The shifting sands of international trade have rarely been more precarious. Political and economic forces are changing global business in unforeseeable ways. Companies are delaying capital investments, searching for new supply chains, and making significant adjustments to business strategies.
These challenges are unlikely to end soon. “World trade will continue to face strong headwinds in 2019 and 2020 after growing more slowly than expected in 2018 due to rising trade tensions and increased economic uncertainty,” the World Trade Organization (WTO) said. “With trade tensions running high, no one should be surprised by this outlook,” WTO Director-General Roberto Azevêdo observed.
Azevêdo is right. What is surprising, though, is that this turmoil is also leading to some extended benefits in the marketplace as companies seek to expand their supply chain and diversify their risk.
“Before now, globalization really meant dealing with one country, and very often, it was one of two providers or suppliers. So, it was not really globalization. It was basically international,” observed Stephen Carew, my colleague and Regional Manager in the Global Trade Solutions group at Bank of the West.
“This is maybe the beginning of real globalization, where even smaller companies are going to stop having just one simple corridor from their home country to another country,” Carew explained. “Instead, we’ll start to have several corridors with companies diversifying more of their risk, which will bring extended, long-term benefits.”
In other words, the real short-term pain of today’s trade wars could very well benefit these enterprises in the longer term.
Different Industries; Similar Challenges
For now, much of the impact—and pain—of today’s trade disputes depends on the industry and size of the company. For example, U.S. wine exports to China were down by one-third* in the first half of 2019 compared with the same period in 2017 because of Chinese tariffs.
For larger companies that can afford a dedicated procurement division, it’s often easier to navigate the current upheavals as they have resources to analyze markets, identify new partners, and pursue new strategies.
But for companies with less than $1 billion in sales, the person in charge of procurement is often wearing various hats. It can be more challenging to identify alternatives and conduct due diligence overseas, and that’s why it can be vital to seek guidance, if not assistance.
In our experience, many companies do not realize how a global banking relationship can help them foster and expand their business in a sustainable way, with a variety of solutions adapted to each commercial and country situation.
Banks with a solid international trade franchise can indeed support importers in their efforts to diversify, or complement their supply chain, by offering tailored techniques to address the resulting sourcing and financing risks.
For exporters, global banks can mitigate the various risks derived from expanding to new markets or weathering through changes in the global economy, within bespoke credit, liquidity, hedging, and payment solutions. A bank with a local presence throughout the world can address each of these issues, and more.
Like many of our corporate banking clients, companies are often unfamiliar with the challenges of expanding into new markets, which typically includes three areas of concern:
- Commercial Risk
- Payment Risk
- Regulatory Risk
For both importers and exporters of goods, companies can be confronted with concerns over mitigating the supplier and product risk, while ensuring that new inbound commercial flow will not alter their liquidity position or pollute well-established commercial relationships and terms with their clients.
By combining Bank of the West’s knowledge of a local company with our parent BNP Paribas’ presence globally, we are able to provide the expertise and experience to assist with expansion. “Being able to tap into the international footprint of BNP Paribas has made a huge difference for my clients,” Carew said. For example, knowing to ask for contracts in both local currency and U.S. dollars can protect against currency fluctuations. “The creative solutions that we can come up with really can have a positive impact on our clients,” Carew added.
Navigating the Unknown
There is no way to ensure that future trade battles and tariffs will not disrupt a business. But anticipating possible challenges is key. Unfortunately, most companies are reactive to problems, rather than preparing ahead of time by laying the groundwork or pushing forward with new alternatives.
Most important is getting prepared now for the inevitable shifting sands that are most likely to come.
“It doesn’t make a difference if you haven’t been impacted yet. I would suggest getting prepared now,” Carew said. “Some companies stay concentrated in China, for example, and don’t even consider going elsewhere because it’s deemed to be too risky.”
“Actually, being concentrated is also risky,” he said, “and the lesson we are having right now is the hard way to learn it.”