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The shifting dynamics of Europe-Asia trade flows

Trade corridors between Europe and Asia are expected to continue evolving and growing at pace, driven by trade tensions playing out elsewhere in the world, and the need for companies to adopt diversification strategies as a result of supply-side shocks brought on by the Covid-19 crisis.

India, which has been scaling up its manufacturing capabilities, is one country that stands to benefit. We consider what is possible.

An evolving trade relationship

   
The Asia Pacific region is a vital intersection of global supply chains. For the last few years, discussions about trade with, and within, the region has been dominated by the effects of the US-China trade war, the rise of populism, and the diversification of supply chains away from China. Throughout this relatively turbulent period, Europe has remained resolute as Asia’s largest and most stable trading partner, and the opportunities for growing trade between the two regions are vast, despite – and perhaps even because of – the Covid-19 crisis.

Europe does not lose its relevance to Asia. There’s a long history to European-Asian trade, and there’s always been very deep integration between the two.

Rahul Bajoria

Asia Economist at Barclays

Bajoria continues: “From that perspective, whether it is commodities and physical goods trade, or technical and financial services trade, the relationship has kept on evolving.”

An integral part of that evolution in the recent past has meant that global companies, after realising their overexposure to China, have been working towards the relocation and reorganisation of their supply chains. As China’s wages climb and skills increase, multinationals have been steadily growing their operations in emerging markets elsewhere in Asia as part of their so-called ‘China plus one’ strategies.

According to a new report by data analytics and advisory firm Silk Road Associates1, China lost global export market share at an accelerated pace in 2019. Its share of global exports dropped by 4% in the consumer goods sector, with the difference being picked up across Southeast Asia, as well as in Europe and Latin America.

While not a new phenomenon, these shifts have been accelerated by the US-China trade war and, more recently, the Covid-19 pandemic, which has brought into sharp focus the need for supply chain diversification and resilience.

In Asia, it’s a trend that is giving way to increased opportunities for countries across the South and Southeast, which may have been overshadowed by China’s dramatic rise as a manufacturing powerhouse during the last two decades.

“Over the next three to five years, companies are likely to spend more resources on trying to minimise the risk of disruption to their supply chains, and countries such as India, Indonesia, Thailand, Malaysia and Vietnam could be beneficiaries of this increased investment and drive towards diversification,” says Bajoria.

Wide-ranging bilateral free trade agreements (FTAs), such as the EUVietnam FTA, which was ratified in June and eliminates 99% of tariffs between the EU and Vietnam, are expected to go a long way to bringing the two sides even closer as trading partners.

As companies prepare for supply chain restructuring, more legally binding commitments of this kind will be critical to their future plans.

Progress on these deals, however, has often been slow. Negotiations for a region-to-region trade and investment agreement between the EU and the 10-nation Association of Southeast Asian Nations were paused in 2009 to give way to a bilateral format of negotiations, and since then the EU-Vietnam FTA is only the second to have been signed between the two blocs, following a similar agreement inked with Singapore in 2019.
 

1Supply Chains Reimagined: Recovery and Renewal in Asia Pacific and Beyond: Baker McKenzie and Silk Road Associates, 2020.

An opportunity for India

For its part, India – not traditionally a strong proponent of multilateralism, having shifted its focus to bilateral agreements and recently renewing its push for self-reliance – has been trying to secure an FTA with the EU since 2007. While it remained an elusive topic at the recent annual India-EU Summit, there is fresh hope for potential concessions on some of the deal’s sticking points as both parties attempt to reduce their economic dependence on China, and because India will no longer be able to rely on the UK as its entry point into the European market after Brexit.

Although there have been historical and well-documented impediments to investment in India, including red tape and a lack of infrastructure, recent commitments by the Indian government are spurring renewed optimism in the country becoming a hub for goods and services trade.

In May, Prime Minister Narendra Modi unveiled a Rs20tn economic stimulus package in an attempt to boost India’s economy, battered by the effects of the Covid-19 crisis. That same month the Reserve Bank of India pledged support to the country’s exporters and importers through a range of new measures, including a loosening of export credit terms.

