Global trade is hard enough in stable time periods. But when it’s disrupted by trade wars, protests, political upheavals, and natural disasters, global trade can seem nearly impossible to navigate. So if you’re doing business in a region struggling with unstable markets, what do you do? We sat down with Carlos Casanova, Coface’s regional economist for the Asia Pacific region to discuss what’s affecting global trade and how businesses can protect themselves from unstable regional and global markets.
How unstable is global trade right now? Is it the most tumultuous it's ever been?
We’ve experienced a very long cycle of growth since the global financial crisis. In fact, if you look at the statistics, it's one of the longest periods of continuous expansion in history.
Now, all of that isn’t going to last forever and it’s starting to unwind. we saw a peak in growth and now we're starting to see a synchronized decline in activity.
So it's easy to assume that a lot of the Asian countries will feel the squeeze a little bit more than they did in the past. And whenever things are going down, all of the negative aspects of the economy, of fragilities, all of the political vulnerabilities tend to show as well. This expression of volatility and vulnerability is a bit more pronounced in Asia than in other parts of the world, because the region has become a lot more exposed to global trading supply chains.
Did this all start with Trump, or is there something larger afoot? Is this a pattern that you’ve seen over time?
Trump epitomizes this trend very clearly, but it's something that started before him. So even under the Obama administration, we did see an increase in the number of protectionist measures that were put in place. The Obama administration was maybe not so vocal about advertising these measures, but the US Department of Commerce was definitely very active in China at the time. It's just that instead of tariffs, they tended to prefer other tools. Tariffs are a little bit convenient because the President can utilize them or deploy them right away. But they're a little bit out of the 70s or 80s trade book.
But we also see similar things taking place in other parts of the region, like the disputes between Japan and Korea, Indonesia and the Philippines, India and Kashmir, and even Brexit in Europe. And it reflects a global trend of higher protectionism and higher uncertainty following a very long period of unprecedented expansion.
Do you have winners and losers in that space in a global trade environment like we're in today?
I think there are no winners in any trade war. But there are companies that are better positioned to react than others. The true losers in this entire debacle are the intermediaries. So, typically, any company that is involved in the distribution of either components upstream or sort of electronic products downstream, between the manufacturer and the retailer, their profit margins tend to be a little bit narrower than the manufacturers themselves. So if you are a distributor that is focusing on the Chinese market and a lot of your demand shifts to Vietnam, you are going to experience significant pressure on an already very tight profit margin. Anyone that is exposed to disruption in terms of distribution and supply would have to be very worried at this juncture.
Do the protests in Hong Kong pose any unique finance problems for businesses operating in the region?
So it does pose a set of problems. We were amongst the first to highlight the possibility that Hong Kong might enter a technical recession in Q3, and that was a result of predominantly some downside pressure on the external front. Meaning that exports contracted quite steeply in the first half of the year. Hong Kong is not a big manufacturing hub, but it's a big sort of offshore center and re-exporting center for a lot of companies that are based out of China.
We did see a very steep downturn in activity as a result of the global trade war. And that downturn activity did not factor in the impact of protests because they started in about July, that's where the situation really deteriorated. So for Hong Kong, we were witnessing a decline in activity and then going forward. Protests impacting the main commercial arteries of the city, were for sure going to have negative spillovers of domestic demand, which is another big part of the GDP in Hong Kong.
We currently expect GDP to contract in the third quarter following a contraction in sequential terms in the second quarter which, of course, is the definition of a technical recession and going forward into the fourth quarter and into 2020.
If you're a CEO or a CFO right now what are the things they should be thinking about to “disruption-proof,” their supply chain to withstand some of the trade pressure that's underway today?
Surprisingly, a lot of CEOs in Asia do not actively manage risk. When we ask them whether they purchase any sort of trade credit insurance or other type of credit risk tools, their overwhelming response is no. So more than 50% of respondents throughout the Asian supply chain do not currently have any sort of tool in place to protect themselves against the risk of non-payment.
Asia is a very special market in the sense that relationships have been traditionally very important but it’s just not enough going forward to protect themselves. Moving away from that mindset where you're assuming a lot of things based on the nature of the transaction and towards a more professionally focused view of the supply chain is vital for companies to pursue. And moving towards a more market-based approach, where you have tools at your disposal to manage your cash flow risks, will definitely help companies in this coming period of higher uncertainty, because in the worst-case scenario, they are covered. And they will be able to have access to working capital while they figure out what to do with their supply chain.
