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2016 in Review: Uncertainty and Risk Rise in International Trade

By Tim Worstall

Although 2016 started out with hopes that several multilateral trade agreements would be signed, lowering international trade barriers and simplifying operations for import export businesses, that turned out not to be the case. Instead, only one deal was signed after years of negotiation, and companies involved in import export trade faced increasing uncertainty and risk.

Amid another year of slowing international trade growth1, negative policy rates emerged in many developed regions of the world, reflecting ongoing low business confidence. China’s efforts to rebalance contributed to the uncertainty, as did the faltering Trans-Pacific Partnership (TPP) trade deal. On the bright side was a growing view that digitisation promises to streamline and reduce the cost of international trade and trade finance processes.


Unintended Effects: Negative Rates Squeeze International Trade


With low interest rates continuing in 2016 – and dropping below zero in the Eurozone and elsewhere – it would have been reasonable to anticipate growing momentum for international trade. In theory, low rates spur borrowing that helps to fuel trade. But instead, some businesses appear to have focused in 2016 on the low confidence that such rates imply, and accordingly avoided investment in growth strategies built around import export trade.2


Further, by affecting bank profitability and investor confidence, negative rates can force banks to limit lending that regulators perceive as risky. This makes trade financing harder to obtain, particularly for small- and mid-sized enterprises (SMEs).3 Also in 2016, low oil and commodity prices combined with negative rates to squeeze profit margins at banks that traditionally provide trade finance, making international trade growth even more challenging.4 These developments led some analysts to suggest that future international trade finance might increasingly be provided via capital markets rather than bank lending, or directly by large cash-rich corporations to their own value chains.5


China’s International Trade Slowdown Ripples Uncertainty Through Asia-Pacific Region


China’s import export trade growth slowed significantly in 2015 and 2016 due to the country’s “determined transition to a more balanced and sustainable growth trajectory,” according to a mid-2016 report from the International Monetary Fund.6 The IMF said that although China’s fast growth in the last decade was principally driven by domestic investment and exports, economies tend to rebalance as they mature, transitioning away from investment and goods exports towards consumption and services. The Chinese government’s strategic desire to rebalance its economy contributed significantly to China’s international trade slowdown; another factor was declining demand from Western developed nations.7


Because China is a trading hub for the Asia-Pacific region, the effect of its slowdown ripples across its nearby trading partners, leading to widespread uncertainty about import export trade growth. As China’s economy shifts toward slower growth led by domestic consumption, its imports of goods for investment and production will naturally decline, replaced by imports of consumption goods and services.8 Countries that have come to rely on exports to China to drive investment and production may need in turn to diversify and rebalance their own economies.


Faltering Trade Agreements Also Increase Uncertainty


While economist Branko Milanovic showed that globalisation has helped lift millions of people out of poverty over the past 30 years, those whose jobs have been offshored or whose wages have stagnated don’t see the benefit.9 As a result, many developed countries experienced growth in national protectionism during 2016. This contributed to the decline in international trade and the increased uncertainty over trade agreements that aimed to simplify global trade and accelerate trade growth.10


Amid the debate between globalisation and national protectionism, three major trade agreements hung in the balance during 2016: the Trans-Pacific Partnership (TPP), involving the U.S., Australia, Canada, Mexico and several Latin American and Asian nations; the Transatlantic Trade and Investment Partnership (TTIP), between the U.S. and the European Union; and the Comprehensive Economic and Trade Agreement (CETA), between Canada and the EU. The TTIP was first to stir up controversy, due to concerns that U.S. firms would be allowed to offer services in Europe that might compete with existing public services, that EU standards might be watered down to meet looser U.S. standards, and that local laws would be superseded by an international arbitration agreement.11 It was declared “failed” in August by Germany’s vice chancellor, Sigmar Gabriel.12


As for TPP, after the U.S. presidential election, president-elect Donald Trump stated that he would issue notification of intent to withdraw from the agreement on the first day of his presidency.13 CETA, too, met with protests and a vote by Belgium’s Wallonia region to block the country’s ratification of the agreement – but a compromise was eventually reached, making it the only international trade agreement to come to fruition.14


Without such deals in place, exporters, particularly SMEs, are likely to experience greater day-to-day uncertainty in terms of changing taxes and customs duties, import quotas, local product standards, and discrimination in government procurement, according to Export Development Canada (EDC).15 For international trade in services, they are also likely to face new regulatory or certification requirements, EDC added.


