Cash & Liquidity ManagementInvestment & FundingEconomyTrade deals: a new paradigm

Trade deals: a new paradigm

While protectionism has gained greater publicity in recent years, there is good reason to believe that trade barriers will continue to be removed.

There is no denying the fact that World Trade Organisation (WTO), free trade agreements and trade cooperation have collectively continued to expand trade relationships, global trade and markets, increased global growth while creating employment and a better quality of life.

Despite rhetoric around protectionism and policy uncertainty, world merchandise trade volume is forecasted to grow at 2.4% in 2017 and pick up slightly to between 2.1-4.0% in 2018, while global gross domestic product (GDP) growth is expected to rise 2.7% in 2017 and 3.6% in 2018.

Economic activity in the main G3 economic blocs – the US, China and the European Union (EU) member states – has also improved due to positive sentiment about US infrastructure spending and tax cuts, Chinese investment in the ‘belt and road’ initiative, improved economic activity in the five ‘BRIIC countries’ of Brazil, Russia, India, Indonesia and China, and the likelihood of further improvements in EU economic activity.

Free trade and mutual ‘win-win’ often overlooked

In recent times, inequalities of income and wealth, corporate redundancies, lower growth, trade deficits and the loss of jobs in developed markets (DM) and emerging markets (EM) alike have been blamed on free trade, investment, immigration and environmental policies. There is indeed an element of truth to this story, although technological changes have also been disruptive.

EMs have partially allowed access to trade, services and investment sectors, while regulations, government support, and ‘win-win’ results have mostly been to the advantage of those EMs. The removal of non-tariff barriers and state support, structural changes, and infrastructure development required in many EMs to allow DM companies a level playing field via free and fair access to EM markets has been slow and selective.

Populist politics, uncertainty and risks

In the meanwhile, political parties, particularly in US and UK, that have reacted to people’s perceptions and changed political narrative favouring protectionist policies have been handsomely rewarded. Entrenched in power, these political parties are now rhetorically pushing policies that promote ‘anti-globalisation and local first’ ‘bilateralism’ and the ‘reversal of environment friendly policies’ while ignoring the overall benefits created by free market and bilateral policies that accelerate sustainable growth, global cooperation and economic integration.

Although specific details of the policy and implementation plan are yet to emerge, the fear of protectionism has heightened uncertainty and risks, increased costs, and stalled new investment initiatives and employment. Meanwhile regulatory and tax compliance has widened, with heightened scrutiny around cross-border transactions, transfer pricing and cash pools.

Disruption caused by technology, digitisation, and changing demographics

The Dodd-Frank Wall Street Reform and Consumer Protection Act, environmental protection laws and the social responsibility mandate of businesses have taken the sting out of carry trades in traditional and commodity industries. Corporates are investing in technology, customer focus, innovation, agility, and efficiently-used resources that reduce cost while improving scale and scope of market share and revenues.

Technology and digitisation have benefitted corporates yet proven to be highly disruptive and reduced asymmetry of knowledge, causing erosion of competitiveness and increased redundancies. There is hollowing and a redundancy effect impacting income and wealth, particularly in traditional industries, unskilled talent and developed markets.

Demand for technology and digitisation has made companies in the technology sector the most highly valued, surpassing finance, energy, industrials and commodity titans.

DMs typically have ageing populations and an influx of immigrants, which has altered demands and the societal mix; reduced productivity; impacted investments and growth; and increased the cost of business. EMs have the youngest populations, which help growth, investment and the adaptation of technology.

Protectionism, the bargaining chip for a better outcome

Protectionism and bilateral trade agreements are likely to be used as a bargaining chip to gain better access to markets for goods and services, accelerate structural changes, and increase consumer spending.

Eventually, all countries will have to encourage free and fair markets and reduce the inequality of income and wealth. Russia, North Korea China, and Middle Eastern countries will have to respect private property rights, uphold the rule of law and promote good governance and geopolitical stability.

The paradigm is changing

The application and impact of science, technology, engineering, medicine, renewable energy and the shared economy is impacting work and daily lives, values, governance, ethics and regulations:

• Company operations are being digitised and automated, which promotes the use of robots, artificial intelligence (AI) and the sharing of resources.
• Ultra-efficient technology and new materials are replacing traditional technology.
• Fossil fuel is being replaced by renewables, which is possible with reductions in investment and operating cost and government support.
• New commodities that cater to the new technology are in demand.
• Companies are focusing on customer solutions and innovations to extract maximum value and create a distinct competitive advantage.
• Fintech and financial engineering are aiding the commercialisation of technological investments.
• Professionals and consumers are highly educated and aware, active learners and socially mobile
• Leadership sees the need to continuously retrain, re-engineer and revitalise.
• Leadership is constantly navigating change, becoming agile, de-risking, deleveraging and managing disruption to ensure business continuity

A new paradigm to exponentially benefit global trade and investments

The size and scope of markets, trade and financing, work and life are being redefined by technology, millennials and newer commodities.

Protectionism will soon be passé, as the forces of globalisation and new technological growth are irreversible. Countries will support free and fair multilateral policies, make structural changes and build global alliances.

Despite recent protectionist rhetoric, in May 2017 China and the US reached an agreement whereby China has lifted its ban on US beef and liquified natural gas (LNG), and allowed US credit card companies and rating agencies into China, while Chinese cooked poultry has been allowed to enter the US. There are ongoing discussions about Chinese banks getting fair access to the US banking market.

Structural changes aid economic growth, stability and competitiveness, and improve access to global trade and investment – as is evident in initiatives by China, India, Indonesia, Brazil, and Eastern Europe. Structural changes are gradual and require investment in technology, infrastructure, people and good governance; each of which improves skills, the quality of life, a sustainable environment and economic stability.

Amazon, Alibaba, Uber, Airbnb, and Uber are among the companies that are scaling up and redefining technological innovation and international trade. Traditional companies and financial institutions are investing in technology and digitation to remain agile, scale up and widen the scope of their activities.

China will position itself as a ‘world economic leader’ and aggressively pursue its ‘one belt, one road’ policy to develop new markets in Central Asia, Eastern Europe, Africa and South Asia, and export its excess industrial capacity.

Navigating change

Both chief financial officers (CFOs) and treasurers constantly have to navigate and adapt to change, seize opportunities in order to prepare for disruptions and risks, preserve competitiveness, and increase productivity, profitability and shareholder value.

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