So the most important thing is to shift gears on traditional views of risk in Asia. The old way of thinking about things is no longer applicable to a modern market integrated into the global supply chain. They will have to be more professional in managing risks in the region. I think that's what's going to help CEOs navigate risks the best.
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Ron Volpe 0:57
Hi, this is Ron and welcome to another edition Supply change. Today we are excited to have as a guest Carlos Casanova, who's the economist for Coface in the Asia Pacific region. So welcome to supply change, Carlos.
Carlos Casanova 1:14
Hi, Ron, thanks for having me on the show today
Ron Volpe 1:16
I thought we might just start off and ask you a little bit about the role you play for Coface and the market in Asia Pacific and kind of some of the challenges that you're facing today.
Carlos Casanova 1:30
Yes, so I am the economist for the Asia Pacific region, which means I am responsible for managing all of the macro economic research for Coface in the region, and it's a very large region, which includes everything from Bangladesh to Australia, and North Korea as well. So it's a fairly large part of the world. We cover out of Hong Kong, with a small group of three analysts at the moment. The research team at Coface is a little bit different to what you would expect from a research team in another type of financial institution such as a bank, or even an asset manager, because we are quite intrinsically involved in the business process.
Ron Volpe 2:13
As somebody that's not in that business specifically, I assume that right now I have the observation that right now, we've never seen the kind of turmoil that we have in markets as we do today. Some of its around tariffs, some of its around other things. So is that just a perception I have? Or is, is the world actually more tumultuous than it's ever been?
Carlos Casanova 2:34
I wouldn't say it's much more tumultuous that it's ever been. We've Of course, experienced a very long cycle of growth since the global financial crisis. In fact, if you look at statistics, it's one of the longest periods of continuous expansion in history. There have been instances of volatility here and there, but it's predominantly been isolated to a few cases in Asia in particular. We did see a little bit of turmoil in China in 2016. For those of you that still remember, in China, there was a series of policy missteps, including a devaluation of the currency by 3%. That led to a very long protracted period of outflows. And that was actually very disruptive from a business point of view, globally, but it was isolated. It was an event that was predominantly related to China and policymaking at the time.
Of course, China reacted by implementing a series of fiscal stimulus measures and monetary stimulus measures. And that coincided with a period where the Fed was still cutting interest rates. So there was synchronized global growth in 2017, a very, very strong period of recovery amongst developed and also emerging markets. Now, all of that is obviously not going to last forever. So it's sort of starting to unwind, we see a peak to that synchronize growth and now we're starting to see a synchronized decline and activity.
The economy grows in cyclical trends. So you have a period of expansion a period of contraction, structurally it might go up or down. But you do have these ups and downs, which we call cyclical business cycles. So we are in a business cycle downturn globally, not only in Asia, but given how far Asia has gone, embedding itself in global supply chains and the fact that the region is much more interconnected within itself, but also with the rest of the world compared to the previous instance where we did see a global declining activity which was a global financial crisis. Given this fact, it's quite intuitive to assume that a lot of the Asian countries will feel the squeeze a little bit more than they did in the past. In 2009, China was able to circumvent the crisis very effectively by implementing policy, this time around they are being hit by a declining global demand and and a lot of countries that are embedded in China supply chains, chains that have become very central in global supply chains, are also going to feel that decline.
Of course, whenever things are going down, all of the negative aspects of the economy of fragilities, all of the political vulnerabilities tend to show as well. So what we're seeing is coinciding with this downturn in activity. And in demand, a lot of the problems in some of the countries in the region are starting to manifest, which is why we see, you know, even further pressure on the cyclical front and some of the Asian economies. And maybe this month, this expression of volatility and vulnerability is a bit more pronounced in Asia than in other parts of the world, because the fact that the region has become a lot more exposed to global trading global supply chains
Ron Volpe 5:33
in this downturn, you know, what kind of impact do you see on—and my background is in the physical supply chain—so what kind of impacts you seeing on the physical supply chain disruptions, inability to get product from one place to another? What are some of the things that are manifesting themselves as we get into a downturn?
