Asia’s trade landscape is undergoing significant change. With structural economic change taking place in the region itself, coupled with growing protectionism in the west, Asia is facing some serious challenges to its – nevertheless robust – export growth. Not the least of these concerns is the US$1.6 trillion global trade finance gap – of which emerging Asian economies (including India and China) account for 43%.
Yet, Asia has experienced above average global trade growth in recent years and continues to do so. For example, US goods imports from Asia increased from US$584.9 billion in 2015 to US$641.4 billion in 2016. While this trend can continue, the region must first address both the internal and external shifts it is facing.
If Asia is to deal with these challenges deftly – and thereby secure and renew the region’s trading successes – regional and global collaboration is crucial.
China leading, Asia rising
China’s economic data has recently been lacklustre, with exports falling 7.7% year-on-year in 2016. Its overall economic growth is forecast to slow to 6.5% in 2017 – the slowest in 25 years. China is also being affected by the growing trend that is seeing low-end manufacturing moving away from its shores to elsewhere within the region – including Vietnam, Indonesia and the Philippines – as businesses seek out lower-cost locations. This shifting landscape is forcing China to rapidly turn its focus to medium- and high-end manufacturing to help address this gap. Of course, on the flip side, this is presenting significant opportunities to the wider region.
The trade outlook for the region is particularly positive, despite challenges to global trade. For example, it has been estimated that the combined GDP of five of the Asean nations – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam – could rise by approximately one third to US$3 trillion by 2020. This growth is being spurred as much by inter-regional trade as external trade due to an increase in commodity consumption from Asean markets (and further-fuelled by a predicted population rise from 620 million to 700 million by 2030) .
Meanwhile, although China’s unexpected economic slowdown has created flickers of uncertainty across global trade, the country’s position at the head of the Asian trading economy remains unshaken. For example, in a great show of Chinese strength, Indonesia’s China-funded railway – costing a sizeable US$5.1 billion – began construction in January this year.
Indeed, China has increased foreign direct investment (FDI) across the board, with estimates that its investment in the Asean’s six largest economies nearly doubled last year to US$16 billion. And with Asean’s trade ambitions set high – at US$1 trillion in trade flows with China by the end of 2020 – China’s hefty surge in FDI can help to directly benefit trade growth in the region.
On top of this, China’s One Belt, One Road initiative could potentially facilitate a complete reinvigoration of Asian trade. The “belt” refers to a road stretching from Hong Kong to Scandinavia; the “road” – a reference to the Silk Road – envisages the creation of new pan-regional shipping lanes. Through investments by the one-year-old Beijing-based Asian Infrastructure Investment Bank (AIIB), China is laying down material trade routes that could become the foundations for substantial trade growth in Asia.
Agreeing on trade
In addition to infrastructure enhancements, there are continual opportunities for structural improvements throughout global and Asian trade, and minimizing tariff and non-tariff trade barriers worldwide is high on the agenda. China is heading up the Regional Comprehensive Economic Partnership (RCEP), a 16-nation strong bloc – consisting of all Asean countries, New Zealand, Australia, South Korea, Japan, India and, of course, China – committed primarily to reducing barriers to trade and promoting economic relations between the member states.
Notably, seven RCEP nations are also members of the Trans-Pacific Partnership (TPP) and therefore potential casualties of the second challenge facing Asian trade: growing anti-globalization and protectionist sentiments emanating from the West. More explicitly, the abandonment of the TPP by the new American administration.
While this was initially a huge blow for the four Asean countries in the partnership – especially Vietnam, which was set to experience an estimated 11% boost to its GDP as a result of the agreement – the chances of RCEP being successfully realized have now increased.
So, even during a period of reduced commodity demand and comparatively slow growth, and in spite of America’s newfound protectionism, China’s economic investments and trade invigoration projects are proving both ambitious and hugely exciting for the Asia region as a whole.
Working together
Yet, realizing the region’s huge potential and achieving Asean’s trade flow goals requires Asian trade to overcome its third challenge: the undeniable dearth of trade finance. Many global banks have retreated from some geographical and market sectors – such as SMEs – due to concerns regarding risk, and this has left a yawning trade finance gap. This financing gap is a key concern, with unmet demand in developing Asia currently sitting at a massive US$692 billion.
Regional banks – particularly in the Philippines, India and Indonesia – are actively trying to address this issue, but while the intent is good and progress is being made, many local banks simply do not have the capital or facilities to make the necessary impact.
This is where collaboration is crucial. By working together, global banks’ extended reach and scale can be combined with the client bases and unrivalled country-specific insights and knowledge of local and regional banks: a “win” for both parties. And, through collaboration, the region can benefit from one other increasingly critical and central factor: technological innovation.
Innovative solutions
The way in which trade value chains operate is changing. Global banks are leveraging increasingly proficient innovative technologies, and exploring how they can be used to streamline the often-protracted processes involved in trade. By using new, cutting edge solutions, cross-border participants in the value chain can offer enhancements including improved risk mitigation and increased efficiency. For trade to continue to drive the Asian economy, these technologies are vital.
Making the greatest mark and with the most potential are application program interfaces (APIs) and the much revered blockchain – distributed ledger technology that does not require any kind of centralized intermediary, thereby mitigating risk and negating the possibility of fraud or multiple financing. For those Asian markets prone to higher risk, such technology could be transformative. And while for many local banks it can be difficult to pursue such levels of fintech innovation, collaboration with global banks enables them to gain access to key digitization strategies.
There are multiple trade opportunities across Asia, and banks have a key role to play in ensuring the region can thrive to its full potential. Simply put, by pursuing collaborative partnerships and leveraging the power of innovative technologies, banks can help to ensure that Asian economies are able to forge a more stable, cohesive, and prosperous future for trade in and beyond the region.
Dominic Broom is global head of trade business development at BNY Mellon and member of the International Chamber of Commerce (ICC) Banking Commission’s executive committee.
