing cross-border payments. Issues relating to lengthy processing times, hidden fees, and opaque transactions have only been exacerbated by a slowdown in global trade and constraints on spending power under the current climate.
While nearshoring can help somewhat to mitigate many of the difficulties typically faced when conducting cross-border payments, there are other concerns currently impacting the market that may cause many countries to seek more autonomous ways of carrying out business.
Cheapest wins
Ongoing international conflict has taken a particular toll on the energy market on top of the typical disruption to global transport. The International Energy Agency hasn’t completely dismissed the risk of possible gas shortages in Europe during the winter of 2023-2024. Any shortages or drop in reserves implies a surge in prices that feeds through to the cost of transport.
The new combination of citizen engagement and state regulation to tackle mounting ecological concerns may also affect international trade. Policies, like the EU’s commitment to carbon neutrality by 2050, are likely to usher in a new era of legislative framework that is both more local and more mindful regarding the ecological footprint.
Furthermore, stubborn inflation has remained a key factor in the West, with many countries struggling to descend to their 2% target despite raising interest rates. As a result, spending power has arguably become the central concern with many participants now in the race to find the cheapest solutions in order to stay competitive. This consideration puts the issues of autonomy, relocation, and control of the supply chain in second place.
As we look ahead in preparation of our prediction of zero economic growth for the remainder of 2023 and 2024, protectionism appears inevitable. The changing global trade landscape will bring with it a host of questions and challenges as we adapt to a revised international business environment. However, a soft landing doesn’t mean the end of international trade but rather the beginning of a new era in which astute treasurers will be central to the success of their organisations.
