There has been softness in global trade recently, for obvious reasons. U.S. exports in 2020 were down about 14 percent compared to the previous year, and imports were down about 9 percent. That broad-based contraction is going to impact all businesses and pull everybody down to a degree.
However, the exact opposite is being forecasted for 2021. The International Monetary Fund expects the global economy to grow this year by over 5 percent, which would be a significant reversal.
“We could go from a year where trade was really in the doldrums to having a record year in 2021,” says Jim Altman, Middle Market Pennsylvania Regional Executive, Huntington Bank.
That should encourage businesses that engage in cross-border trade, and those considering, to look ahead for opportunities, but also take steps to mitigate potential risks.
Smart Business spoke with Altman about the factors affecting the global trade environment, trends to watch and risks to consider in the new year.
What are the political factors affecting U.S. global trade?
Over the past few years trade tensions and the surrounding rhetoric became quite sensational. There are issues that, if resolved, would benefit the U.S. and U.S. companies. The broader impact of the trade policy coming out of the federal government, apt but applied in a less-than-ideal manner, has created challenges for U.S. companies, particularly those importing and exporting from China. It’s created an effect that everyone is going to feel.
There are some concerns but also some favorable expectations associated with the incoming administration in this regard. A continued focus on improving the U.S. position in global trade, in general, from a fairness perspective, is expected. And China is likely going to remain a focus. However, there could be a fundamental shift in how the U.S. deals with China, moving from a unilateral to a more multilateral approach. Trade alliances could be strengthened, in particular with Europe and larger trading partners in Asia, which should create opportunities for U.S. companies in those regions. That expected momentum, combined with what should be above average growth next year, could lead to a real opportunity for companies that know how to take advantage of it.
What trends are taking shape related to global trade?
COVID has definitely exposed some weaknesses in global supply chains. Because of that, two prominent trends are starting to emerge. One is near shoring and the other is ‘glocalization.’ While some high-value and critical good manufacturing is coming back onshore, the more significant trend we are seeing is near shoring of low-value manufacturing to low-cost markets closer to the U.S., such as Mexico. This helps preserve the manufacturer’s cost base while at the same time shrinking the supply chain and associated risks.
Glocalization, on the other hand, is a trend that sees companies building in countries where they sell to reduce risk and take a few links out of the supply chain. A global shift in production of this nature will likely be led by large companies, though with cascading impacts downstream. One of the most common reasons small and mid-sized companies expand globally is to follow their larger customers. This trend seems set to accelerate over the medium term.
How should U.S. businesses prepare for the coming year?
The total impact of COVID isn’t known yet and there’s going to be unexpected winners and losers. So, businesses either active in global markets or considering that activity should protect themselves through risk mitigation techniques such as letters of credit, foreign exchange hedging and credit insurance.
Seek advice from a bank that has a global network, both in terms of foreign banks and local advisers that can consult on local market practices and conditions, and diverse products that support companies that do cross-border business. Companies should also have an insurance broker skilled in cross-border risk and credit insurance. There are banks that have their own insurance arm, which can lead to a more comprehensive approach to risk management in cross-border dealings.
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