Putting Trade Back on the Map

After a few years in which protectionism ruled, trade is officially making a comeback on the global economic stage. We are seeing this in a number of ways. The tariffs and barriers to trade that were implemented by countries to protect their economies during the global downturn are slowly being removed. Free trade agreements, such as those proposed between the US and South Korea, are back on the political agenda, while the UK’s recent trade mission to China demonstrates the continued importance of global trade to major governments.

But it is not just countries leading this charge – businesses are also looking to get involved in international trade. For many though, there are still uncertainties of how to transform a business from having a purely domestic operation to then taking advantage of the opportunities afforded by going global.

Understanding exactly where the opportunities lie, however, is challenging. HSBC commissioned Delta Economics to develop Mapping the World’s Trade Connections, the first report to give a complete picture of how the world is trading today, to help businesses understand where the opportunities may lie in the future. Bringing together extensive international trade data, the opinion of 50 businesses from around the globe already successfully trading internationally and expert insight from HSBC trade heads, the report’s authority lies in the breadth of the opinion and practical information it draws on to support business leaders in their decision making.

Why Trade is Important

Over the past 10 years, the nature of doing international business and trade has been transformed. Trade is no longer just about the import and export of goods and an international business is no longer simply one which sells its products in overseas markets.

Instead, operating internationally is as much about accessing markets for talent and innovation as it is about buying and selling products. A business’s international credentials today may well include joint ventures with overseas organisations, dealings in foreign currencies, a parent company or subsidiary based abroad or an internationally employed workforce, as it seeks to take advantage of global opportunities.

To the business with a global mindset, location decisions are no longer about what can be produced most cheaply and where, or even about where market demand is biggest. Rather, it is now about combining different research or innovation potential in one country with technical skills in another country and marketing and sales somewhere else. The world is a platform for businesses to accelerate growth strategically.

Trade also produces advantages for companies themselves. The competitive advantage for businesses of trading internationally, which for global corporations includes greater access to markets, improved economies of scale and access to capital, and allows a company to gain the edge in an increasingly competitive global business environment. Even at the smaller end of the business scale, a survey conducted across 33 European countries found that while just a quarter of European small and medium enterprises (SMEs) had undertaken international business relationships or transactions in the last three years, those who did trade internationally were more innovative and grew faster in terms of employment and turnover than those without international reach.

Trade Making a Comeback

While trade has itself been affected by the recent downturn, we are now seeing a return to growth and the positive trends that were evident in the past decade continuing.

According to HSBC’s latest Trade Confidence Index, international trade is fuelling global economic activity in the short term and will remain the strongest driver for growth in the next six months. Traders surveyed across 17 markets globally expected trade volumes and their trade finance requirements to increase or remain at current levels into 2011. It also found businesses in India (55%), South East Asia (52%), South America (36%) and Europe (29%) said their need for trade finance would increase in the next six months.

For businesses located in Europe, trading with markets across the continent is often a logical extension of the domestic supply chain. Europe is attractive for a number of reasons; barriers to trade are minimal and because Europe is a single market for services as well as goods, it provides a route to further accessing the global supply chain.

As a whole, Europe accounts for more than a third (34%) of world trade. Although this decreased between 2008 and 2009, we have seen that certain markets are showing strong growth figures. For example, share of trade in Germany, France, Italy, Ireland, the Czech Republic, Malta and the UK increased during this time period, suggesting that these countries are experiencing a quicker recovery than average in the EU. The largest trading partners in the EU are Italy, the UK, France and Germany who, in their own right, account for nearly 23% of world trade.

In terms of share of world trade, Mapping the World’s Trade Connections reveals some clear leaders in Europe, with Germany ranked third in the world with a share of over 10%, and France fifth with a share of almost 5%.

Europe’s Strengths on the Global Trade Stage

Europe has become renowned as an exporter in high value sectors, including biomedical products, petroleum fuels, engines, cars and data processing. All of these sectors are important to the world economy, suggesting that Europe is well placed to continue to be a world leader in these industries. Additionally, the skill levels of Europe’s workforce are high and continue to improve.

Europe’s historical experience in trade also continues to set the tone for some of the emerging markets’ own business models, and remain a lynchpin for global growth. The report finds that India and China are becoming increasingly similar to Europe in terms of their trading strategies, meaning that although these markets will be more directly competitive in terms of the types of sectors in which they are trading and their structure of trade, there are also likely to be more partnership opportunities.

