A sharp wave of anxiety is spreading among Asia Pacific traders and bankers as to the potential damage of the US-China trade war, with many now accepting that the situation is unlikely to improve for some years.
Dozens of interviews with key figures in the trade finance industry over the past three weeks, on and off record, have revealed that after months of hoping that the forceful rhetoric would not play out in reality, people are planning for the worst.
Trade flows will undoubtedly be damaged once capital is pulled out of markets in Asia. Many are therefore afraid to speak publicly as they do not want to rock the boat any more than it already has been.
Until recently, trade banks had not seen a material impact on their deal flow or the demand for their products. That is starting to change.
“When I spoke to you three months ago, everything looked great. Now it’s very different. We’ve seen a big drop off in demand in the last quarter, everybody is spooked by the trade war,” says the head of Asia Pacific trade finance for a big European bank, who wishes not to be named.
The treasurer for a large global commodity trader says that the trade war has led to procurement slowdown in China, which is hitting many of the suppliers in countries in South Asia.
“You’ve seen prices start percolating down. It’s not a distant future, it’s already started happening. People have become more conscious of the impact of the trade war. China works with smaller economies, such as Bangladesh, which provides a lot of stuff for their manufacturing base. And we’ve already started seeing a slowdown in procurement. The impact is seen now – the resultant effect, prices are coming off,” they say.
After the US followed through on 10% tariffs on an additional US$200bn of goods imported from China, Beijing responded in kind today (September 19). US$60bn of US goods will be levied with tariffs of 5% and 10%, to be activated on September 24.
While China has little room left to manoeuvre, in terms of new goods to place tariffs on, it can continue to increase the level of tariffs, or may look to implement so-called qualitative measures, which could make business conditions difficult for US firms in the country.
Either way, the mood has soured significantly in recent weeks. Companies are now anticipating a long trade winter between the world’s superpower economies. There’s an awareness that the issues are deep-rooted and may not be resolved by a change in leadership in the US, or in the unlikely situation of China completely shifting its economic model to appease US demands.
“I don’t think we’re going to return to a globalisation business as usual. This is not just about [US President Donald] Trump. This is about a swathe of economic nationalism that’s gone across Europe, Latin America and the US. It’s politicians using trade as a tool to make it look as though they’re focusing on their domestic politics… ‘Make America Great Again’ or ‘Make Britain Great’, or whatever,” says Rebecca Harding, a trade economist and CEO of Coriolis Technologies, a data analytics company.
Gopul Shah is the director for corporate treasury and structured trade finance at Golden Agri Resources, one of the largest palm oil plantation companies in the world. He believes that the tariffs are just the tip of the iceberg, pointing to issues such as inequality, technological disruption and consumer debt trap, indicators which he says show the world’s economy is heading for a crash.
“The biggest problem, which people don’t want to talk about, is that the US dollar is king. Unless governments think they can admit to and resolve this issue, I don’t think negotiations will go forward to achieve free and fair trade. It’s going to be stuck in a melee and prolong itself, causing huge economic and social pain. The more it prolongs, the more difficult it is for business to operate, you’ll see more and more issues around currencies impacting trade, credit, interest rates, investments and consumer confidence,” he says.
The mood is in stark contrast to the optimism that filtered through the market before the halfway point of the year. At that point, loan books were up and pricing had shown some upward trajectory. Commodity banks in particular were sanguine about the outlook, pointing to strong prices and the long-term contracts that existed in the market, particularly in the structured commodity finance business.
Now, conversations are peppered with realism. “I think we’ll still be talking about the consequences of this situation next year and the year after that. It’s impossible to know how it will affect the market – we just have to hope that common sense will eventually prevail,” says a senior trade financier at a bank in Singapore.
Sanman Shetty is head of trade and supply chain finance sales for MUFG Bank in Asia. He presents a nuanced view of the trade war, pointing to the healthy growth rate elsewhere in Asia and stating that he is “confident that we will overcome this with our customers; we are constantly advising them on solutions and timing”. However, he acknowledges that everyone in the market is preparing for a storm.
“We are definitely monitoring the situation closely. No doubt we will have to brace ourselves for volatility, but we still expect current developments to bring about a rebalancing of flows, risk and pricing, rather than major interruption or disruption,” Shetty tells GTR.
Other countries are beginning to follow the lead of the US and China and introduce new trade barriers of their own. Late in August, the Indonesian government said it would impose higher import taxes on 900 goods in order to bolster the struggling rupiah, and to help shrink its current account deficit.
Indonesia is the largest economy in Southeast Asia, which has been billed by many as a beacon of free trade in an increasingly protectionist global trade picture.