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The New Age of Global Trade: Innovation and Opportunities

Technological advances and innovation are now changing the way we do business and the way trade takes place across borders. Both the rapid expansion of e-commerce and the proliferation of trade agreements across the world are giving rise to a new era of growth for global trade.

At HSBC Trade Outlook Forum - The New Age of Global Trade: Innovation and Opportunities – trade and economic experts, alongside industry leaders, discussed the region’s economic and trade outlook for 2018, as well as sharing insights on how Hong Kong businesses can seize the trade opportunities presented by the digital economy through harnessing the great power of e-commerce and innovation.

Trade in the Digital Age: Opportunities and Challenges

The rapid development of e-commerce has led many to contemplate the future of conventional brick-and-mortar businesses in the digital age. Companies need to adjust to the digitally savvy generation and put customer experience at the heart of how they approach their operating and marketing models.

"Trade in the Digital Age: Opportunities and Challenges" was the theme of a customer event organised by HSBC. A number of speakers offered insights into the latest trends shaping the e-commerce industry, as well as advice on how businesses can tap into the full potential of e-commerce.

Trade Perspectives: Global Deals and Technology to Shape the Future

HSBC’s customer engagement event, ‘A New Perspective to Trade’, held in Hong Kong, delved into how China’s Belt and Road Initiative (BRI) and other initiatives can address challenges trading companies face currently. Douglas Lippoldt, Chief Trade Economist at HSBC Global Research, and Ajay Sharma, Regional Head of Global Trade and Receivables Finance Asia-Pacific, highlighted the various catalysts behind the current fragility of global trade, explored the potential impact of a number of new and pending trade agreements, and commented on the rise of digital innovation affecting the trade process.

Trade Perspectives Global Deals and Technology to Shape the Future Speaker 1
Douglas Lippoldt, Chief Trade Economist, HSBC Global Research

Rising tide of global trade

The world economy has been showing signs of improvement with GDP forecast to rise 2.8 per cent in both 2017 and 2018 and trade expected to accelerate by 4.1 per cent and 3.2 per cent in the same period1 .

Against the backdrop of an improved pace of economic growth, Dr Lippoldt commented that, “Global trade is nonetheless currently showing some signs of fragility.” The potential for serious conflicts in various regions of the world likely stems from economic nationalism. Globalisation and the rules-based multilateral trade system, which seemed so universally desirable not so long ago, are increasingly becoming subject to local interpretation.

Dr Lippoldt elaborated that Asia is well positioned to counter these developments and play a leadership role in trade. International commerce at the regional and global levels can be reinforced via pursuit of an ambitious implementation of the BRI, conclusion of new free-trade agreements (FTA) such as the Regional Comprehensive Economic Partnership, and engagement in a positive agenda at the World Trade Organization (WTO).

Disrupted progress to liberalisation

There are a number of factors that could hamper the march of liberalisation and the global trade gains made over the past decade. Mr Sharma acknowledged the work carried out by the WTO to progress the removal of tariffs, but notes that friction is now arising from non-tariff barriers such as regulatory compliance and customs processes.

Protectionism is a mounting trend, a reflection of the state of global politics in 2017, and it is weighing upon global trade. The withdrawal of the US from the Trans-Pacific Partnership (TPP), an agreement drafted over many years of negotiations, is a high-profile demonstration of this.

The OECD’s Global Trade Alert2 estimated that 6,616 new restrictive trade measures have been put in place since 2008. The flip side to this is that trade liberalisation efforts are at risk in some areas. This underscores the importance of steps in Asia to ensure that momentum towards free movement of goods and services is maintained.

China’s involvement offers new possibilities

China continues to maintain its role as a catalyst for trade and is at the centre of many of the major global production chains3 . This is set to increase as Chinese firms move up along the production value chain.

“The Belt and Road Initiative, and other similar initiatives, help in cutting through some of the challenges such as shortfalls in infrastructure development and customs cooperation,” said Dr Lippoldt. “By addressing these issues and reducing friction at the border, BRI could help boost trade by perhaps 5 per cent or more.”

The BRI provides a trade ‘belt’ to link the Eurasian continent through a growing network of railways, highways, pipelines and other infrastructure and trade ‘road’ that links China with South-East Asia and Africa through ports and other maritime linkages. It improves prospects for business by facilitating the flow of trade between the connected countries.

The sheer size and potential of the initiative, which has plenty of political support, should ultimately cause a step change to the way trade flows in the region. The BRI will connect over 60 countries that together account for an aggregate population of 4.4 billion.

“These figures represent 62 per cent of the world's population and 30 per cent of global GDP,” commented Mr Sharma. “It has been rightly referred to as ‘The Project of the Century’ by Chinese President Xi Jingping. And, I think it will change the way trade is conducted in the future globally and the way that we do business … and it will be a huge benefit to us in Asia.”