Carlos Casanova 5:51
So the short and long term impacts. Of course, our product lifecycle tends to be a little bit shorter because we do insurance on account receivables. So typically we're looking at a product lifecycle that is between three months and one year, two years. That the much longer terms is something that we called single risk. And we tend to view risks in a very different light of a single risk. But effectively our assessments are recalculated and recalibrated once a quarter. So we do have a little bit more flexibility.
We focus a lot more on the short term than in the long term risks. But we will touch upon both so on the short term, a lot of downside risk because there is disruption in global supply chains. And we have seen some countries in the region benefiting in the short term. Vietnam, Malaysia, Thailand and Taiwan are examples that spring to mind. Most of this improvement has been on the back of existing capacity. So you had economies that have very similar production structures than China. Many cases such as Malaysia, and Taiwan, they were upstream so they were companies that were producing components exporting into China, and China was reprocessing them or assembling them into other electronic products and exporting to the US and other parts of the world. These countries had the ability to for certain products adapt very quickly and sort of take over some of the demand that was shifting out of China and into these countries. But there's a limit to that, because the factories all were already running at 80% capacity. So there's only a sort of 20% upside to that equation, going forward into the sort of coming quarters. If there is going to be a shift in supply chains out of China and into other countries, that is going to be very disruptive for a lot of existing players. Because they will have to find alternative suppliers for components. And that takes time.
And on the very long term, while it is positive for some countries in the region, it does take between, I would say one to four years to put together an assembly line for for a high tech electronic product. So I mean, a lot can happen in between now and four years when when those factories are up and running. And a lot of companies will feel, potentially, their cash flows being reduced because they just are not nimble enough to adapt to the changes. So in the very short term, we do see that a global downturn, this global increase in protectionism, trade wars between the US and China, Japan, Korea, etc, etc, are going to have a very direct impact on the supply chain because a lot of that supply chain is currently in flux. In the long term, of course, the region will continue to be a very strong manufacturing center is just going to be a little bit more diversified than it is right now. And some countries tend to gain but in the short term, a lot of companies will just not be flexible enough to adapt in time. So we have revised our our assessments for a lot of the countries to take into account The fact that and sectors This was into account the fact that there will be a shift in supply chains.
Ron Volpe 9:06
So, you know, coming from the US, you know, we hear a lot about tariffs, and we all make the assumption that this all started with Trump, but I'm wondering if it did start with him, or if there was something larger afoot. And if this is a pattern that you see over time?
Carlos Casanova 9:23
In our opinion, obviously, Trump epitomizes this trend very clearly, but in our opinion, it's something that started before Trump. And it's something that now goes beyond the US China bilateral relationship, which is arguably one of the most important relationships and so that's very important. But a lot of these phenomena go beyond. So even under the Obama administration, we did see an increase in the number of protectionist measures that were put in place. The Obama administration was maybe not so vocal about advertising these measures, but the US Department of Commerce was definitely very active in China at the time, it's just the instead of tariffs, they tended to prefer other other tools. Tariffs are a little bit convenient because the President can utilize them or deploy them right away. But they're a little bit out of the sort of 70s or 80s trade book, excuse me for saying that.
But they are very convenient. But it's not something that started with Trump. I think the Trump administration has been very effective at capitalizing on the momentum that has been built both in Congress and the Senate behind sort of adopting a much more restrictive stance towards China. But by no means have we seen just a sudden increase in in protectionist measures under the Trump administration.
Moreover, this is obviously a commercial dispute between China and the US, but we see similar things taking place in other parts of the region. So a very clear example, potentially even as disruptive if not more disruptive than the current trading impasse between the US and China, is a dispute between Japan and Korea. So Korea electronic manufacturers that have benefited a lot from this declining demand from Chinese products are very dependent on imports of Japanese tech for the manufacturer. So the fact that Japan has decided to play some of these key components on negative watch or effectively remove them from something that they call a whitelist, it means that in order to export these products, you need to seek approval from the central government. And if they do stop issuing export licenses, that could completely disrupt the Korean electronics supply chain. And of course, that has spillover effects for the whole set of other products because the Korean electronics industry is very advanced in terms of semiconductors and other types of products that go into all sorts of things. So that's potentially a little bit more disruptive even.
