Author: Eleanor Wragg
RCEP: a shot in the arm for Asia’s supply chains, a blow to the US
From Global Trade Review (GTR) | By Eleanor Wragg
Eight years after the official start of negotiations, the Regional Comprehensive Economic Partnership (RCEP) – a free trade agreement covering almost a third of the world’s population and 30% of global GDP – is now a reality. The deal, concluded between China, the 10 Asean member states, Australia, New Zealand, Japan and South Korea, is almost unrivalled in its complexity. Its 20 chapters plus 17 annexes and 54 schedules of commitments manage to cover market access, rules and disciplines, and economic and technical cooperation between what are 15 very different trading nations. The agreement pulls together a pan-Asian basic standard for trade that goes beyond the terms provided by the World Trade Organization (WTO), supporting regional integration and engaging emerging markets and developed economies. Although the RCEP was an Asean initiative, it is regarded by many as a China-backed alternative to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a deal that excluded China but included many Asian countries. For the first time, RCEP brings together China, Japan and South Korea in one trade agreement, roundly cementing the primacy of the Asia-Pacific region in global trade. However, not all is rosy in the RCEP area, as Australia and China are currently embroiled in a trade dispute that has rolled on since China imposed an 80% tariff on barley imports from Australia and an outright ban on beef imports from four major producers, citing compliance issues. Nonetheless, for many onlookers, the general mood seems to be one of optimism about the deal’s potential to bring the region together. “RCEP may prove to be the tonic Asia needs to recover from the pandemic-induced slump,” says Stuart Tait, regional head of commercial banking for Asia-Pacific (Apac) at HSBC. “Although international trade continues to face uncertainty, the signing of RCEP underscores the belief that market openness will lead to greater economic growth for more. Intra-Asian trade, which is already larger than Asia’s trade with North America and Europe combined, will continue to power global economic growth and pull the economic centre of gravity towards Asia.” Common rules of origin Because many of the RCEP signatories already have bilateral trade pacts with each other, there’s little in the way of immediate tariff reduction in the pact’s 510-page document. Indeed, the average tariff of Asean countries on imports from RCEP partners had already dropped from 4.9% in 2005 to 1.8% currently. However, the agreement now delivers a single set of rules covering all 15 markets, making trade simpler and reducing compliance costs for exporters. The biggest win in the deal is the creation of a common rule of origin certificate, which harmonises the information requirements and local content standards for businesses in the RCEP member countries. Effectively, this means that parts from any member nation would be treated equally, which Euler Hermes calculates will boost merchandise exports among signatories by around US$90bn a year on average, giving companies an incentive to locate their supply chains within the trade region – likely leading to a further boost for intra-regional trade, which already makes up close to three-fifths of total trade activity in the Apac region. Another deal without the US The signing of RCEP marks the second mammoth Apac trade deal that excludes the US, after President Donald Trump pulled the country out of the CPTPP in 2017. With the International Monetary Fund (IMF) forecasting that the region will regain an average growth rate of over 5% by 2021, US exporters need access to its lucrative markets if they are to share in post-pandemic economic growth. In a statement, Myron Brilliant, head of international affairs at the US Chamber, said: “The US Chamber welcomes the trade-liberalising benefits of the newly signed regional comprehensive partnership agreement but is concerned that the United States is being left behind as economic integration accelerates across the vital Asia-Pacific region. China has become the most important trading partner for most of the Asia-Pacific, and its central role in the RCEP will only cement this position. While the Trump Administration has moved to confront unfair trade practices by China, it has secured only limited new opportunities for US exporters in other parts of Asia.” He calls for the US to adopt a more “forward-looking, strategic effort” to maintain its economic presence in the region, or risk “being on the outside looking in as one of the world’s primary engines of growth hums along without us”. President-elect Joe Biden’s plans for the region are yet to be seen, but hopes are high among US exporters that, at the very least, the incoming administration may consider a return to the CPTPP fold. Door still open for India Trans-Pacific issues aside, the next step for RCEP will be working through the barriers to India’s accession. The country withdrew from negotiations last year due to mismatches between its protectionist-leaning trade policies and the market access commitments required by the deal. However, during the signing of the deal, RCEP signatories were keen to leave the door open for the South Asian nation. “We would highly value India’s role in RCEP and reiterate that the RCEP remains open to India,” they said in a joint statement. “As one of the 16 original participating countries, India’s accession to the RCEP agreement would be welcome in view of its participation in RCEP negotiations since 2012 and its strategic importance as a regional partner in creating deeper and expanded regional value chains.” The post RCEP: a shot in the arm for Asia’s supply chains, a blow to the US appeared first on Global Trade Review (GTR).Trump’s ‘America first’ policy yet to impact US trade flows
From Global Trade Review (GTR) | By Eleanor Wragg
In 2016, US President Donald Trump told Americans: “Ladies and gentlemen, it’s time to declare our economic independence once again.” But less than two years later, the United States International Trade Commission’s (USITC) Year in Trade 2017 report shows little evidence of the ‘America first’ policy’s impact on trade, and American trade finance bankers remain sanguine about their prospects – at least for now.
