International Trade in Global Financial Crisis

The subprime crisis of the big power has led to the global financial crisis. It seems that such

an expression overstates the strength of the big power. But we cannot ignore the economic

globalization which makes economic communities connect with and affect each other positively

or negatively.

In the financial tsunami hitting every corner of the world, what are the status quo and future

trend of international trade? First of all, it is necessary for us to look at the trade chain: raw

materials – finished product processing firms (manufacturers) – (suppliers – trade companies) –

logistics companies – importers – wholesalers – retailers- end consumers, financial service

providers such as banks, and Internet platforms for international trade led by Alibaba. On the

chain, all the elements are interactional and can transmit to each other. Price transmission is a

key element. Rate of exchange influences trading price. We can begin with importer, one of

initiators of trade. With the global financial tsunami seeming to gradually calm down, a

procurement manager working with a large company that was founded one hundred years ago

talked about their current situation: we are now facing extremely high pressure in retail and

need to reduce retail prices of our products in market. The manager urges suppliers to cut down

price with three simple reasons: 1. Against the background of current financial crisis, prices of

raw materials have decreased; 2. Significant reduction in prices of energy products such as

petroleum means lower freight and storage cost; and 3.With the decreasing and stable

amplitude of the financial crisis wave, rate of exchange will tend to level off and rise. Then why

do suppliers need to reduce their prices? Because the consumption end of commodities is facing

much lower purchasing power of the country due to the financial crisis. The information from the

consumption end is that the consumer confidence index goes down and end consumer groups

(including corporate and individual procurement) reduce their costs, expenses and consumption.

With such a weak market, merchants can only use price reduction as their sharp tool to

stimulate consumption. Merchants promote psychologically by enabling consumers to buy the

same goods as before with less money. Wholesalers and retailers in the middle of the chain

deliver goods on the chain from one level to another. During this course, they gain profits and

ensure normal circulation of goods. Their sensitivity to price and inventory leads to importer’s

action mentioned above. As for wholesalers facing high retail pressure, lower purchasing power

and weak sales, price is the only and effective solution to improve sales.
 As for consumables, those who are able to provide the market with inexpensive commodity

with proper quality will have a large market share, no matter they are wholesalers or importers.

This is low-price transmission resulting in larger trade volume. With increasingly stable financial

community, trade will tend to be active and large in size when consumers have suitable savings

and their purchasing power and consumption confidence index rise. Maybe experts and scholars

then will conclude that the crisis has ended and economy begins a recovery journey. When it

comes to the bulk commodity market, economists say that its bull market has ended since crude

oil price peaked. Those people trading at the peak of the bull market have made a great loss

due to substantially lower price. The time for them to recover from such a loss may be longer

than that for the crisis to come to end. Therefore, goods at low price will be favorites of people

in a certain period of time.

Next, we will discuss the price transmission from the perspective of suppliers. With the global

financial tsunami directly leading to significantly shrunken trade volume, it is truly a thorny

problem to retain customers while continuing to make profit and reducing risks and losses in

such an environment. To maintain its normal operation, supplier may adjust prices of its

products or accept orders and deposit foreign exchange if rates of exchange fluctuate narrowly,

waiting for further stabilization and rebounding of exchange rate. They look like those who are

bundled to stocks purchased at high prices and wait for being unbundled and reducing loss.

Prices of products from suppliers will be influenced by that of raw materials. It can not be

ignored that the crisis directly makes many small-and-middle-sized enterprises (SMEs) go

bankrupt, or stand on the verge of bankruptcy, or reduce their employees. As an Internet trade

platform, Alibaba, which has a close relationship with those SMEs, said that the next few years

will be a winter in its operation. A lot of SMEs get orders, generally small ones, through Alibaba.

Due to the crisis, there are no longer any small orders from Alibaba for those SMEs. With the

economic depression caused by the crisis ensuing the global inflation and big ups and downs of

price, the lack of orders has directly led to huge loss of SMEs, especially for those who focus on

export trade. As a result, there is a bankruptcy upsurge of SMEs that operate on a high-cost-

and-low-price basis. The bankruptcy and shrinkage of SMEs have directly affected the proceeds

of Alibaba that mainly provides services for SMEs. Considering this point, the financial crisis also

leads to early coming of the winter of Internet Business-to-Business E-commerce. Internet E-

commerce seeks for breakthroughs in a new operational mode while waiting for its spring.
 What about logistics companies between importers and suppliers? Suppliers or importers have

a direct business relationship with those logistics companies. Significantly shrunken volume of

freight causes the over-capacity of those shipping companies and forwarders. There is even zero

trade freight for transporting goods to the countries near the ocean. In fact, freight is paid by

importers. However, for now, transport cost is significantly lower than ever before. Similar to

sea-borne and air-borne shipment, international express business has witnessed a big drop in

delivery of samples and documents resulted from decrease in trade. It can be seen that most

parts of the influenced trade chain will incur loss. What about banks? It is impractical to say that

the destruction in trade will lead to weaken business of banks. At most, banks will have less

volume of business in loans and export bill purchase. It is financial derivatives that are affecting

banks, seemingly not in the same field as trade.

Financial crisis is a situation where the capital chain of financial system breaks. Superficially,

there is not enough currency in an economic system. Actually, the reason is that the circulation

of currency is not good. Superficially, companies or merchants do not have funds or lack funds

and cannot get loans from banks. Money can not flow freely. These have led to the fact that

companies go bankrupt, or reduce their size of production, or even slow down their trade

expansion. The shrinkage in production and manufacturing industry can be seen directly from

less orders and substantially reduced procurement volume of importers. On the side of retailers,

they sell their inventory as soon as possible, sell at discounted prices to recover cash, and

control inventory or even keep zero inventory. As the financial turbulence hit normal trade

circulation, it results in the big fluctuation of exchange rate and depreciation of currency. As a

result, the procurement cost will be higher. Trade is hit severely by both increase of purchasing

cost and decrease of purchasing power. At this time, merchants need inexpensive goods more

than ever before to compensate the loss caused by the financial shock. If the sales volume of

low-price goods soars in one country or region, trade friction between trading countries will

come forth, without exception during the time of financial crisis. If there are too many imported

goods in a country, this will directly lead to the rise of trade protectionism and more trade

barriers that violate the principle of free and fair trade. In the previous crises, countries set

trade barriers to hold back low-price goods from exporters, with the purpose to protect its local

industries from being hit, to lower unemployment rate, and to avoid spread of crisis to a larger
scope. Such measures based on individualism will conversely further the depression of global

economy. The measures, aimed at protecting domestic or local companies, are not good for

recovery from a crisis. It will take longer for the economy to recover when it falls to the bottom.

In this financial crisis, headlines of newspaper report that governments have invested a huge

amount of money to rescue the market and central banks have greatly lowered interest rate

consecutively to stimulate economy, drive consumption, avoid long-time economic depression,

abate financial fluctuation and reduce the huge damage brought about by the crisis. At this very

moment, it is both a risk and an opportunity for international trade. Risk means that companies

and banks may go bankrupt at any time while opportunity means that consumers of the world

need more low-price goods. The bull commodity market of the world has ended. It seems to tell

us that people need to have more inexpensive goods with good quality when facing lack of

money.

Under such an economic environment, how do companies on the trade chain face the situation?

After each crisis, there are cheap shares and assets everywhere. It is perfect time for companies

to reconstruct, merge and acquire. Those companies with abundant cash flow will expand and

develop themselves at this time through the measures mentioned above. Exporters shall seize

opportunities to cooperate with international brand companies. Strength of low cost will play a

more important role in future trade.

Written by Gerry Ding

Dec-18-2008

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