We also have an increase in protectionism in Indonesia and Philippines, in India as well. The clear example is sort of what's happening in Kashmir and that being predominantly politically driven. And of course in the developed markets in Europe, we have Brexit in two weeks, and nobody knows what's going to happen yet. So it is something that goes beyond Trump. And it reflects a global trend of just higher protectionism and higher uncertainty following a very long period of expansion, as I mentioned before, that is quite unprecedented in modern history.
Ron Volpe 12:23
You know, you mentioned electronics, and you mentioned Korea. I'm wondering what are the other sectors or other verticals that you see being significantly impacted as we get into the downturn?
Carlos Casanova 12:33
Definitely. So electronics is a very big supply chain. Just to put this into context, semiconductors have become the biggest import for China, surpassing crude oil in 2014. This is huge because everybody thinks of energy as one of the biggest markets in the world. And China is the biggest importer of crude oil. So the fact that semiconductors have become a bigger important just points to the fact that this is a huge, huge industry. So it's a very important supply chain. And everything that happens for electronics has implications for the global economy as well, but there are the supply chains that are very Asia focused.
A great example is automotive. That's another supply chain that will be significantly impacted by tariffs. And by the way, it's not only the Americans that are targeting the auto supply chain in Asia, I think there's been some sound coming out of the European Union, with them not being happy with some of the cheap auto imports from China. And of course, it's not only China. So a lot of countries in the region including Malaysia, again, Indonesia and the Philippines, they do produce upstream sort of more basic auto components that get reassembled in China and then export to Germany, to the USA, even to Mexico to get reassembled into products that go to the US afterwards. The automotive supply chain is another another big one.
And of course, the other obvious supply chain is the textile supply chain. Luckily for textile, and barring the very high tech sort of performance, sports clothing, it is a fairly nimble supply chain. So it is technically less complicated to set up a textile factory. So we have seen, and we have seen for many years, a shift in textile supply chains out of China and into places such as Vietnam and Bangladesh. So, just just to point out and up on what I've just said, a lot of these shifts were taking place before the trade war between the US and China. What the trade war has done is it's now like added a veneer of uncertainty and higher costs to that sort of equation. So if companies were doubting whether or not to shift, and remember Samsung moved out of China in 2008 into Vietnam, so other companies that were sort of on the fence about it, now they have a stronger incentive to move out of China. And textile is a nimble and quite reactive supply chain. So they have been for a number of years been moving out of China. So potentially they will be impacted less because they're able to react more quickly to the sort of global threats. But it's also a supply chain that is very Asia-centric and also very exposed to any potential changing in protectionism.
Vietnam is definitely absorbing a lot of that. However, Vietnam has a trade surplus with the USA. So they stand to benefit insofar as Trump doesn't impose tariffs on Vietnam as well, which is unclear at the moment. So there's definitely a lot of uncertainties for some of the supply chains that are Asia-centric. And it's difficult to predict how the political winds are going to change in the future.
Ron Volpe 15:43
You know, I think of a company like Apple as building a fairly resilient supply chain that seems to be able to weather some of the storms like this. Are there other—are you seeing the "haves and have nots" within companies in terms of companies that are prepared to deal with a situation like we have right now? And going into a downturn, is Apple one of the ones that is a winner? Do you have winners and losers in that space in an environment like we're in today.
Carlos Casanova 16:09
We definitely have winners and losers. So of course, contrasting Samsung to Apple because we mentioned both brands, Samsung has managed to dodge some of the risks that are surrounding the electronic supply chain in Asia because their manufacturing is distributed very differently to that of Apple's. A lot of their assembly takes place in Vietnam. They have factories, of course and other places to benefit from lower labor costs. But most importantly like Apple is the same with their factories in India, etc. It's to benefit from tax incentives for products that are sold in the local market. So on a global scale, Vietnam is perhaps Samsung's hub, whereas Apple is a lot more focused in South China so they collaborate with Taiwanese company called Foxconn. And we have the factory Schengen that's where most of the phones have been manufactured. There's talk now that, and Apple of course knows how to navigate the risks in China very effectively because they have been present in the market for many, many years. They are considering alternatives. I think they have perhaps over invested in Schengen a little bit too much for their liking. Of course, they are already present in India and there's a chance that, especially for forms that are sold in other emerging markets in the region that that could become a hub. But Foxconn is also relocating some of its supply chain away from China and into Taiwan. So in a way, the fact that they've chosen a very good local partner means that they are able to circumvent some of the risks because you know these companies are already reacting and are already thinking about where they should be expanding capacity going forward. That's not to say that they will win.
