The coronavirus outbreak and its accompanying containment measures around the world have significantly hampered global trade. While a return to normality may still be some way off, new opportunities along the transatlantic corridor could present much-needed bright spots when the green shoots of recovery emerge. As the UK plans trade talks with the US and the EU, and the US and EU look to reset strained economic relations, putting in place solid foundations for the post-Covid-19 trading landscape will be crucial. Against this backdrop, it is time to rethink the way banks support exporters.
Accounting for about half of global GDP and nearly a third of world trade flows, the combined might of the UK, EU and US defines the shape of the global economy. Despite the rise of China and the trend of outsourcing to emerging economies, the EU28 – including the UK – and the United States have long been each other’s largest trading partners, with bilateral trade flows growing steadily: by 2018, the EU28 accounted for over 22%, or US$1.3tn, of US total trade – double the 2003 figure.
But in recent years, this vibrant trade corridor has been somewhat overlooked by policymakers. Under the Obama administration’s ‘pivot to Asia’, the US shifted its gaze across the Pacific, with the signing in 2015 of the Trans-Pacific Partnership (TPP), while the EU28 also looked east with a flurry of trade deals and comprehensive agreements with Asian nations.
Today, the pendulum of global trade has once again swung. The scrapping by the US of several trade deals, from Nafta to the TPP, the UK’s vote to leave the EU, and the US-China trade war, as well as the impact of the coronavirus crisis on globe-spanning supply chains have left investors and exporters alike re-examining their business models. For many businesses, the transatlantic corridor represents an untapped opportunity, closer to home.
“The disruption from the Covid-19 outbreak has affected every sector,” says James Binns, global head of trade and working capital at Barclays. “While many corporates have sought recently to shift supply chains as a result of unpredictable geopolitical challenges, this current crisis has brought everything into sharp focus.” He adds that an increased level of new transatlantic trade flows has become apparent, while in the wake of Brexit, both UK and EU companies are starting to look beyond Europe for business, particularly in high-value added sectors such as technology. “There is a huge amount of investment coming into London from the US into the technology sector, and there will be a lot more transatlantic trade in areas such as licensing fees and intellectual property.”
Aoife Wallace, European trade director at Barclays, points to Ireland’s strong commercial relationship with the US, with bilateral trade and investment topping US$825bn in 2018, as one example of the EU’s growing trade relationship across the Atlantic. “Over a quarter of all Irish goods exports go to the United States, with sectors such as life sciences and technology seeing impressive export growth in recent years. Ireland is also an excellent market for American firms seeking a foothold into Europe,” she says.
Cautious optimism
Since the UK left the EU at the end of January this year, much has been made of a possible trade agreement between Britain and the US, with Prime Minister Boris Johnson calling the potential of a pact “enormous”.
“There is a real cautious optimism that alignment between the UK and the US is going to continue to grow in a very constructive way,” says John Miller, global head of banking coverage, investment banking at Barclays. He highlights the strength of the bilateral investment relationship as a key driver of ongoing trade integration: American firms have invested nearly US$750bn in the British market, nearly a quarter of their total investment in Europe, while over 1.25 million Americans work for British companies in America, in sectors ranging from manufacturing to chemicals, pharmaceuticals, information technology, and financial services.
Meanwhile, hopes are high for a resolution of tensions between the US and the EU, most recently focused around European car exports, spurred on by comments from EU Trade Commissioner Phil Hogan that a “mini-deal” between the two sides may be on the horizon.
“What we pick up from our clients is just that people want certainty,” says Peter Gordon, managing director of government relations at Barclays. “It is a challenging time again but in a positive sense, the big existential question of whether Brexit is happening has been answered, so we are moving forward. Negotiations with the EU have finally started, albeit now with various question marks over timelines, and while negotiations with the US have their own challenges, they could absolutely bring opportunity.”
