Fast reading
- Federated Hermes Trade Finance Strategy experienced minimal disruption during the previous round of US-China tariff hikes and would expect to see little impact should trade hostilities resume.
- However, a renewed trade war would still have consequences. It would likely force the US and China to seek new suppliers for imports, opening a window to explore new avenues for financing deals.
- A significant change over the last decade has been the rise in so-called south-south transactions between emerging economies and a reignited trade war would likely increase momentum behind this trend.
One of the great unknowns of the US election is the impact a new administration might have on global trade. In the run up to the 5 November vote, both parties have upped the rhetoric, but Republican nominee Donald Trump has generated the most headlines with a plan to bring in a 60% tariff on all Chinese goods.
Such a move would build on the duties of either 7.5% or 25% that the former president imposed on more than US$300bn worth of Chinese goods during his first term (2017-2021) – and has raised the spectre of a renewed US-China trade war.
So, for us, an obvious question is: could a change in US administration affect our ability to either source or finance deals?
Not our maiden voyage
One view is that Trump’s policies tend to be unconventional and unpredictable – making it difficult to speak with great certainty. But we can also say that we have seen some of this act previously: when it comes to trade wars it’s not our maiden voyage and for the most part, we believe we will be unaffected by an increase in tariffs.
That’s because we have never financed direct US-China trade, and with good reason. For one thing, such flows tend not to require much financing and, if they do, they are priced at levels that are too low to be of interest to our Trade Finance Strategy. Furthermore, US-China trade generally focuses on manufactured goods – and, again, these are not a focus of the Strategy1.
We have never financed direct US-China trade, and with good reason.
For this reason, the Strategy experienced minimal disruption during the previous round of US-China tariff hikes and so would expect to see little impact should trade hostilities resume.
That’s not to say, however, that a renewed trade war would be consequence free.
New avenues to explore
During the previous trade ructions, one market we watched with some interest was the US-China soybean trade. China is the world’s largest consumer of soybeans and was the US’s largest export market until the US brought agricultural products into its tariff policy. Over the course of one year (2018), the US-China soya trade flow fell from approximately US$20bn annually to just US$3bn2.
The fall in US soy exports caused many ripple effects; not least forcing China to diversify its soya imports and seek new suppliers. So, while we never took part in the US to China soya trade, this shift opened a window for us to explore new avenues for financing deals. Indeed, it’s exactly this type of south-to-south transaction that requires a trade finance solution to de-risk it, while still leaving room for attractive returns.
The bigger picture
Another effect of the former administration’s focus on trade was the popularisation of terms such as nearshoring, friendshoring and ally-shoring. We believe this is just a step in a larger and longer-running macro trend with wider ramifications for the trade finance space as a whole.
Global merchandise trade volumes have grown from approximately US$14tn in 2007 to US$25tn in 20223. It is interesting to note that within this growth, the expansion in emerging-economy-to-emerging-economy trade has outpaced its peers. Our view is that a reignited trade war would increase momentum behind this trend and that this, in turn, could lead to further opportunities for our Strategy.
To conclude: if a new US-China trade war were to develop, we expect the negative impact on the Strategy to be minimal. Indirectly, a redistribution of trade flows would likely be a good thing for our Strategy as it would provide the additional avenues for us to offer our solutions to new suppliers.
For more information on Trade Finance, please click here.
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1 The one major exception to this rule is agricultural goods which are the largest US export to China (accounting for approximately 20-25% of overall trade) but, even here, our main focus is on agricultural machinery. (As an aside, this is one of the main reasons the Strategy was largely unaffected by post-Covid supply-chain disruptions: with agricultural machinery the main exception, we tend not to finance containership goods.)
3 UNCTAD
BD014834