I think there are no winners to any trade war. But there are companies that are better position to react than others. So the true losers in this entire debacle are the intermediaries. So, typically, any company that is involved in distribution of either components upstream or sort of electronic products downstream, between the manufacturer and the retailer, their profit margins tend to be a little bit narrower than the manufacturers themselves. So, of course, if you are a distributor that is focusing on the Chinese market and a lot of your demand shifts to Vietnam, you are going to experience significant pressure on an already very tight profit margin. So, on the distribution front, we definitely are a lot more cautious than on the manufacturing front. And even companies such as Huawei, which has become a target of sanctions, not even tariffs, but sanctions on a number of different counts including human rights abuses, but also alleged trade between Huawei and Iran as well and theft of US intellectual property. So even a company like Huawei, they still have a fairly healthy profit margin, they still have other revenue sources from the building of 3g and 4g infrastructure. Remember, a lot of the emerging markets are still building their 4g infrastructure, and the hold pittance for 5g infrastructure. So even companies that are very directly targeted, might be in a better position than we think to, to navigate the risks. But of course, anyone that is exposed to them in terms of distribution and supply would have to be very worried at this at this juncture.
Ron Volpe 19:40
I know you've got a deep research team, what's the value that they add to your organization?
Carlos Casanova 20:12
So we are very lucky to first of all have a research team on the ground. Our competitors don't necessarily have people in Asia. They tend to focus on the risks in a more sort of, like from from headquarters. So it's a slightly less local approach. But, and this is true for Coface and other great insurance companies. Our macro research is also influenced by our own payment data. So when we calculate country risk assessments, the product in itself might look very similar to some of the ratings that are published by Fitch or Standard and Poor's and Moody's. But they focus a lot more on sovereign debt, whereas we, first of all look at indicators of corporate debt and corporate risk a lot more closely. But 25 percent of our risk assessment is dependent on our own payment experience. Now we have the largest exposure globally of all of the trade credit insurance companies in Asia, that's around 60 billion of exposure. I think globally, it's much more, it's about 500 billion, don't quote me on the figures, but they change every day, depending on the on the deals that we're working on, obviously. But it's a fairly huge exposure and it's very diversified.
So it's not to say that it's all in one country or two countries, it's throughout the region and across many different sectors. So when a sector in a particular economy or market is experiencing difficulties, we know like we see this coming even before it's made the headlines because typically companies will sort of, you know, claim their insurance before you know the bankruptcy. Bankruptcy form has been filed and before the media gets it, so we do have sort of a heads up in terms of who is suffering the most of course, we are very—we support trade, but we are a risk company. So we do try to focus on anticipate risk and react to risk in advance. And whereas we cannot disclose that information publicly, it is part of our assessment. So if there is a lot of downside in a particular market, we will have to react by downgrading the assessments.
And this is valuable information that our local clients like to have, because they know that we we are ahead of the market in terms of understanding where that risk lies. And it is an intrinsic and very important part of our risk assessments both at the country and sector level. So this is something that really differentiates our macroeconomic research to that of other parties. Sometimes it can be a little bit depressing in the sense that you're always talking about risk. It's nice to talk about the upside as well. But it's true that you know, we grow very organically, but we're very cautious about about the downside of things in different markets. So it's something that we have to monitor on a daily basis and very closely.
Ron Volpe 22:56
I know you're hosting a risk conference in Singapore sometime next month called unraveling globalization. Can you talk a little bit about what that means? What's that conference about, particularly what does unraveling globalization mean?
Carlos Casanova 23:09
Yes. So one of our flagship initiatives, it's also different to some of the other companies is that we host a number of risk conferences around the world. So we kick off the season with a big event in Paris in January. That takes place at the Louvre Museum. And then we have about 20 events in the different markets. We finish off with Asia.
