An Inflection Point for Globalization (select a colored circle to filter) Click to Refresh Timeline Growing Eastern hemisphere dominance Retreat of traditional trading powers Politicization of trade

Key Takeaways

Featuring viewpoints from Haytham El Maayergi (Global Head of Transaction Banking at Abu Dhabi Islamic Bank), Patricia Hines (Senior Analyst, Corporate Banking at Celent), Tran Phuong (Senior Executive Vice President at Joint Stock Commercial Bank for Investment and Development of Vietnam) and Herbert Plank (Head of Trade Finance at Credit Suisse)

One Belt, One Road

Explainer: Launched by China at the end of 2013, the Silk Road Economic Belt and the 21st Century Maritime Silk Road encompasses around 60 countries. The vision is to accelerate economic growth across the Asia Pacific area and Central and Eastern Europe through Chinese-backed infrastructure development.

Consequence: China can use the Belt and Road Initiative to address excess capacity in its industrial sectors. Eventually entire production facilities may be migrated out of China into Belt and Road Initiative countries, with the resultant implication for supply chains.

China's plan to build ports, roads, railways, and other forms of infrastructure means some $900bn1 of investments, financed by a variety of credit funds and Chinese or China-backed banks, many of them members of the newly-formed Asian Infrastructure Investment Bank (AIIB), are projected.

September/October 2013

Increased Regulatory Scrutinyselect circle to see key quote on topic

Explainer: Recent years have seen regulators place greater emphasis on strengthening anti-money laundering and terrorism financing regulations. As part of these efforts, the U.S.’s Financial Crimes Enforcement Network proposed2 Know Your Customer requirements in 2014, starting a trend toward higher KYC standards worldwide.

Consequence: As this increased regulatory pressure affected the banks in their home jurisdictions, the standards were applied there as well. In less-developed economies where larger banks do not have a physical presence, this resulted in those banks which lack the sophistication and technology to manage their own customers being left out of the correspondent banking chain.

According to the ICC’s recent publication, Rethinking Trade and Finance3, because adverse financial and reputational consequences arising from compliance failures by correspondents could be catastrophic, the current risk-reward equation has fundamentally put into question the viability of traditional correspondent networks, with the cost of maintaining even a basic relationship reportedly increasing more than five-fold.

July 2014
Increased Regulatory Scrutiny Created with Sketch. We’re talking to our clients about how to improve their product quality and to adapt to evolving regulations. - Tran Phuong, Senior Executive Vice President at Joint Stock Commercial Bank for Investment and Development of Vietnam

U.S. Exim Lapse in Authorization and Subsequent Loan Guarantee Cap

Explainer: The U.S. export credit agency’s authorization lapsed in 2015, but was restored five months later. However, with only two of five board seats filled, its loans and guarantees are capped at $10 million, preventing it from financing large exports such as commercial aircraft and power turbines.

Consequence: Foreign ECAs have stepped up their support for exporters which are able to access their financing. Meanwhile, innovative solutions have had to be found in order to keep trade moving, including taking deals directly to the capital markets, leveraging on the strength and ratings of airline buyers. Larger exporters have to seek public sector support for both credit and liquidity, with the resultant increase in costs. For those smaller, emerging multinationals who require more than $10 million coverage per deal, this represents a barrier to trade.

July 2015

Nuclear Deal with Iran

Explainer: A preliminary framework agreement reached in 2015 between Iran and a group of world powers: the P5+1 plus the EU, the Iran nuclear deal framework allowed for the lifting of all nuclear-related economic sanctions on Iran.

Consequence: While the lifting of sanctions potentially opens the way for oil revenue and frozen assets to be realized, many countries remain reticent to develop trade ties with Iran, due to concerns over potential issues around compliance with remaining sanctions. However, in the first deal since sanctions were lifted in early 2016, French oil major Total, along with China's CNPC, has signed a $4.8 billion agreement to develop the country’s South Pars gas field4. It has since been followed by a consortium of Indian businesses, who are reportedly offering $11 billion to develop another of Iran's natural gas fields, Farzad-B field, demonstrating a potential uptick in investor confidence around the country. As countries begin to expand their trading relationships with Iran, natural gas markets may become disrupted, potentially challenging the expansion of the nascent U.S. shale gas industry.