But as the UK works out its future trading agreements with both the US and the EU, the economic backdrop remains one of heightened and prolonged volatility, leaving many companies unsure of where to place their bets. The underlying strength of the US economy, though, means a chance of greater stability for those looking across the Atlantic, as Michael Gapen, head of US economics research at Barclays, explains.
“In situations where economic uncertainty is high, businesses don’t really want to commit to large-scale capital investment plans. High uncertainty means you get less business spending,” he says. “But on the other hand, there have been positives. In the US, the expansion has been long. Slow expansion doesn’t mean fragile. Slow means durable. Everybody has been cautious, and nobody is getting overextended or making foolish bets.”
A different type of trade
Transatlantic trade is different in nature to US-Asia or Europe-Asia flows. Led in great part by the two sides’ solid investment relationship, it is dominated by high-value, high-tech sectors. Bolstering this corridor therefore means taking into account the investment, working capital and trading needs of very different types of companies – as well as mitigating myriad risks presented by the current geopolitical environment.
“The transatlantic trade corridor in the last decade or so has largely been on an open account basis and therefore hasn’t really had a huge amount of trade finance or structured trade involvement,” says Binns. “We are starting to see more requests from clients who are trading on open account terms around how we can help them mitigate the risks associated with transatlantic trade, and, equally, how we can start to use trade and working capital solutions to fund more of those trade flows.”
A holistic approach
From receivables discounting structures to silent payment undertakings, a growing number of companies are looking for different forms of either risk mitigation or funding. But taking a broader look at their financing needs may be the key to gaining a competitive edge, says Binns.
“Leveraged finance advisers working alongside trade and working capital specialists can work out where the investment-grade receivables are that can be carved out to produce cheaper sources of funding without undermining the collateral package around the underlying debt facility,” he explains. “Banks will need to think more broadly as to what the optimal balance is across the funding and capital structure for a client, in order to deliver the most value to them in terms of sustainable and cost-effective funding.”
In addition, given transatlantic trade often means juggling three currencies – pounds sterling, US dollars, and euros, an innovative approach to mitigating forex volatility is crucial. “There is a large amount of currency derivatives business where people are putting macro hedges in place to support underlying trade flows. In many cases, they will be posting either cash collateral or bank guarantees to underpin these structures, but if we start to identify the underlying trade associated with these macro hedges, we could potentially offer discounting of investment-grade receivables on a rolling basis to create cash collateral to then get more efficient derivatives pricing,” says Binns.
Today, more than ever, companies from SMEs to large corporates need the ability to think through a world where economic integration seems, in many quarters, to be on the decline. “It is our job to try and help clients understand what that might mean for business decision-making, for trade flows, for asset markets and for monetary and fiscal policy,” says Gapen. “It goes beyond what the Federal Reserve is going to do at the next meeting or what GDP is going to be in the next quarter. It is about a perpetual fundamental realignment of global economic systems.”
This also means a renewed importance of the role of banks as advocates for industry. “From a purely public policy point of view, this is blank sheet of paper time. There are a lot of conversations around how the UK can be more competitive,” says Gordon. “We are using our networks and our relationships both to influence the outcomes but also to understand what is happening. We are also trying to make sensible points on behalf of clients in Brussels, because what happens over the next two to three years will have long-lasting impact on all of the industry going forwards.”
Breaking down the walls
But bringing all of these approaches together under one roof is not as simple as it might seem. Long shaped by incentive schemes for employees and inter-departmental competition, the traditional banking model doesn’t necessarily lend itself to a cross-sectoral approach.
“One of the typical impediments to those type of initiatives is a silo mentality that develops out of the predisposition to be internally competitive where success is a zero-sum game,” says Miller. “This is a brave new world that we are operating in. You need that whole bank approach and in order to do that you need take a long hard look at your internal culture and what you are rewarding either overtly or inadvertently.”
In this new trading environment, a singular focus on trade, investment or payments is no longer fit for purpose. To fully support companies on the road to global recovery from the pandemic, banks need to pull together not only their different businesses, but their different geographical locations in order to give companies the clear line of sight and multi-product solutions they so urgently need.