So typically in Asia, we look at the risks for the next year. And this year, we—last year, we hosted it in Singapore, in Hong Kong, sorry—and this year, we're hosting the event in Singapore. Last year's theme was protectionism and trade wars and an interesting outcome of the conference was the fact that a lot of our participants and our clients we're actually already anticipating that they were going to shift their supply chains into other parts of the world. So since the event last year, we've seen this become sort of a mainstream trend, a lot of people have talked about winners and losers and supply chain shifts. But we've also seen a very steep deterioration in global conditions. And we have seen a lot of other economies engaging in protectionism. And so what we are trying to understand is whether we are moving away from a very global integrated supply chain towards more locally distributed supply chains, or whether we are actually just sort of experiencing a cyclical downturn and potentially, you know, this will all you know, just shift a little bit and then result in nothing.
So, the theme of this year is unraveling globalization, because and there's a question mark, so it's not that we're saying that globalization is unraveling, we're just interested in understanding how companies are thinking about their supply chains a year later. You know, when tariffs are here to stay, and a lot of other markets have decided to be engaging in that sort of behavior, and are companies going to become a lot more local, or are they going to continue to adapt the strategy of, you know, offshoring and centralizing production in a particular market. So we're trying to understand how this is going to shift going forward. Because we do see that a lot of these sort of protectionist measures are not going to go away anytime soon. Even assuming that there is a deal between the US and China, and elusive deal between the US and China, does take place before the elections.
Ron Volpe 25:35
Do you have any, you know, one of the current events right now in things in the news is the dispute between China and Hong Kong. Does that pose any unique problems and from a finance perspective for businesses operating in the region?
Carlos Casanova 25:52
So it does pose a set of problems. We were amongst the first to — again, we have data on payment trends — so we were amongst the first to highlight the possibility that Hong Kong might enter a technical recession in, in Q3, and that was a result of predominantly some downside pressure on the external front. Meaning that experts contracted quite steeply in the first half of the year. Hong Kong is not a big manufacturing hub, but it's a big sort of offshore center and re-exporting center for a lot of companies that are based out of China. So a lot of the trade goes by Hong Kong and of course, any product that is manufactured in China, even if it goes fine, in Hong Kong it's subject to tariffs in the USA, so we did see a decline in exports from Hong Kong.
Exports account for a very, very sizable chunk of GDP in this part of the world. And so that deterioration in activity in the external front has negative spillovers on the domestic economy. So you have all of the companies that are engaging in trade, they see the revenues go down, they postponed their investment decisions, they postponed their consumption decisions overall domestic demand falls, which of course, in turn, hurts the profitability of companies in the retail, hospitality sectors, etc, etc. So we did see a very steep downturn in activity as a result of the global trade war. And that downturn activity did not already factor in the impact of protests because they started in in about July, that's where the situation really deteriorated. So for Hong Kong, we were we were witnessing a decline in activity and then going forwards, protests impacting the the main commercial arteries of the city, were for sure going to have negative spillovers of domestic demand, which is another big part of the GDP in Hong Kong.
So we currently expect GDP to contract in the third quarter following a contraction in sequential terms in the second quarter, which of course, is the definition of a technical recession and going forward into the fourth quarter and into 2020, we do see, you know, pressures continuing on the back off tariffs on all of the remaining exports of China to the US that kick in in December. A lot of those products are consumer goods, electronics, that go through Hong Kong. That's that's one of the main type of product that goes through Hong Kong to other parts of the world, that's going to definitely have a bigger impact on what we've seen so far, and of course, even if the protests are resolved between now and the end of the year, a lot of this will have negative implications on investor sentiment and Hong Kong MA, the de facto central banks, the monetary authority of Hong Kong has started to actively monitor capital outflows from the city. So we do see a decline in financial activity going forward because of the reputational damages that the protests are having on the city. And of course, Hong Kong is a very, very important financing center for Chinese companies.
So just to give you a few figures, about 60% of China's total outbound foreign direct investment, so all of the investment from Chinese companies into Greenfield, Brownfield equity, etc. investments in other parts of the world goes by Hong Kong. And also about 65% of all of the total offshore bond issuance by Chinese firms is done via Hong Kong. So it's a very important market for Chinese companies to finance themselves. And of course, that makes it a very important financial hub. So when they are reputational damages, what happens is a lot of Chinese companies will seek alternatives and that will have long term impact on the economy as well.
Ron Volpe 29:31
I know this is not in the Asia market, but I'm just curious, you mentioned it earlier in the conversation, any observations about Brexit and what you think we should expect coming out of that?