July 2015

Nuclear Deal with Iran

Explainer: A preliminary framework agreement reached in 2015 between Iran and a group of world powers: the P5+1 plus the EU, the Iran nuclear deal framework allowed for the lifting of all nuclear-related economic sanctions on Iran.

Consequence: While the lifting of sanctions potentially opens the way for oil revenue and frozen assets to be realized, many countries remain reticent to develop trade ties with Iran, due to concerns over potential issues around compliance with remaining sanctions. However, in the first deal since sanctions were lifted in early 2016, French oil major Total, along with China's CNPC, has signed a $4.8 billion agreement to develop the country’s South Pars gas field4. It has since been followed by a consortium of Indian businesses, who are reportedly offering $11 billion to develop another of Iran's natural gas fields, Farzad-B field, demonstrating a potential uptick in investor confidence around the country. As countries begin to expand their trading relationships with Iran, natural gas markets may become disrupted, potentially challenging the expansion of the nascent U.S. shale gas industry.

July 2015

Formation of AIIBselect circle to see key quote on topic

Explainer: Established in December 2015, the China-led Asian Infrastructure Investment Bank comprises 57 member states, with a further 23 prospective members. Neither Japan nor the U.S. are currently members.

Consequence: The ADB estimates that developing Asia needs $800 billion each year in infrastructure investment, and the AIIB will go some way to increase the pool of multilateral resources available to help meet these needs. Between this, and the planned One Belt, One Road initiatives, there will be growing opportunities for project finance. These consortia and projects will be led by Chinese companies, and as a result the balance of power is shifting. The AIIB has demonstrated a willingness to provide liquidity at reasonable pricing, providing a profitability benefit for those who choose to participate.

December 2015
Formation of AIIB Created with Sketch. China will say to the U.S.: ‘If you don’t want to take the lead, we’ll take your place.' - Patricia Hines, Senior Analyst, Corporate Banking at Celent

Saudi Development Planselect circle to see key quote on topic

Explainer: Vision 2030, approved by the Saudi cabinet in April 2016, constitutes a roadmap for the kingdom’s development and economic objectives for the next 15 years. Highlights include the planned transformation of Saudi Arabia into a “global investment powerhouse,” leveraging its strategic location into a hub connecting three continents, and the diversification away from oil.

Consequence: As the Saudi government works to overhaul the economy, new opportunities could emerge for companies focusing on infrastructure. An offering of up to 5% of Saudi Aramco in an IPO, at a predicted price of $100 billion and valuing the company at $2 trillion, is expected in late 2018/early 2019, and will not only enable the government to finance its budgetary requirements and reduce its dependence on oil, but will also be seen as inspiring investor confidence and garnering counterparty trust in an economy in which the primary driver of economic growth has been thus far government spending.

April 2016
Saudi Development Plan Created with Sketch. This shift will open more doors for the Middle East, creating an opportunity for the region to push for diversification. This means less addiction to oil and more infrastructure and technology. - Haytham El Maayergi, Global Head of Transaction Banking at Abu Dhabi Islamic Bank

The Brexit Voteselect circle to see key quote on topic

Explainer: About 44% of UK exports in goods and services went to other countries in the EU in 2016, representing £240 billion out of £550 billion total exports. Exports from the rest of the EU to the UK were worth about £310 billion. As it has decided to leave the EU, the UK will need to strike new, bilateral deals in order to trade with the remaining EU members, or failing that, it will be required to follow World Trade Organization (WTO) rules on tariffs.

