Services trade to continue growing despite shifting trade landscape: HSBC global trade chief

Business Times

3 days ago

[SINGAPORE] Even as tensions surrounding trade and geopolitics hog the headlines these days, there is still cause for optimism, said HSBC global head of global trade solutions Vivek Ramachandran.
'I'm cautiously optimistic,' he told The Business Times at the bank's Singapore office.
'I'm cautious because there are a lot of decisions. Lots of companies are in wait-and-watch mode, and companies are waiting for some certainty to unlock strategic decisions.'
But the 'consensus view', said the London-based executive, is that the dust is expected to 'settle' before the end of the year.
'Assuming that happens, that gives me optimism because then we will see businesses move forward.'
He added that businesses have proven that they will actually respond. 'They may not like the scenario, but they will find ways to respond and create opportunities,' he said.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
Fundamental change
Still, there is no downplaying the changes that the world has seen since US President Donald Trump unleashed his 'Liberation Day' tariffs in April. Average tariff rates today are at about 20 per cent, compared with 2.5 per cent prior to early April.
'It is a big shift in terms of what the global trade landscape looks like,' said Ramachandran.
For companies, this has brought at least two challenges: managing their working capital with the increased costs and figuring out who is in their supply chains.
'Supply chains have evolved over many decades with one objective – cost minimisation – and you can argue that they've done that incredibly effectively. That objective, at many times, has come at the expense of transparency,' he said.
Supply chains are also no longer linear, he said, with multiple crossing supply chains and some goods crossing borders multiple times.
'Very few companies have visibility into that and, in fact, there's no technology that allows you to measure provenance.'
In one of his previous roles, he said, he looked at the apparel industry in depth to trace a product from a cotton farm all the way through to its finish.
His conclusion: 'It's almost impossible, because the yarn or cotton could take six months to a year and get blended across multiple farms.'
This makes it a very difficult challenge for companies to truly understand which parts of their supply chains are affected by imports into the US or China.
The past few months have shown companies that they need to put a lot more premium into knowing exactly who is in the supply chain, where the country of origin is and what sensitivities they have.
Asked if the drive towards transparency would be beneficial in an era where sustainability-conscious consumers have become more demanding about where their products are sourced, Ramachandran said it depends.
'Some companies have benefited from lack of transparency further up the supply chain,' he said. 'If you are an intermediary who's sourcing, then in that case, you benefit from lack of transparency.'
In any case, while some consumers care deeply about what they eat or wear, they simply do not have the capacity or appetite to really understand who is in the supply chain for more complicated products, such as cars.
'In many cases, actually it's not a consumer benefit as much as I think transparency will help with sustainability,' he said.
'It's much easier to embed practices in your supply chain if you know who you're dealing with,' he said, noting that there has been 'almost an exponential number' of new sustainable supply chain finance mandates rolled out.
Growing trends
At the same time, amid the fundamental changes the world is seeing, Ramachandran pointed to several themes that will remain.
Among them, he expects services to continue to grow and become a larger share of trade over the next five to 10 years.
'If you look at most developed economies, services are 70 to 80 per cent of gross domestic product, but it's only 25 per cent of trade,' he said.
Platform-based models and e-commerce are likely to continue growing, with many more companies cutting the middleman and going direct to consumers. This means that service-related solutions such as buy now, pay later solutions or embedded financing platforms will accelerate, changing the dynamics of the services industry.
He also expects growing demand for trade assets from private credit or institutional investors, a development that could change the economics of trade.
Additionally, with the International Chamber of Commerce being proactive with its digital standards initiative and a critical mass of countries trying to establish legal frameworks surrounding trade digitisation, Ramachandran said he is hopeful trade will become more digital with less paper in the next five years – a development that would 'unlock a huge amount of value'.
Meanwhile, new trade corridors are also emerging, he noted, such as the one between China and Asean.
China and the US have yet to reach a deal, but the potentially lower effective tariff rates that Asean is facing compared with China could accelerate the China+1 strategy.
Asked if South-east Asia could again benefit from a US-China trade war – as was the case during Trump's first term – Ramachandran declined to be drawn into predicting who the winners and losers would be, calling it a 'fool's pursuit'.
Instead, he said, companies should focus on building agility into their treasury and supply chains.
'It's much more important to focus on building flexibility... Anything we picked three months ago would have been wrong at this point in time and, in fact, it would have changed a few times by now,' he said.
'Our advice to companies is yes, you plan for multiple scenarios, but it's way more important that you build agility and flexibility into your decision process, into your capital allocation process and into your sourcing practices.'
These disciplines, he said, would help them respond to a world that is 'changing quite a lot'.
The core skills of agility and ability to change do not just apply to companies – but to countries as well.
He cited Singapore as an example of embodying the mindset of adapting, innovating and not standing still – qualities that he believes could make Singapore a 'beneficiary' of the trade war, more than the fact that it is facing the lowest tariff rate.
A pro-business environment, high liveability and good infrastructure are often cited as factors drawing companies to Singapore, but Ramachandran considers these table stakes, albeit at a high level.
'You're already competing in an elite league with very few economies that have all of that, but what keeps you fresh is not all of that,' he said.
'What keeps you fresh is an ability to reinvent the country and to adapt based on themes, and I think that, for me, is what gives confidence and also what makes Singapore unique.'