Carlos Casanova 29:42
It's a big question mark. So Brexit will, if you just look at the impact on Asia in terms of supply chains, is not very big. China is of course the biggest exporter to the UK, but in terms of exports to the UK a percentage of GDP, it's negligible. You have to look at smaller economies such as Bangladesh and Vietnam, to see like a very large impact in terms of trade, so Vietnam and Bangladesh have the highest proportion of exports to the UK as a percentage of GDP. So for those economies, you know, disruption in supply chains are sort of Brexit would would have very significant implications on their GDP because obviously, if we have a hard Brexit, it will take many, many months before companies have understood how to navigate and how to place orders and who's paying what and how much.
And of course, given the importance of the European market for British companies, it's very likely that all of the efforts will focus on the European market first before they have time to even think about the Asian suppliers. So for companies based out of Vietnam and Bangladesh, even China but of course it being a much smaller proportion of GDP. It will take many months before they can receive their experts to UK so they will feel a squeeze. But the biggest impact is, of course, in case this hard Brexit that leads to significant deterioration in global sentiment, which is likely to be a case, and then we will see another repeat of capital outflow so out of all of the Asian economies.
And what happens is when you have capital outflows, the central banks, and the central governments are not able to stimulate the economy — and remember, we are in a cyclical downturn a global cyclical downturn — so now it's the time to implement counter cyclical easing measures. And if you can't do that, because you have capital outflows, because global investors are going crazy with everything that's happening in the world, then your economy just suffers this. There's nothing you can do to to, to counter or to try to buffer this this downside pressure on activity. So a baseline scenario still that some form of deal will be reached, that would minimize uncertainty, which of course, would still have implications on the supply chain but would be less disruptive in terms of capital outflows and global uncertainty and global sentiment. But at this juncture, we cannot exclude the possibility of a hard deal. So I think we all have to brace for the worst in two weeks in case we do have a hard Brexit.
Ron Volpe 32:16
So this has been a really informative and a terrific discussion. One last question for you. I appreciate all the insight you've given us. So if you're a CEO or a CFO right now, whether you're operating in Asia or not, what are the things they should be thinking about to disruption-proof, if you will, their supply chain to withstand some of the trade pressure that's underway today?
Carlos Casanova 32:36
So keeping on top of things is an important development trying to anticipate risk and react practically, is a good thing. Surprisingly, we do have a publication which we call an payment survey, we conduct that for nine economies in Asia, we had over 3000 respondents. And surprisingly, a lot of these CEOs in Asia do not actively manage the risk. So when we asked them whether they purchase any sort of trade credit insurance or other type of credit risk tools, their overwhelming response was no. So more than 50% of respondents throughout the Asian supply chain do not currently have any sort of tool in place to protect themselves against the risk of non payment. That would be in in stark contrast to, you know, multinationals in Europe who are very good at managing their supply chain risks and managing their their cash flows through financial products, such as trade credit insurance.
So I think moving away from that mindset, where — and Asia is a very special market in the sense that relationships and you know, like 10 years of trading with one company means that they will never ever default on your payments, or Oh, because it's a Chinese SOE they will never default on my payment — so moving away from that mindset where you're assuming a lot of things based on the nature of the transaction, and towards a more professionally focused sort of view of supply chain — so you know, relationships are important, we do take into account the number of years that two companies have been trading with each other when we evaluate risks on individual deals — but it's just not going to be good enough going forward. And we have studied to see defaults by Chinese state of enterprises as well this year. So shifting away from that old mentality where you take certain things for granted when you think about risks in Asia, and moving towards a more market-based approach, where you have tools at your disposal to manage your cash flow risks will definitely help companies in this coming period of higher uncertainty, because worst case scenario, they are covered. And they will be able to sort of have access to working capital while they figure out what to do with their supply chain. So I think the most important thing would be to just shift gears in terms of how we're thinking about risk in Asia. And understand that, you know, it just developed very quickly since 2009, and before then. So that sort of like old way of thinking about things is no longer applicable to a modern market that is very integrated in global supply chain. So we do have to sort of try to be a lot more professional in how we manage risks in the region. I think that's what's going to help CEOs navigate risks the best.
Ron Volpe 35:18
Carlos, thank you so much for talking with us today. It's been incredibly insightful. I think our listeners are going to get a huge amount out of this particular podcast, and really appreciate you joining us.