As a continuation of the article Trade Finance and Geopolitical Landscapes - Part One, part two continues to look at the world as it affects trade finance in the aftermath of first the 2007-8 financial crisis, and of course, the ongoing discord caused by the coronavirus pandemic.
Expectations
As was touched upon in part one, emerging markets were expected to trail more established ones as the world traversed its way through the global pandemic. But this has not been the case. There are some sound reasons for having believed it though. Perhaps first and foremost is the more brittle healthcare provision of the countries in which emerging markets typically reside: they are less capable of dealing with the unique circumstances of an epidemic. This may well have been the case seen recently in India. Furthermore, weak infrastructure and administrative processes means poor facilities for channeling of the virus as well as less robust record keeping and data analysis. Sensitivity to the ebb and flow of tourism, combined with external restrictions on movement, can have profound repercussions, and be indicative of a developing nation with an immature market. And, ultimately, limited financial resources equates to weaker support for a country’s communities and any measures they might want to take to curb the disease’s proliferation. Indeed, it was thought that the dependence of perceived vulnerable countries on export revenues would forbode a gloomy future coming through the pandemic.
What has happened however, and as highlighted by Robertsen for Standard Chartered, is that emerging markets’ exports have recovered over two quarters compared with the six or so that they took in the aftermath of the 2007-8 financial crisis. Of this unexpected turnaround, Asia in particular is experiencing a financial rebound (predicted too by Natalie Blyth, Global Head of HSBC’s trade finance business, in an article by Mark Clifford). The fiscal uptick is described by Robertsen as being down to ‘intra-regional trade’. This is very much in line with the notion that regionalization is on the increase as a result of the pandemic and mentioned in part one.
Asian Hegemony
Wider still, trade within the Asia-Pacific (APAC) region has gained momentum and China has now leapfrogged the US as the primary market for exports from other APAC nations. Assuredly, in November 2020, a trade agreement was reached between 15 APAC countries. Called the Regional Comprehensive Economic Partnership on Trade (RCEP) (and outlined by Lovells for JDSUPRA), it is the world’s largest regional trade agreement and was finalized after eight years of to-ing and fro-ing. In contrast other agreements have had wider scope, such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). However, the US opted out of this particular agreement and so finds itself with some challenges in light of the ratification of RCEP (which it was not invited to). The new agreement in APAC is sure to usurp some established US exports into the region fostering a conglomerate of competition against the US and its previous ‘America First’ policies, not to mention the isolationist legacy of Donald Trump’s reign that still exists (at least for the time being). Wholesale then, the rise of Asian trade is set to continue, with new partnerships and a more buoyant pandemic recovery.
Asia-Pacific is also proving to be a draw for Vladimir Putin. Russia’s 2014 invasion of the Ukraine saw a major break with the West. Souring relationships even further was the attempted murder of Sergei Skripal and his daughter in 2018 (and the subsequent diplomatic turmoil that ensued: a number of countries commiserated with the UK). Nonetheless, Russia’s trade relationship with APAC is somewhat underdeveloped, something that has not gone overlooked in the midst of a coronavirus-addled world economy. In particular (and discussed by Rumer, Sokolski, and Vladicic, for the foreign policy thinktank Carnegie Endowment for International Peace), is Russia’s relationship with Japan. Such ties are dependent on the ongoing dispute over the governance of the Kuril Islands. Japan and Russia contend that each has rights to the four southernmost islands in the chain, an argument that has continued since their annexing by the Soviet Union during WWII. Friction resolving this issue comes in the way of Russia’s strategic partnership with China, and also Japan’s accords with the United States. Broadly speaking, Russia’s relationship with Japan has been a stalled one since the end of the Cold War. Where some sort of progress could mean great economic leaps forward for both nations, the likelihood of that progress continues to look doubtful for now. It is not within the realms of the ridiculous to believe that Putin may look to establish some understanding with Yoshihide Suga, the Japanese Prime Minister, to offset the more recent break Russia has experienced with western powers, however. At the very least, Russian strategic ties to China – what with Chinese economic advancement – will continue to be valuable to Putin, especially since China regards the US as its primary international trading adversary.
Figure 1: Countries that make up the RCEP agreement.
The Brexit Exit
Before the pandemic landed and dominated the airwaves, the UK’s exit from the EU was a prominent and slow burning news item. Since that time, the UK’s transition away from the EU has been from inside the COVID-19 bubble, and finally officially occurred on 31st January 2020 at 23:00. The UK in 2018 – according to Eurostat – had the fifth highest nominal GDP in the world, and the EU – upon the departure of the UK – experienced a net loss of 13% of its unified population, as well as a decrease of 2.4 trillion euros in GDP. These data, in conjunction with the fact that the UK is the only nation to-date to have left the bloc, makes for some sober reading.
So, the UK has come to be the captain of its own vessel in navigating the world’s financial oceans, and in so doing, has turned its attention to an agreement mentioned above, and from which the US thumbed its nose: the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). This is an interesting move for the UK as some experts believe Britain will be simply swapping the impositions of the EU for new political and economic constraints (as discussed in The Week in June 2021). UK exporters are not expected to gain many benefits from the partnership compared with EU competitors, and there is the added risk that Britain will be drawn into complicated geopolitical machinations.
Gravity
Since the UK gained it freedom from its European neighbors, it has been dedicated to cementing deals with countries such as Vietnam, Japan, and Norway. These are countries to which Britain previously had financial links through the grace of EU association. Indeed, supplementary concessions may now be required. This is because in comparison to the relatively simple and liberal trade agreements that existed with these nations while the UK resided within the EU, the new independent deals now necessary are likely to be convoluted and will not enjoy the backing of the wider European community.
Equally, in trade, there is a concept known as the ‘gravity model’. This deals with the idea that the closer two countries or regions tend to be – like objects floating in the vacuum of space – the more likely they will be to attract one another. In terms of trade, it is easier and less expensive to export and import any commodity from an immediate neighbor. From the UK’s point of view, when taking into consideration the geography of Europe compared with that of the countries brought together by the CPTPP (that have borders with the Pacific Ocean), one is hard pressed to ignore the advantages bestowed upon Britain by its one-time inclusion in the EU.
It is important to note that, in general, and not just for the prospects of nations, regions, or even continents, macroeconomics experts have divergent views on the overall extent, projected long-term resurgence, and over-arching recuperation of the worldwide economy. Even though the watchwords are recovery and containment, and have been for a while, the global community is set to experience broad uncertainty for some time into the future, and any progress back to the world of the pre-pandemic may well be lethargic for some time yet to come.