Despite a marked slowdown in international trade, members within the leading cross-border trade and economic growth region of the world are well-positioned to lead global trade in the years to come.
With a weak growth of 1.6%, the year 2016 marked the sixth consecutive year of trade growth (in volume terms) being below the 3% mark. According to the World Trade Organization, the slowdown was on account of pervasive slowdown in economic activity, as also structural changes in the relation between trade and output.
According to the World Trade Organization, the slowdown was on account of pervasive slowdown in economic activity, as also structural changes in the relation between trade and output.
Historically, the volume of world merchandise trade has grown faster than global output, but for a few peripheral years. In fact, it grew more than twice as fast in the 1990s. Since the financial crisis, the ratio of trade growth to GDP growth has fallen to around 1:1, and last year for the first time since 2001, this ratio has dropped below 1, to 0.6:1. Several reasons have been attributed to the decline in this ratio including changes in the import content of demand, absence of trade liberalization, rising protectionism, contraction of global value chains, and a role of the digital economy and e-commerce.
Historically, the volume of world merchandise trade has grown faster than global output, but for a few peripheral years.
However, this prolonged period of weak growth in trade and output has now ended with a resurgence in exports growth in key regions, especially the Asia-Pacific. Trade volume growth in 2017, the strongest since 2011, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure.
This prolonged period of weak growth in trade and output has now ended with a resurgence in exports growth in key regions, especially the Asia-Pacific.
Resurgence in Asia-Pacific
Growth in merchandise exports from the Asian region has driven the global exports growth in the past few quarters. This growth has been broad-based and not confined to a few countries. In fact, growth in merchandise exports has picked up for all the major Asia-Pacific economies, with the quarterly exports growth of most of the Asian countries recording their highest levels during the various quarters of 2017 (Table).
Growth in merchandise exports from the Asian region has driven the global exports growth in the past few quarters.
There is a clear signal of revival in global trade. Asian economies are at the vanguard of this pick up in trade, given that the region accounted for nearly 41% of the global exports in 2016.One of the key drivers for the export rebound in Asia is the strong upturn in global demand for electronics. This global upturn in electronics demand has helped to boost the electronics exports of many East Asian economies during 2017.
A robust Chinese economic recovery has also boosted import demand and stimulated trade between China and its Asian trading partners in 2017. Going forward, regional trade linkages in Asia will continue to remain important for developments in global output and trade.
A robust Chinese economic recovery has also boosted import demand and stimulated trade between China and its Asian trading partners in 2017.
The positive growth and outlook in merchandise trade from the Asian region is also reflected in the commercial services trade. World commercial services trade recorded a strong expansion in 2017 after two years of weak to negative growth. Asia’s exports of commercial services recorded an annual average growth rate of 5.2% during 2010-17, while imports recorded growth of 6.3% during this period.
Clearly, Asia forms the cornerstone of the revival in trade of both global merchandise and commercial services.Growth is picking up in two-thirds of economies in developing Asia, supported by higher external demand, rebounding global commodity prices, and domestic reforms, making the region the largest single contributor to global output growth at 60%. This also implies that the region is in need of increased liquidity. This need doesn’t necessarily translate into supply of finance.
Asia forms the cornerstone of the revival in trade of both global merchandise and commercial services.
Trade Finance in Asian Region
The Global Financial Crisis has ushered in a new era of regulations. The Basel III standards require commercial banks to hold additional capital and undertake initiatives to address maturity mismatches between their assets and liabilities, thereby affecting their role as a long-term funder or non-investment-grade risk taker for long-term export finance transactions. This retreat creates a term and risk gap of significant proportions for Export Credit Agencies (ECAs) to fill.
The Global Financial Crisis has ushered in a new era of regulations.
Comparison of bank lending with ECA lending indicates that both ECA lending and bank lending declined during 2015. However, during 2016, there has been a significant increase in ECA lending, while bank lending remained stagnated.
Asian MLT export credit has also surged in the first half of 2017, which has driven the global growth in MLT business. ECA members of the Berne Union’s MLT Committee underwrote USD 65,950 million of new business in the first half of 2017, a rather significant increase of 35% over the same period in 2016.
Role of Exim India
Like other ECAs in the region, Exim India has also played a pivotal role in expansion of trade and investment from the country.
With industrial demand slowing down globally, governments around the world are now targeting energy and infrastructure projects as vital conduits to exporting high-value machinery, labor, expertise, and technology packaged as project engineering, procurement and construction (EPC), and ECAs are proving a vital tool for supporting these policies. Exim India has also focused on this aspect, and through project exports, provides vital conduits for exports expansion in the face of global slowdown in merchandise trade.
ECAs and their mandates are constantly evolving to adapt to changing market conditions, new opportunities, competition and political priorities. In response to the changing market and demand conditions, Exim India has launched several new initiatives in the recent period for fostering trade and investment in the region. Guidelines for existing programs have also been fine tuned to streamline processes and strengthen project monitoring.
ECAs and their mandates are constantly evolving to adapt to changing market conditions, new opportunities, competition and political priorities.
Way Ahead
Capacity building of the local financial sector will form the cornerstone of initiatives for improving the trade financing in developing countries. The growing role and influence of emerging-market firms in international trade need to be supported through a reform of the domestic institutions. Financial markets in several developing economies remain risk averse and much of the deposits in these economies are invested in low-risk instruments. Companies that are creditworthy but not having strong banking relations face higher interest rates, fees and capital requirements, which in turn restricts their prospects for growth and diversification. Technical assistance, aid, and policy advice will be required to equip developing countries with the necessary tools to counter the existing challenges and risks to trade finance.
Capacity building of the local financial sector will form the cornerstone of initiatives for improving the trade financing in developing countries.
Development Finance Institutions (DFIs) from developing countries can also explore the prospects for a trade finance facility to enhance the access to trade finance by companies and banks from participating countries. The facility can provide unfunded guarantee to enhance the international confirming banks’ appetite for local issuing banks by substitution of risk from the local bank to the facility. The facility can also extend trade finance loans, structured around a company’s trade cycle period—starting from the import/ purchase of raw materials to the receipt of sale proceeds. Loans can be provided against evidence of invoices/ trade activity.
Development Finance Institutions (DFIs) from developing countries can also explore the prospects for a trade finance facility
Co-financing is another well-established way of working for development – donors, multilateral institutions, and development agencies come together to assist developing countries with a variety of projects. For further encouraging co-financing of projects, a Register of Projects can be maintained for sharing early stage projects where other ECAs/DFIs and Multilateral Development Banks including Asian Infrastructure Investment Bank and New Development Bank can participate.