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Turbulence in Global Trade: Effective Strategies for Navigating Through the Headwinds

India’s significant trade volume and capital flows underline the crucial role of foreign trade policy in the country’s economic growth.

Sanjay Notani, partner, ELP
Sanjay Notani, partner, ELP

Let us start with some statistics about India’s economy: (a) Starting from USD 452 billion in 1999, India’s GDP crossed USD 2.6 trillion by 2017 – a growth of almost 6 times1 during a period when global GDP increased by only 2.5 times; (b) Per capita income nearly trebled in the past two decades; and (c) Total exports from India (merchandise and services) have increased 8.73 per cent year-on-year in 2018-19 (up to February 2019) to reach USD 483.92 billion, while total imports have increased by 9.42 per cent year-on- year to USD 577.31 billion2.

Increasing protectionism, the US-China trade dispute and uncertainty around Brexit have contributed to the lowest global trade volumes in 9 years.

Such significant trade volume and capital flows underline the crucial role of foreign trade policy in the country’s economic growth. While these numbers are indeed impressive, they cannot be seen in isolation. The world is witnessing increasingly protectionist measures – in the past few years, we have witnessed significantly higher tariffs (including export taxes) and have experienced many trade barriers (including imposition of quality conditions, unreasonable/unjustified packaging, labelling and product standards, and requirement of additional trade documents like Certificates of Origin and Authenticity). This, compounded by the US-China trade dispute, uncertainty surrounding Brexit and a slowdown in China and Europe, has contributed to the lowest global trade volumes in 9 years.3

In this milieu, businesses are well advised to review their exposure to global trade risks from a supply chain perspective, input cost perspective and a broader regulation perspective, in order to ensure that effective response and mitigation strategies are in place.

EXPECTATIONS OVER THE SHORT AND MEDIUM TERM

  • Tariff to continue either in the form of customs duties, along with the increase of trade actions such as anti-dumping, countervailing or L safeguard actions.
  • Non-Tariff Barriers being built and introduced to disallow or frustrate the process, coupled with delay in licensing and clearing imports timing and increase in costs of goods.
  • Endeavors by other regulators include bringing in customs valuation investigations for changes in related party contracts and transfer pricing regulations.
  • Increase in restriction of data flow by way of compulsory storage of data locally, compulsory setting up of offices, mandated compliance of privacy, tax and audit compliances, all of which have high cost implications.
  • Over-regulating laws for the use of emerging technology such as Artificial Intelligence, Blockchain and IOT; restricting data flows on E-commerce and introducing privacy regulations irrespective of individual data or commercial data sets.
  • Tougher IPR regulations and restrictions on the transfer of technology restricting investments into strategic sectors or blacklisting the firms. Country sanctions including but not limited to export control sanctions which can impact the flow of trade and inward bound capital.

STRATEGIES AND MITIGATION STEPS TO BE MINDFUL OF:

— A fair assessment of costs pertaining to raw materials should be done. The following factors should be taken into consideration:

A fair assessment should of costs pertaining to raw materials should take the following factors into consideration:

  • Is it procured locally or internationally?
  • How many sources of inputs?
  • Expected availability and price patterns
  • Duties and taxes
  • Upcoming regulations and notifications which will have an impact on the raw materials or on the final product.

This will necessarily involve a detailed study of the businesses’ supply chain so as to optimize costs along each element of the sourcing network. It is equally important to map alternative sources of procurement so as to minimize sole dependency on one particular method.

— Influencing policy outcomes through regular engagement with Government and concerned agencies: The current global scenario presents a perfect opportunity for companies, sectors and industry associations to engage with Governments to monitor domestic policies and regulations as well as guide them on positions being taken by them for proposed Free Trade Agreements (FTAs) / Regional Trade Agreements (RTAs) being negotiated. By way of illustration, India has been one of the key participants in the Regional Comprehensive Economic Partnership, i.e. ASEAN plus China PR, Japan, Australia, New Zealand and Korea RP that is being negotiated. In this situation, it is critical for sectoral leaders to take a position and open a dialogue with Governments to provide their inputs on negotiating FTAs and RTAs. An opportunity – risk matrix mapping can help the industry in approaching governments and putting forth their recommendations for securing and gaining market access during trade negotiations.

— Trade compliance programs: Trade compliance can broadly be divided into two silos: internal hygiene compliances and international trade compliances. There have been several instances where compliance programs have been critical in resolving issues of export control and sanctions, including country sanctions as well as financial crimes. Such programs typically include a quantitative element (cost reduction and optimization) as well as a qualitative element (correct classification of goods, valuation or country of origin). Fines are applicable if import procedures are followed incorrectly, if false or negligent drawback claims are submitted and/or if inaccurate preferential trade agreement claims are made due to incorrect or fraudulent certificates of origin. Crucial to compliance would be clear communication between suppliers and buyers.

— Emerging framework on data regulation: There are regulations being introduced the world over in areas of data privacy and cybersecurity. Businesses will need to be prepared for complying with data privacy requirements in both domestic and external jurisdictions. To be future ready, companies will need to consider factors such as source of data, consent of the data provider and data security. Failure to take – and prove – effective steps can result in class actions suits, massive fines and reputational risks.

CONCLUSION

Protectionist measures across the globe will increase, compliance requirements will become more stringent, regulatory uncertainty may persist – however, success comes to the prepared. In this scenario businesses need to now be ‘hyper’ prepared. The next generation market will be for businesses which have started thinking ahead of the curve. It will also be imperative to build mitigating and compliance strategies and simultaneously keep a focus on costs. Engaging with industry regulators and dialogue with the Government are important factors to close this loop. Internal and external conditions not withstanding – it’s all about efficiency, profitability and market access.

Sources

1 The World Bank

2 The Ministry of Commerce, Government of India

3 The World Trade Organisation

Contact:

Sanjay Notani

E:

www.elplaw.in

Legally India's 2019 InLegal 50 Issue

The 2019 print and digital edition of Legally India is a joint publication by Global Legal Media and Legally India. The issue introduces the InLegal 50, which is an annual fully-transparent tracking of India’s corporate law firms. Browse and click through below for more market and legal analysis in this issue.

InLegal 50 Editorial:

Download PDF of issue here

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