Europe has also been recognised for its leadership in cutting edge research-led sectors such as high value manufacturing and design. Its strength comes in part through its established research bases in countries like Germany, the Czech Republic and increasingly Poland, enabling high value-added, innovative production across all areas of industry. The report highlights that Europe is likely to remain highly competitive in this area, offering both invaluable insights for countries looking to enhance their own high-value production capabilities.

The strategic reasons for developing partnerships within Europe are compelling. Not only can European businesses offer a platform to the rest of the world, but openness to trade is growing and commercial innovation is strong. This, combined with access to leading research, has enabled European businesses to create some of the most cutting edge products and services with many companies across Europe world leaders in their sectors. This presents opportunities for businesses of all sizes, as many larger companies will take smaller suppliers with them as they enter other markets, offering an effective and low risk strategy to opening up opportunities to operate globally.

While Europe’s strengths should be acknowledged, it is also important for businesses to see where the growing trading opportunities are abroad, and how they can access them.

Rising Stars

Outside of Europe, there are a number of markets that will become the ‘rising stars’ of the future. Well-known markets such as Brazil, India and China feature highly in the list, though there are some more surprising, lesser known markets that are making their mark. Africa is mentioned as a region to watch, and countries such as Vietnam, Turkey and Mexico were picked as economies that are likely to show high growth figures, and therefore more opportunities for businesses to explore, over the next 10 years.

Vietnam was mentioned successively as a country on the rise, particularly by commentators and businesses from the CIS and eastern European (CEE) countries. Its trade data has not been going in the right direction recently, largely as a fall-out from the financial crisis. The future though is likely to be based on its emerging strengths, particularly in footwear and clothing. It is growing as a major competitor to countries like Turkey and China in this sector, while CEE and CIS countries are exploiting strong historical and political links to develop markets and investments over there in heavy machinery and machine tooling as well as mining equipment.

Although there are many opportunities in ‘new’ emerging markets, key markets such as China and India should not be ignored. Both countries are fast becoming more directly competitive with the EU in terms of sector strengths and trade structure. These growing similarities will eventually mean that businesses in Europe looking to locate in either of these countries will see cost reductions and more opportunities for strategic partnerships.

Closer to home, the report finds that growth in some of eastern Europe’s emerging economies, such as the Czech Republic and Poland, is set to gain further momentum. These markets are building on the strengths and historical relationships with other emerging economies in the Middle East and Asia. They are also developing sector strengths in the infrastructure industry and taking advantage of the demand for such products in the rest of the world. The future role of these markets will be as an innovation gateway for European companies to access emerging markets in the east and north Africa, making them an attractive partner for international opportunities.

Turning Insight into Reality

While it is essential to map the trends and influencing factors which will help a business to decide where best to maximise opportunities in international markets, it is equally critical to acknowledge the role of professionals – be that banks or advisors – in helping businesses turn these insights into reality. The following need to be considered:

  1. Take time completing the right research: A business’ success in a new country will depend on the level of research conducted at the outset. Providing knowledge of a wealth of factors, about the country through to its economic and trading conditions and the extent of competition in the target country is key.
  2. Is the business ready to trade internationally? While there are a number of opportunities for businesses to explore across the world, these need to be developed at the right time. Does an international move best fit into their business’ overall strategy? For example, do they have sufficient production capacity to meet new demand? Are there resources available, or potentially available, on the ground?
  3. How to mitigate the risks:
    1. Consider the bigger picture – is the country’s political instability a factor?
    2. Investigate the reputation of a business’s trading partner – can they speak to other businesses they are trading with to establish their credentials and payment history?
    3. How can the impact on cash flow in international investment be managed?
  4. Financing trade: The disparate payment objectives of buyers and sellers can put a strain on a company’s cash flow. Careful planning is required to ensure that working capital facilities are in place at every stage of the trade cycle, and companies should engage with their bankers at an early stage to determine the level and structure of facilities to finance their international trade.
  5. Where to seek expert advice: The right advice will lead to the right decisions for businesses. Aside from banks, government organisations, chambers of commerce, customs & excise, trade associations and insurance brokers are well placed to help.

For businesses operating in a global world, the myriad choices can seem overwhelming. There are different languages, different cultures and different routes into new markets, and it would be disingenuous to try and suggest that there is one size that fits all businesses.

The message from Mapping the World’s Trade Connections is, above all, that businesses should take time to understand how the international outlook is changing and how best they can capitalise on the opportunities these changes will bring. The businesses that understand and adapt to such changes are the ones that will survive and thrive over time.

To learn more about HSBC Global Transaction Banking, please visit the company’sgtnews microsite.

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