Digital Technology’s Potential to Streamline Global Trade Processes and Lower Cost


A counterpoint to 2016’s rising uncertainty was the growth of digitisation. Emerging digital technologies promised to streamline processes, reduce transaction time and cost, and mitigate fraud risk.16 Peter Wong, a founder of the International Group of Treasury Associations, has said that the digitisation of trade finance will drive down the cost-per-unit of transacted revenue and increase the transparency of receipt and payment flow information. That, in turn, can “result in improved cash forecasting, streamlined credit collection efforts and more efficient deployment of working capital.” Further, digital trade finance “can be an enabler for entry into e-commerce.”17




The failure of multiple trade agreements and the resurgence of national protectionism led to rising uncertainty in 2016 for companies seeking growth via international trade, particularly SMEs. But emerging digital technology promises to counter that uncertainty to some extent by streamlining processes and reducing costs.

Tim Worstall - The Author

The Author

Tim Worstall

Tim Worstall is a British writer on business and economics whose work has appeared in The Times, The Daily Telegraph, The Guardian, The New York Times, The Wall Street Journal and numerous other publications. He is currently a regular contributor to Forbes. His past business activities include exporting rare earths from Russia and producing video games. He is a Senior Fellow at the Adam Smith Institute in London.


1. "OECD says Trump’s policies could lift global growth", The Wall Street Journal; http://www.wsj.com/articles/oecd-says-trumps-policies-could-lift-global-growth-1480327202
2. "Negative Rates, Part 2: Trying to Explain the Relationship Between Negative Interest Rates and Global Trade", American Express FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/influence-of-negative-interest-rates-on-global-trade/
3. "Negative Rates, Part 3: Banks, Business Investment and Trade Finance", American Express FXIP Blog; https://www.americanexpress.com/uk/foreign-exchange/articles/influence-of-negative-interest-rates-on-trade-finance-from-banks/
4. "Negative Rates Part 4: Trade Finance – The Oil and Commodities Story", American Express FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/influence-of-negative-interest-rates-on-trade-finance-oil-commodities/
5. "Trade Finance: The Big Squeeze On Margins", Global Finance Magazine; https://www.gfmag.com/magazine/may-2015/big-squeeze-trade-finance
6. The People’s Republic Of China 2016 Article IV Consultation, International Monetary Fund; https://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf
7. "The Economic Effects Of China’s Import-Export Trade Slowdown", American Express FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/economic-effects-of-china-economic-slowdown-on-import-export-trade/
8. Ibid.
9. "Why the Global 1% and the Asian Middle Class Have Gained the Most from Globalization", Harvard Business Review; https://hbr.org/2016/05/why-the-global-1-and-the-asian-middle-class-have-gained-the-most-from-globalization
10. "Weathering the International Trade Slump", American Express FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/weathering-international-trade-slump/
11. "As The Trans-Pacific Partnership Falters, A Look at the Future of International Trade", American Express FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/future-of-international-trade/
12. "Germany's Vice Chancellor Gabriel: US-EU trade talks 'have failed'", Deutsche Welle; http://www.dw.com/en/germanys-vice-chancellor-gabriel-us-eu-trade-talks-have-failed/a-19509401
13. "Trump vows to renounce Pacific trade deal on first day in office", Financial Times; https://www.ft.com/content/dd98598a-b044-11e6-a37c-f4a01f1b0fa1
14. "Belgium Reaches Agreement to Back Stalled EU-Canada Trade Deal", The Wall Street Journal; http://www.wsj.com/articles/belgium-reaches-agreement-to-back-stalled-eu-canada-trade-deal-1477564243
15. "Dealing with Trade Barriers", Export Development Canada; https://edc.trade/us-p2w1-todd-winterhalt-e/
16. "Harnessing the Power of Digital for International Trade Finance", American Express FXIP Blog; https://www.americanexpress.com/uk/foreign-exchange/articles/digitalization-of-international-trade-finance/
17. "A Wave of New Technology is Gradually Modernising the Trade Finance Landscape", The Treasurer; https://www.treasurers.org/node/310681

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