Douglas Lippoldt, Chief Trade Economist, HSBC Global Research


Ajay Sharma, Regional Head of Global Trade and Receivables Finance Asia-Pacific, HSBC

Support for friction-reducing trade deals

BRI is not the only bright spot. A couple of giant trade agreements could help: the Regional Comprehensive Economic Partnership (RCEP) and a revised TPP now that the US has withdrawn. Also, trade facilitation measures at the border for businesses of all sizes – from multinationals to small-and-medium-sized enterprises (SMEs) – can help drive more inclusive outcomes from trade liberalisation.

“Improved market openness is needed to fully release the benefits that go with trade,” Dr Lippoldt said. “This includes reducing red tape and increasing the ability of SMEs to participate via e-commerce.”

RCEP is a proposed FTA between 16 countries – the 10 members of the Association of Southeast Asian Nations (ASEAN) and Australia, China, India, Japan, New Zealand and South Korea. ASEAN has FTAs with all six of these countries.

The revised TPP4 is another proposed FTA, originally between 12 countries. With the withdrawal of the US in January 2017, the remaining 11 members include Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

China has not been involved with TPP to date. But, TPP is a deeply liberalising trade agreement and China's eventual participation could provide it with improved access to a broad cross-section of markets around the Pacific Basin (and vice versa). China's engagement in TPP may help facilitate the integration of RCEP and TPP in a grand unified FTA of Asia and the Pacific. Academic studies have found that very large welfare gains could emerge from such trade integration (one study found gains of USD1.9 trillion). Either way Dr Lippoldt made the audience certain as to the importance of China’s role in the next steps of global trade.

Technology evolution

While the world watches the developments in FTAs and BRI, technology’s influence on trade cannot be ignored. Mr Sharma highlighted this trend as a major force for making trade easier, and the importance of the support from governments across Asia in rolling out digital platforms.

Digitalisation of trade processes is set to create an ‘Industrial Evolution’5 that will support the expected tripling of global trade by 2050. There are many technical developments that will take place in conjunction with e-commerce, but also there are ways in which it can be used to remove the ‘physical’ friction in trade flows. An example of this is HSBC’s partnership with IBM to use machine-learning to reduce the amount of paper that is used in trade deals and streamline this fundamental process.

All parties in the trade process are working together to find more efficient ways of conducting business, looking for technological solutions to both basic and complex issues. As Mr Sharma noted, “Technology will fundamentally change how we trade in Asia and the world.”

China to lead Asian trade push

Prospects for further market opening in some regions of the world are dimming. Contrary to this, buoyed by underlying GDP strength, Asia has a string of long-term initiatives coming to the fore in terms of regional and multilateral deals and technology trends that will bring positive economic impact and also have the potential to give the region a central global leadership role in trade.

 


1 HSBC, Global Economics: Getting the balance right, 27 September 2017.

2 Global Trade Alert (as of August 2017); OECD/UNCTAD/WTO (2016), WTO (2017), B20 (2015)

3 HSBC, Asian global value chains, 1 September 2017; UNCTAD

4 The remaining TPP members have recently redubbed the accord as the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

5 HSBC (2015), Trade Winds: shaping the future of international business

Infrastructure Outlook - Building for the future

It's not an overstatement to say that infrastructure is the lifeblood of economic growth. At a recent seminar sponsored by HSBC Commercial Banking – Building for the Future: Opportunities for Hong Kong’s Infrastructure Sector – speakers from the bank, alongside industry leaders, exchanged insights and new ideas about how the city’s corporates could tap into the growing opportunities offered by domestic and overseas infrastructure projects.

Infrastructure facilitates the flow of people and goods, creating new business opportunities. It is also the driver behind the stellar rise of countries such as China and Singapore, commented by George Leung, Advisor, Asia-Pacific, HSBC.

“The priority for Hong Kong is to build more infrastructure, including the Guangdong-Shenzhen-Hong Kong Express Rail Link that connects with the mainland and the Third Runway that links the city with other parts of the world,” Leung said. “Hong Kong needs to leverage its proximity to China, as our close competitor Singapore has already eclipsed us in areas such as import of labour and per-capita GDP. Singapore is also expanding its airport capacity, which will surpass Hong Kong in 2020.”

For years, infrastructure spending has been one of the major drivers of Hong Kong’s economic growth. The construction of the Hong Kong-Zhuhai-Macau Bridge, the Shatin to Central Link and the Hong Kong Section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link is reaching an advanced stage in all cases. Early-stage reclamation works have now started for the long-awaited three-runway system at Hong Kong International Airport. Plans are also under way to remodel old districts as low-carbon smart neighbourhoods.

