Trade integration, the key to Asia's future

Increasing intra-regional trade has propelled Asia to the top tier of global trading regions, but to stay there it must address its trading inefficiencies.
Kah Chye Tan
Kah Chye Tan

Throughout history, wars have been fought over trade. Asia is a region that recognises this more than most -- as far back as the 15th century, the East Indies clashed with several European nations over control of the spice trade and in the 19th century the opium wars were the climax of trade disputes between China and the British. In the 21st century little has changed. Trade is still a hotly-contested area between nation states, although it is now economic power, not military might, that is decisive in defining the winners and losers.

Certainly, the global financial crisis has created a seismic shift in relative economic power from west to east and it can now be said with some certainty that it is Asia, not the US or Europe, that is leading the world in terms of the economic response to the downturn. And much of Asia's success in weathering the crisis can be attributed to the growth of intra-Asian trade, which rose by 80% between 2003 and 2007, while the percentage of total Asian exports accounted for by the US, EU and Japan dropped from 43% to 31% during the same period, according to Standard Chartered research. Consequently, we see Asian countries trading and investing between each other at a much faster pace and in much larger volumes than ever before.

In simplistic terms, the global trading landscape could be viewed in recent history as OECD countries being the key consumer and R&D markets, while non-OECD Asia concentrated on its role as a producer. Yet this has changed. While the OECD countries can still claim proprietary over global R&D developments -- for now -- the financial crisis (which had little impact in Asia compared to the west) should signal Asia's emergence as a significant consumer economy.

Certainly, increasing affluence in the region over the coming decades is likely to see Asia's role in the global economy become even more important as its newly-confident consumers generate demand for products that could offset, or at least match, the decreasing or flat-lining appetite for spending in the west.  

Such a recalibration of Asia's growth model has put additional pressure on the region's trading capabilities. And this has exposed some flaws -- most crucially, Asia's lack of regional integration. In comparison to the US, which is completely integrated, and Europe, which is partially integrated (and moving towards further integration with the onset of the Single European Payments Area), it is clear that Asia remains worryingly fragmented.

Contrary to what many may think, this is not a matter of currency standardisation or political nation-building. It is something as small as the terms of trade between nation states that will most likely hinder the region's future development. Within the EU, for example, most trade activities are conducted on an open account basis (meaning payment is transferred directly into the exporter's account when the goods and invoice are received by the importer) because a certain level of mutual trust has been fostered. This is lacking in Asia where corporates still turn to the safety of letters of credit or other payment guarantees to mitigate perceived higher levels of counterparty risk with trading partners. This can lead to delays in payments, stifling corporates' ability to efficiently manage liquidity in their supply chain.

For example, a shipment of oil between Singapore and Indonesia may take only a day to complete, but as it is still conducted on a letters of credit basis, the paperwork may take up to a week to catch up -- creating significant supply chain bottlenecks and idle capacity.

In aiming to overcome these inefficiencies, it is imperative that Asia looks to Europe's integration -- both to draw from its successes and to heed the warnings of its failures. Indeed, while Europe can be justifiably used as a benchmark, it is clear that the European model will need to be re-calibrated to suit Asia's own social, political and economic environment.

Admittedly European integration was some 50 years in the making. But without question, Asia can catch up far more quickly by utilising learned European knowledge and picking and choosing only the specific elements of its model we require. Asia does not need to concern itself with the more political and idealistic aspects of European integration -- it does not need one Asian passport, one Asian identity, or even one Asian currency. What it does need is quicker, more efficient trade and payment structures.

How can this be achieved? The increasing sophistication of financial supply chain management technology is perhaps the biggest potential leap -- helping corporates to more efficiently deal with volume expansions, longer supply chains, increasingly sophisticated purchaser demands, as well as stringent governance standards and regulatory environments

The Asian approach could also go beyond customs and excise controls by addressing the costs of counterparty-related risks, such as aligning legislation for payment defaults or having better international arbitration approaches to hasten the reduction of letters of credit usage. Or perhaps, on a more concrete level, a few countries could establish an independent "small claims tribunal" platform to address small and medium-sized enterprise trade with values less than say $100,000.

Certainly, over the past few years, banks have witnessed more and more corporates searching for end-to-end solutions to unlock liquidity and maximise their working capital potential. Yet the provision of these systems by banks is only one step on what is a much longer journey towards Asian trade integration.  

Kah Chye Tan is global head of corporate cash and trade at Standard Chartered Bank. 

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