Despite Trump’s mercantilist aim to boost exports across the board while cutting imports, the US saw an increase in the value of both exports and imports of goods in 2017, according to the figures released by the USITC this month. Exports were up US$95.7bn, or 6.6%, and imports up US$155.1bn, or 7.1%. The growth in export value was mostly driven by the crude price increase and the removal of the US government ban on most exports of crude to countries other than Canada in December 2015, which pushed energy-related product exports 45.5% higher to US$143.2bn.
According to the USITC, the value of merchandise exports to all major trading partners increased, with the exception of Taiwan, which saw a decrease of 1.1%. India saw the biggest rise, of 18.7%.
“It’s really value change that we saw in the US, not increased volume. The cost of oil affected both sides of the ledger,” says Michael Quinn, managing director of global trade and loan products at JP Morgan. “A rising tide raises all boats.”
In a year which saw the fastest economic growth in three years and four Federal Reserve rate hikes in 12 months, “the macroeconomic aspect is supporting positive performance more than any specific policy”, says Michael McDonough, JP Morgan’s head of corporate trade and supply chain.
Trump has made cutting the US trade deficit one of the cornerstones of his trade spats with major partners, but this new data shows that only the agricultural sector experienced a trade surplus in 2017, with US$5.7bn more in exports than imports. This actually narrowed from 2016, where agricultural exports were worth US$129.7bn versus imports of US$113.1bn. The energy-related products sector’s deficit fell to US$4.5bn, but the trade deficit in other sectors of the US economy widened.
There are structural reasons for this. As a recent Oxford Analytica Daily Brief pointed out: “A permanently higher dollar due to the desire of investors to buy US assets will keep the US goods balance in deficit despite trade policy.”
“The impact of individual policy changes hasn’t penetrated yet,” explains Quinn. He believes that 2017 was in general a “better year” in US trade finance than prior years, largely due to global economic strength. However, with the US pushing forward with plans to impose further tariffs on China, the implications for lenders could be serious.
USITC figures show the value of imports from China were the biggest gainer in 2017, up 9.3%. “If tariffs kick in with any permanence then I think sourcing patterns would change. US steel or aluminium, because of reciprocal tariffs, would become more expensive and a European Union importer could then turn to China or India for the same product,” says Quinn, although he believes it is still “too early to tell for the future if tariffs are going to be sustained”.
So far, then, America’s trade finance banks are yet to see any material implications of the ‘America first’ policy. “Ultimately, our business will change if and when our clients change their sourcing and their selling patterns. If we were to see a wholesale shift away from manufacturers importing input to then manufacture and export, that would impact our business. But as of yet, we have not. We haven’t seen any substantive, longer-term shifts in clients’ behaviour that we weren’t seeing already,” says McDonough.