Consequence: UK companies which trade with Europe may consider relocating to the continent. The implications include a shift in supply chains as well as the impact of new tariffs and non-tariff barriers, potential restrictions to trade in services and a change in corporate footprints.

As UK-based banks seek to restructure their businesses to prepare for the potential terms of a future UK-EU market access agreement, the reduced economies of scale may result in them narrowing their service offering to cover only their largest and most important customers. This may negatively impact upon small- and medium-sized businesses whose needs are more cost intensive.

Meanwhile, new bilateral trade deals may generate documentary trade activity to help mitigate the risk of new trading relationships with new counterparties. New trade routes could also result in an increase in demand for supply chain finance, while new FTAs may also lead to more data-based trade finance as exporters rethink relationships.

June 2016
The Brexit Vote Created with Sketch. We should not just see Brexit as a challenge, but also as chance to seek opportunities. What we face in Europe right now is too much administrative burden, specifically the negotiation of EU contracts across the region, which can slow down the process. - Herbert Plank, Head of Trade Finance at Credit Suisse

The Brexit Voteselect circle to see key quote on topic

Explainer About 44% of UK exports in goods and services went to other countries in the EU in 2016, representing £240 billion out of £550 billion total exports. Exports from the rest of the EU to the UK were worth about £310 billion. As it has decided to leave the EU, the UK will need to strike new, bilateral deals in order to trade with the remaining EU members, or failing that, it will be required to follow World Trade Organization (WTO) rules on tariffs.

Consequence UK companies which trade with Europe may consider relocating to the continent. The implications include a shift in supply chains as well as the impact of new tariffs and non-tariff barriers, potential restrictions to trade in services and a change in corporate footprints.

As UK-based banks seek to restructure their businesses to prepare for the potential terms of a future UK-EU market access agreement, the reduced economies of scale may result in them narrowing their service offering to cover only their largest and most important customers. This may negatively impact upon small- and medium-sized businesses whose needs are more cost intensive.

Meanwhile, new bilateral trade deals may generate documentary trade activity to help mitigate the risk of new trading relationships with new counterparties. New trade routes could also result in an increase in demand for supply chain finance, while new FTAs may also lead to more data-based trade finance as exporters rethink relationships.

June 2016
The Brexit Vote Created with Sketch. We should not just see Brexit as a challenge, but also as chance to seek opportunities. What we face in Europe right now is too much administrative burden, specifically the negotiation of EU contracts across the region, which can slow down the process. - Herbert Plank, Head of Trade Finance at Credit Suisse

U.S. Electionselect circle to see key quote on topic

Explainer: The election of President Donald Trump upon a platform that moved away from free trade and globalization represents an enormous regime change in global economic management.

Consequence: Policy highlights include: the U.S. withdrawal from the Trans-Pacific Partnership (TPP); a “tougher” stance on trade negotiations; the Secretary of Commerce will be tasked to identify violations of trade agreements and use American and international law to end any abuses; the renegotiation and potential withdrawal from the North American Free Trade Agreement (NAFTA); tariffs and taxes on countries actively manipulating their currencies, and the naming of China as a currency manipulator; U.S. Trade Representative to bring trade cases against China addressing violations of the World Trade Organization (WTO) rules and restrictions; employment of aggressive tariffs against countries promoting illegal activities.

Small- and medium- sized enterprises may be dissuaded from international business, becoming more domestic in focus. As a result, banks may begin to reconsider their customer base.

Nov 2016
U.S. Election Created with Sketch. U.S. policies now can change overnight, which makes it harder for other countries to do business with the U.S., because their corporations cannot plan. - Patricia Hines, Senior Analyst, Corporate Banking at Celent

U.S. Electionselect circle to see key quote on topic

Explainer: The election of President Donald Trump upon a platform that moved away from free trade and globalization represents an enormous regime change in global economic management.

