A new report suggests that business leaders in the Asia Pacific Economic Co-operation (APEC) region are finding pathways to sustainable growth as trade barriers continue to rise.

 

Escalating tariffs between the US and China no longer tell the full story of cross-border business conditions for companies with operations spanning the Pacific Ocean. Companies based throughout the APEC region are experiencing rising constraints on a range of day-to-day cross-border activities. Concurrently, they are channelling new investments into economies that support strategies to diversify, as well as into advanced technologies. 

 

Automation is leading 25 per cent of surveyed companies to redefine employee roles. Business leaders are mindful of a fast-evolving global arena. They are forging ahead in the face of continuing policy fragmentation, especially relating to data security and privacy. 

 

PwC surveyed 1,014 business leaders from May to July 2019. Survey results include responses from each of the 21 countries forming APEC – economies that collectively account for half of global trade and more than half of the world’s GDP. In its 10th year, the survey reflects business sentiment in the region; on average, respondents are investors in six other APEC economies. 

 

Protectionism is on the rise

 

The new report finds that tariffs are the biggest disruptors to cross-border trade in Asia-Pacific, with 44 per cent of respondents stating that a reduction in tariffs would have the most positive influence on business across borders. 

 

Other types of protectionism are also on the rise. Business leaders experienced more barriers to cross-border activities than they had expected at this time last year – and they expect to face similar restraints in 2020. Hiring foreign workers, and providing or receiving services across borders are becoming increasingly difficult. When asked which ‘one change to policy would have the most positive impact on your ability to grow your business across borders within APEC?’ 44 per cent cited a reduction in tariffs – or, more directly, a resolution to the US-China trade tensions.

 

The remaining respondents believe improvements will stem from other types of trade policy reform, which ranged from easing trade in services to harmonising data privacy rules. For example, seven per cent called out barriers to hiring foreign workers as an area that is ready for change. “We need more work permits for foreign expertise within APEC,” offered an executive from Indonesia.

 

Brighter prospects ahead?

 

Even though trade agreements fell short of expectations in 2019, some see brighter prospects over the next 12 months. Why is that? Some have high hopes from new multilateral or bilateral trade resolutions – particularly in regions and economies crafting those agreements. For example, 42 per cent of respondents in Mexico and 37 per cent in Japan expect an increase in revenue opportunities in 2020 resulting from trade arrangements compared with 28 per cent of all respondents. Trade policymakers in many economies are actively seeking to diversify their trade portfolios and strengthen existing arrangements.

 

Trade barriers impact real economic activity with a lag. The official statistics mirror the business executives experience: Global trade contracted over the first seven months of 2019 as global manufacturing production stalled, while the slowdown in goods trade appeared to spread into global trade in services (e.g., financial and IT services, passenger flights) through the second quarter.

 

Survey findings suggest that 2020 will belong to companies that find new pathways around barriers to cross-border business, whether it’s flow of data, talent or capital. Many are starting to implement changes that may help mitigate trade policy unpredictability, including by diversifying operations, strategic upskilling or influencing policy in nascent areas.

 

Top APEC investment targets 

 

Accordingly, portfolio diversification away from China and the US is picking up speed. Within APEC, Vietnam, Australia and Singapore are the most favoured among respondents for net increase in cross-border investment over the next 12 months. Business leaders in Vietnam and Australia are also likely to be more optimistic than their peers in the region.

 

Findings this year mark the first time China and the US do not make it into the top five since PwC began analysing net future investment targets across borders in APEC economies back in 2015. 

 

Among other factors, these investment intentions likely signal continued supply chain re-configuring. Over the past year, Vietnam, Chile and Malaysia have emerged as early beneficiaries of trade diversion. Australia’s commodity exports to China have soared, as China acted to boost domestic economic activity to cushion the pinch of US tariffs. 

 

Shifting trade winds are pushing companies to rethink their footprint – and as they do so they are looking at an expanded set of considerations that include risk, components, trade laws, rising labour costs, barriers to business, direct investment and shortening of supply chains due to digitisation, as well as how to secure future growth prospects.

 

Adapting to barriers

 

How can businesses adapt to barriers curbing the flow of talent, data, goods and services? Here are some shifts PwC is beginning to see – starting with a more nimble global footprint. Facing the trade policy rollercoaster, the only two choices for companies need not be ‘wait-and-watch’ or ‘lift-and-shift’ operations. Businesses reinventing supply chains for greater operational efficiencies can build in resilience to respond to disruptions and opportunities. For example, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU is helping to contain costs for some Canadian businesses. 

 

With an eye on where future growth lies, some companies are moving toward dual supply chains – one in China to serve China and the broader Asian market, and the other oriented toward North and South America. Others are scouting for alternatives and back-up suppliers to change their product flow in the event of a sudden policy change, without needing to overhaul their physical footprint.

 

Another observed shift is towards the use of trade automation tools. Manual, scattered trade processes are ill-equipped for new or emerging trade agreements that are more detailed and prescriptive than before – and whose enforcement is becoming more sophisticated, given the greater transparency in trade data. For example, the United States-Mexico-Canada Agreement (USMCA) creates opportunities for North American border authorities to collaborate on whether companies within the region meet content rules for products to qualify for preferences. Robotic process automation (RPA) in international trade finance can simplify trade and customs documentation and automate order processing and payments. Trade automation solutions can help manage regulatory volatility by screening every transaction against pre-defined criteria such as sanctions, import and export licenses, and tariffs classification. 

 

However, compliance is not the only reason to integrate automation into trade (and business) strategy. Multitudes of Free-Trade Agreements (FTAs) are in effect in APEC for reduced-duty or free-duty entry. Automation can streamline to drive better decisions. With more visibility into trade data, it’s easier to calculate duty and tariff costs while restructuring supply chains or take advantage of duty drawbacks.

 

A final key shift that PwC is beginning to see is new leadership on policy. There’s regional momentum behind the adoption of advanced automation and AI across industries. A majority of business leaders surveyed see that advanced technologies like these are improving trust relationships with their customers, with more mixed results among other stakeholders. Yet they are also cognisant of the need to strengthen trust over data usage and protection. Certainly, digital world challenges are big, but far bigger are the opportunities. Those that have their sights firmly trained on these opportunities will ultimately be the winners in cross-border business.

 

To access PwC’s Asia-Pacific Business Leaders Survey, visit: www.pwc.com