Opportunities abound for local corporates, whether they are small start-ups or multinational conglomerates. The city’s spending on domestic infrastructure is expected to exceed HKD240 billion per year over the next decade, according to Albert Chan, HSBC’s Head of Commercial Banking, Hong Kong.

Chan also observed that adding to that optimistic domestic outlook are the new opportunities arising from China’s Belt and Road Initiative. Abundant opportunities will arise in the next three years or so as projects in these countries kick off. Hong Kong is best positioned as a ‘super-connector’, or even to take a lead role in some cases, for outbound mainland Chinese firms.

Chan also expressed that Hong Kong firms can play an indispensable role in the Belt and Road Initiative, because they understand and are able to meet high international standards, something their mainland Chinese counterparts are not always able to match.

Belt and Road Initiative

During the seminar, many industry leaders shared their experiences of how to play up Hong Kong’s strengths, particularly in the context of successful projects that have taken place along the Belt and Road countries.

MTR Corporation is one of the city’s forerunners when it comes to expanding abroad. The railways it operates overseas are already four times the length of those it runs in Hong Kong.

Jacob Kam, the Corporation’s Managing Director – Operations and Mainland Business, told the audience that MTR’s strengths are in railway operations, and finance, contract and rail asset management. These qualities are highly sought after by mainland Chinese firms, as well as by overseas partners.

Design and build services firm Fruit Design & Build Limited (FDB) is one of the few Hong Kong firms to have already participated in the Belt and Road projects. Back in 2015, the company was appointed by China’s Ministry of Commerce to be the supervisor of the Nepal Armed Police Force Academy, overseeing the procurement of equipment and materials, vetting construction plans and monitoring work quality.

“We believe overseas experiences are very valuable and must be developed gradually over time. In addition, our professional experiences were something our Chinese partners lacked. Based on this, we decided to seize this opportunity,” said FDB’s Director Wallace Lai.

Industry practitioners and leaders also shared some of their lessons and tips with an audience interest in securing a share of the growing Belt and Road markets.

Tapping into this experience and insight at the event, the following are five useful tips for corporates which are looking for ‘overseas’ business opportunities:

1: Focus on what you are best at and create value by offering expertise that your clients or partners lack.

hpa, a seasoned architectural, engineering and property development consultancy in Hong Kong, has for years been involved in numerous similar projects in Southeast Asia. “We are very clear about our strengths and advantages, and we focus on doing what our partners cannot do and creating value for them,” said the firm’s Deputy Managing Director Nicholas Ho.

2: Avoid entering new markets alone.

Ho said that as many Hong Kong firms have accumulated a wealth of experience bidding for and managing overseas projects, they are potentially the best partners for those with less experience.

“If you can’t find a partner and must go it alone, don’t invest too much upfront. You can test the new market by trying smaller projects and teaming up with different local partners. The key is to gather experience at this stage,” added Ho.

3: Understand the local business environment and build trust with stakeholders.

In every new market, said MTR’s Jacab Kam, the company prioritises understanding the business environment, such as local legal and tax systems. “An infrastructure contract could be 10 or even 30 years long. Trust and understanding are the foundations for such a long-term venture,” he said.

James Law, Founder & CEO of Cybertecture International Holdings Limited, added that his staff would even try to learn the local language. “Cultural differences don’t have to be eliminated. In fact, such differences bring in business opportunities and inspire good design. For instance, we built a futuristic-looking building in India that incorporates elements of Feng Shui,” said Law.

4: Be prepared to adapt to the unexpected.

When FDB was supervising the construction of the Nepali police school in 2015, a massive, deadly earthquake interrupted the project.

“Our project was suspended for three weeks following the earthquake. But the overall experience, for me, wasn’t negative. We actually learnt a lot, especially in terms of project management,” Wallace said.

Ho from hpa also recalled how a sharp swing in the value of the Malaysian ringgit led to unexpected foreign-exchange losses for the firm. “That was a painful and costly lesson,” he said. What the firm learnt as a result was to diversify its ‘baskets’, so that currency losses in some countries could be offset by gains in other regions.

5: Be bold and grab the opportunities that come along.

“I believe people in Hong Kong have an entrepreneurial spirit, vast experiences, talent and creativity. We just need to be more brave and adventurous to rise to the next level,” said Law from Cybertecture.

Market Insights

Important notes:

  • The Hongkong and Shanghai Banking Corporation Limited (the "Bank") neither endorses nor is responsible for the accuracy or reliability of, and under no circumstances will the Bank be liable for any loss or damage caused by reliance on, any opinion, advice or statement made in this video.
  • The opinions expressed are those of the featured speakers, and except where a speaker is specifically identified as a representative of the Bank, do not represent the Bank's views. The opinions are subject to change without notice and should not be construed as a recommendation of any individual holdings or market sectors.
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