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22 October 2018

Businesses Encouraged to Broaden Trade Relationships

Businesses Encouraged to Broaden Trade Relationships

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Alexandra Cain

Writer, Cain Creativity, Inc.

Summary

In the wake of new US tariffs, now could be a good time for Chief Financial Officers (CFOs) to explore fresh trade relationships to help mitigate against potentially tighter trade rules across the globe.

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The global trade landscape has faced a host of new and challenging dynamics in recent years. In this environment, CFOs are encouraged to stay abreast of developments in global trade and be ready to pivot their businesses to help take advantage of emerging opportunities, such as the upcoming free trade agreement between Australia and the European Union (EU).

At the same time, it's important for CFOs to be aware when trade rules have the potential to become more restrictive, and of the impact this could have on earnings. This could allow them to focus on overseas markets that offer Australian companies more suitable trading terms.

The present renegotiation of the North American Free Trade Agreement (NAFTA), involving the US, Canada and Mexico, the on-and-off negotiations for the Trans-Pacific Partnership Agreement and Brexit are just some of the events that are hamstringing local and global importers and exporters.

Add in the US's recent decision to introduce new tariffs, and CFOs are facing a global market that has rarely been more uncertain.

New tariffs risk decades of progress

In March this year, the US announced new tariffs on steel and aluminium, but it has said Australia and some other nations are conditionally immune from the decision.

Lisa McAuley is the Executive Director of the Global Trade Professionals Alliance (GTPA). She says these situations are putting at risk much of the progress that has been made over the past few decades advancing rules-based trade.

“Trade has been a powerful driver for economic value creation, inclusion, poverty reduction, as well as peace and security. Trade growth rates have exceeded growth of global GDP. Global supply chains are anchored in developing and emerging markets, with communities of suppliers numbering the thousands, from everything from micro enterprises all the way to big multinationals,” she says.

McAuley says any serious move to return to past practices is mind-boggling, because global supply chains are now so integrated.

“International trade and investment has been crucial for the global economic recovery after the financial crisis of 2008, and it's also vital for every country's economic prosperity. Trade wars are not the answer to creating economic growth and jobs,” she says.

This environment cries out for the World Trade Organisation (WTO) to take a more active role, argues McAuley.

“What is important, is to continue to look to the WTO as the mechanism through which issues regarding dispute regulation and tariff are driven. As Erik Brynjolfsson, an economist at MIT's Sloan School of Management, has said, 'No nation can succeed by trying to protect the past from the future. We will succeed by having the confidence to embrace competition, and leveraging our comparative strengths, which are numerous. We have the largest, most productive, and most technologically advanced economy that's ever existed on this planet. The more open the world economy is, the more we have an opportunity to leverage our many strengths'.”

McAuley warns Australia is not immune to anti-trade sentiment. “It's something we're going to have to watch very closely. It's easy to talk negatively about trade, but no one seems to have done a very good job communicating the benefits of trade to Australians.”

Her argument is that many Australians are not aware of the consumer goods they might forego if trade deals falter.

“No-one could afford an iPhone, for instance, without trade. You only have to look at Brexit to see people don't understand the benefits of trade. What the European Union is and what a free trade block is, wasn't really communicated. So, there's an opportunity to communicate the benefits of trade and promote the message that imports aren't bad.”

Expand trade relationships

While many local businesses are focused on building trade relationships with China, there are possible opportunities right around the world for local importers and exporters. CFOs are encouraged to look broadly at import and export markets.

In May, it was announced Australia is in negotiations with the Council of the European Union to form an Australia-EU free trade agreement. Should the deal succeed, it could give local businesses fairer access to the world's second largest economy.

As prime minister Malcolm Turnbull said in a statement, “An FTA with the EU has the potential to set the benchmark for what can be achieved between like-minded partners. Australia and the EU share a commitment to the rules-based global trading system and to open markets.”

The statement notes that, “As a bloc, the EU is Australia's second largest trading partner, third largest export destination and second largest services export market. The EU was Australia's largest source of foreign investment in 2017.”

According to the document, the EU has the potential to be Australia's second largest free trade agreement. It notes, “An FTA with the EU will open up a market for Australian goods and services of half a billion people and a GDP of US$17.1 trillion.”

“It's time to start embracing different international markets. Australian companies have been so focused on the China opportunity they may not have been looking at other parts of the world like the EU, South America and ASEAN,” says McAuley.

“I'm not saying that there isn't a big opportunity in China. Australia's been very focused on trading relationships with China, which is fantastic. But it's also important that Australian companies look at the bigger opportunities that exist,” she adds

In particular, the Trans-Pacific Partnership agreement could be a huge opportunity for Australia. This is a trade bloc deal between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and, potentially, the US.

Australian companies could look to how this, and other trade deals, might impact their business and how they are potentially able to take advantage of opportunities in other markets as they arise.

Key Takeaways

  • New US trade sanctions on steel and aluminium don't apply to Australia – for now.
  • CFOs could look to explore trade relationships across the world, not just in popular markets such as China and the US.
  • The Trans-Pacific Partnership Agreement (TPP) might be an opportunity for local businesses to build trading relationships across more than 10 Pacific Rim nations.

 

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