Over the last several years, with the help of Modi’s Make in India drive, the country has also set itself on the path of becoming an attractive destination for investment in the manufacturing sector. Today, multinationals such as GE, Siemens, Nokia and Boeing have either set up manufacturing plants in India, or are planning to roll them out, drawn by the market of more than a billion consumers.

Earlier this year, France’s Alstom delivered the first batch of electric locomotives to Indian Railways, all 800 of which will be manufactured locally. The contract is one of the largest foreign direct investments into the country’s rail sector. More recently, in August, Spain’s Siemens Gamesa received an order from Adani Green Energy for one of the biggest wind power projects in the country. Wind turbines for the project, which will be developed in the state of Rajasthan, will be manufactured at Siemens Gamesa’s facilities in India.

The Indian government is working on offering production-linked incentives^ to boost domestic manufacturing in as many as five sectors in a bid to attract even more investments.

According to Bajoria, the prospects for European companies in India as a result of this push are “immense”, whether in services or manufacturing, across both hi-tech and mass market products. He explains that European companies will have a distinct advantage, given India’s reliance on the quality of technology that Europe produces and its ability to meet very high levels of standardisation requirements.

Such opportunities are expected to be buoyed by India’s dedicated freight railway project, which aims to make it cheaper, faster and more reliable to move goods between industrial centres in the country’s north, and ports on the eastern and western coasts. The first two corridors are due to be operational by the end of 2021.

The completed project will bring India’s logistical infrastructure on par with most of the competitive Southeast Asian and North Asian countries, as far as product turnaround time is concerned.

Rahul Bajoria

Asia Economist at Barclays

Growing financing needs

The increased opportunities for European companies to become involved in India’s manufacturing and infrastructure sectors is playing out in their financing requirements.

The Europe-India trade flows are definitely something to look out for, given what we are seeing on the ground.

Brandon Feng

Head of Trade for Asia and the Middle East at Barclays

Feng continues: “We see a lot of cross-border bank guarantees being requested by our clients in Europe for going into India, using the Barclays footprint to help facilitate those guarantees.”

He adds that there is also an increasing number of companies looking to have conversations about their working capital needs onshore.

A similar trend is reported by Aoife Wallace, Barclays head of trade and working capital in Europe.

Traditionally, a lot of clients in Europe would have been importers of Asian-made supplies. That’s slowly shifted as the buying power of the Asian companies has increased, and we now have European companies becoming exporters into that market, particularly now that Brexit is on the horizon.

Aoife Wallace

Head of Trade and Working Capital in Europe, Barclays

Should this trend gather pace as expected, Feng says that banks operating across the region could stand to benefit. “There will be more opportunities for funding requirements and perhaps different types of financial products to help support the growth in the industry,” he says.

Future developments

As companies begin to plan their next moves, geopolitical unpredictability will continue to impact their ability to make decisions and manage risk, making it another important point for financiers to consider.

As part of ongoing trade tensions, how will the rise of populism and nationalism further impact supply chains and trade corridors in the future? We may not have the answers to these questions now, but we are exploring them and keeping close to our clients’ evolving needs.

James Binns

Global Head of Trade and Working Capital at Barclays

Although Europe’s initial reaction to the Covid-19 pandemic gave rise to fears of growing protectionism, with medical supplies held in national warehouses while borders were closed, the EU’s unified monetary and fiscal responses to the crisis may have gone a long way to demonstrating the bloc’s solidarity.

Bajoria believes that the development of a more cohesive economic policy for the region over time, leading to the strengthening of Europe’s position globally, will ultimately be of benefit to Asia, both in terms of driving demand as a market, but also in terms of accelerating global growth.

“There was a lot of internal focus within the EU as we went through the decade’s debt crisis, which was distracting from a global trade perspective,” he says. “2020 could possibly be a transition year. I’m certainly now more optimistic about the trade dynamics with Europe than I have been in the last few years.”

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