For now, despite sabre-rattling from the US president, it remains business as usual for trade finance in the country. “Looking at the future, I think the changes we see are more dependent on longer-term trends such as the continued shift to open account, which drives an increase in supply chain finance or other related open-account financing activities. We are also seeing an increased shift towards digitalisation or electronic trade,” says McDonough. “Those are both long-term trends, and frankly I don’t think that change in trade policy has much impact on them.”
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From Global Trade Review (GTR) | By Eleanor Wragg
A recent report by Fitch Ratings in the wake of UK construction firm Carillion’s collapse has sounded the alarm over supply chain finance (SCF) programmes, calling for the extension of payment terms due to reverse factoring to be classified as debt.
The ratings agency says that reverse factoring was a key contributor to the largest construction bankruptcy in UK corporate history, as it “allowed the outsourcer to show an estimated £400-£500mn of debt to financial institutions as ‘other payables’ compared to reported net debt of £219mn”.
Calling this an “accounting loophole”, the report suggests that supply chain finance programmes could be used to enable corporate buyers to operate with a lack of transparency in their finances – an implication which is roundly rejected by industry participants.
“This is very standard practice,” Geoffrey Wynne, partner at Sullivan & Worcester UK tells GTR. His firm is currently working on a transaction whereby the bank is allowing the buyer to negotiate for 360-day payment terms. “If there were any suggestion that they were helping mislead investors, they would be really appalled. The simple answer is that this is a financing device for extending trade payables.”
To ascertain the scale of the practice and whether an increase in reverse factoring is occurring, Fitch analysed historic payables days from 2004 to 2017, finding that median payables days were highest in 2017, rising 14 days since 2014. Fitch calculated that this suggests an overall increase in payables of US$327bn.
“As seen in the case of Carillion, reverse factoring could have a potentially large impact on vulnerability to default for specific issuers,” Fitch said, adding that it will adjust credit metrics to classify any extension of payment terms due to reverse factoring as debt.
One of the main benefits of SCF is that the financing structure is not treated as debt for balance sheet purposes, but as a trade payable which isn’t considered leverage. Such a reclassification would defeat the purpose of these kinds of arrangements for many corporate users.
“SCF is different to bank debt,” points out Omar Al-Ali, partner at Simmons & Simmons. “The problem with debt is you essentially have a very large liquidity issue on a specific day when you need to repay, say, US$100mn. In SCF, you need to pay smaller amounts on spread-out days, which is less likely to give rise to liquidity issues. That is an important difference between the two.”
If the view on SCF does change, it is likely that economic thresholds will be adjusted to reflect the new reality because the liabilities have always been there, and banks are comfortable with them.
This is not the first time a ratings agency has called out supply chain finance. In late 2015, Moody’s Investors Service said that Spanish environment and energy group Abengoa’s large-scale reverse factoring programme had “debt-like” features, and announced a review of its rating methodology. The International Trade and Forfaiting Association (ITFA) successfully challenged that review, asserting that payables finance is a legitimate and acceptable form of finance which should not automatically result in trade debt being re-categorised as financial debt.
“ITFA had a very good dialogue with Moody’s. It looks like we’re going to have to start the dialogue with Fitch,” says Sean Edwards, chairman of ITFA. “There has been an increase in days payable, because it is very widespread. But, does that mean that it should be treated as bank debt? I don’t think so. In abnormal cases, like possibly Carillion and Abengoa, they had additional features. In the case of Carillion, it dwarfed their other lines of finance.”
For Fitch, the problem is one of disclosure. “An annual report should give you a fair picture without you having to guess. If you look hard enough, you can find clues that this is happening, but there is a distinction between being able to find clues and something being clearly disclosed,” Frederic Gits, managing director, corporate ratings Emea at Fitch and co-author of the report, tells GTR. “In itself, supply chain finance is a perfectly legitimate funding technique. The issue is that because disclosure around it is weak, it can leave a door open for companies to use it in a less appropriate way, for example to hide a debt increase in trade payables.”
While those in the industry reject the charge that corporates are widely using SCF to hide debt, ratings agencies say that they have no way of knowing for sure unless there are stronger disclosures around SCF programmes, in order for investors to make better-informed decisions about whether they want to treat them as debt or not.
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