Consequence: Policy highlights include: the U.S. withdrawal from the Trans-Pacific Partnership (TPP); a “tougher” stance on trade negotiations; the Secretary of Commerce will be tasked to identify violations of trade agreements and use American and international law to end any abuses; the renegotiation and potential withdrawal from, the North American Free Trade Agreement (NAFTA); tariffs and taxes on countries actively manipulating their currencies, and the naming of China as a currency manipulator; U.S. Trade Representative to bring trade cases against China addressing violations of the World Trade Organization (WTO) rules and restrictions; employment of aggressive tariffs against countries promoting illegal activities.

Small- and medium-sized enterprises may be dissuaded from international business, becoming more domestic in focus. As a result, banks may begin to reconsider their customer base.

Nov 2016
U.S. Election Created with Sketch. U.S. policies now can change overnight, which makes it harder for other countries to do business with the U.S., because their corporations cannot plan. - Patricia Hines, Senior Analyst, Corporate Banking at Celent

Withdrawal from TPPselect circle to see key quote on topic

Explainer: The Trump Administration’s decision to leave the 12-nation trade deal that included the U.S., Japan, Mexico, Canada, Australia, New Zealand, Vietnam, Peru, Chile, Malaysia, Singapore, and Brunei reflects a major pivot for the U.S. on trade policy. The U.S. government is seen in favor of negotiating trade deals with individual allies rather than via multinational agreements.

Consequence: The remaining TPP members have stated that they will continue with trade integration, shutting the U.S. out of measures to address issues faced by multinational corporations, such as compliance with multi-jurisdictional supply chain regulations, and placing it at a disadvantage in terms of duty-free access for goods, opening up services and investment and ensuring cross-border data flows.

While large corporates have the expertise to manage in the conventional tariff construct, the elimination of tariff barriers and other impediments to trade offered by the TPP would have presented efficiency gains for smaller firms, enabling them to function with one business process across at least 12 countries. As a result of the U.S. departure from the deal, small- and medium- enterprises looking to grow internationally will need to increase investment into knowledge to navigate these markets.

Jan 2017

Withdrawal from TPP

Explainer: The Trump Administration’s decision to leave the 12-nation trade deal that included the U.S., Japan, Mexico, Canada, Australia, New Zealand, Vietnam, Peru, Chile, Malaysia, Singapore, and Brunei reflects a major pivot for the U.S. on trade policy. The U.S. government is seen in favor of negotiating trade deals with individual allies rather than via multinational agreements.

Consequence: The remaining TPP members have stated that they will continue with trade integration, shutting the U.S. out of measures to address issues faced by multinational corporations, such as compliance with multi-jurisdictional supply chain regulations, and placing it at a disadvantage in terms of duty-free access for goods, opening up services and investment and ensuring cross-border data flows.

While large corporates have the expertise to manage in the conventional tariff construct, the elimination of tariff barriers and other impediments to trade offered by the TPP would have presented efficiency gains for smaller firms, enabling them to function with one business process across at least 12 countries. As a result of the U.S. departure from the deal, small- and medium-sized enterprises looking to grow internationally will need to increase investment into knowledge to navigate these markets.

Jan 2017

French Elections

Explainer: Far-right anti-EU candidate Marine Le Pen reached the last stage of the French presidential election. Victory, however, went to pro-EU centrist and political unknown Emmanuel Macron, who took 66.1% of the final vote on an internationalist agenda. Nonetheless, Ms. Le Pen’s party, the Front National, took around 11 million votes, the highest it has ever polled, demonstrating growing anti-globalization sentiment in the EU’s third-largest economy.

Consequence: Were France to have elected the Front National, a “Frexit” referendum would have been held, and with it the potential for the country to withdraw from the EU, leading to an existential crisis for the trading bloc in the wake of Brexit. This crisis was averted, but nonetheless, the political discourse in France has undergone an emphatic shift toward trade, as this becomes a greater foreign and domestic policy priority for the French government.

May 2017

Renegotiation of NAFTA

Explainer: : In May 2017, U.S. Trade Representative Robert E. Lighthizer announced the Trump Administration’s intention to renegotiate the North American Free Trade Agreement (NAFTA). A July release by the U.S. government outlined the key negotiating objectives to “improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.”

Consequence: : One aim is to strengthen rules of origin that ensure products from non-NAFTA countries do not have the same benefits as those produced in the region. Supply chains in the auto and aerospace manufacturing industries could be impacted by adjusting rules of origin, with a potential increase in costs for companies as they buy components from countries outside of the NAFTA area.

This could impact upon U.S. net exports, which will potentially become less competitive and more expensive if component costs increase along the supply chain. Smaller businesses will likely be hardest hit, as they often lack the knowledge and resources to navigate through additional restrictions.

May 2017

Korea FTA Renegotiation

Explainer: In June 2017, President Trump announced that the U.S. would renegotiate its trade deal with South Korea in order to address that country’s $17 billion trade surplus with the U.S. and rebalance the pact.

Consequence: President Trump is set to call for the lifting of barriers to U.S. auto sales in South Korea and address the issue of Chinese steel exports that potentially reach the U.S. via South Korea. Meanwhile, South Korean companies have unveiled plans to import more American shale gas and build new factories in the U.S. While this may result in some shifting supply chains, South Korea will likely move aggressively into Asian markets to offset any lost trade values with the U.S., and the ultimate impact of the FTA renegotiation may be an increase in intra-Asian trade.

June 2017

Korea FTA Renegotiation

Explainer: In June 2017, President Trump announced that the U.S. would renegotiate its trade deal with South Korea in order to address that country’s $17 billion trade surplus with the U.S. and rebalance the pact.

Consequence: President Trump is set to call for the lifting of barriers to U.S. auto sales in South Korea and address the issue of Chinese steel exports that potentially reach the U.S. via South Korea. Meanwhile, South Korean companies have unveiled plans to import more American shale gas and build new factories in the U.S. While this may result in some shifting supply chains, South Korea will likely move aggressively into Asian markets to offset any lost trade values with the U.S., and the ultimate impact of the FTA renegotiation may be an increase in intra-Asian trade.

June 2017

Key Takeaways

Click white bullets to explore more insights

Trade decisions are becoming more political. They are no longer taken on the basis of the numbers alone.

Sanctions have become a common response to several geopolitical challenges. In a changing global trade marketplace, there exist various opportunities to violate these restrictions while doing business, and corporates need to locate sanctions tripwires before making decisions.

The currents of trade are now starting to push back against some countries that will be less favorably viewed in a trade deal.

Time is a challenge, since as long as there is uncertainty around markets, decisions cannot be taken.

The traditional focal point of global trade has accelerated its shift eastward, and corporates will increasingly find themselves operating in new markets and new economies.

The new environment is going to create demand for creative solutions from banks in order to support their clients, from capital markets funding to direct bank lending or even exporter education opportunities.

While populism and nationalism in some quarters will see a move toward protectionism, new leaders of global trade are emerging.

Banks and corporates which are able to adapt to the shifting sands of geopolitics will be best equipped to take advantage of the new opportunities springing up amid worldwide changes.

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FOOTNOTES:
1 https://www.ft.com/content/0714074a-0334-11e7-aa5b-6bb07f5c8e12
2 https://www.treasury.gov/press-center/press-releases/Pages/jl2595.aspx
3 https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
4 http://www.total.com/en/media/news/press-releases/iran-total-and-nioc-sign-contract-development-phase-11-giant-south-pars-gas-field
5 https://www.bloomberg.com/news/articles/2017-07-03/india-gives-iran-11-billion-best-offer-on-farzad-b-gas-field
6 http://www.adb.org/news/more-public-private-partnerships-can-help-meet-development-challenges
7 https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l83u and https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l7px
8 https://assets.donaldjtrump.com/DJT_DeclaringAmericanEconomicIndependence.pdf
9 https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf
*All dollar amounts refer to USD unless otherwise noted.*
 

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