How Australia-China tensions could increase the need for trade credit insurance

How Australia-China tensions could increase the need for trade credit insurance | Insurance Business

How Australia-China tensions could increase the need for trade credit insurance

Tensions between Australia and China hit boiling point last week when a Chinese government spokesperson tweeted out a manipulated image of an Australian soldier holding a knife to an Afghan child’s throat. The image – a reference to the recent Brereton report investigating war crimes committed by certain Australian soldiers in Afghanistan – led to an international war of words and further soured the already-deteriorating relationship between the two nations.

Earlier this year, the Australian government called for an international inquiry into the origins of COVID-19, incensing the Chinese government. In response, China reduced the level of Australian beef imports and instituted heavy tariffs on imported Australian barley. Just last month, it levied tariffs worth 200% on Australian wines and, according to Al Jazeera, is “expected to block further imports, including sugar, lobster, coal and copper ore”.

In terms of both imports and exports, China is Australia’s largest trading partner, accounting for 35% of Australia’s total trade. In an interview with the Australian Financial Review, Citi analysts Faraz Syed and Josh Williamson detailed how a 10% reduction in exports to China over the next twelve months could reduce nominal GDP growth by about 0.33% overall.

Furthermore, if exports to China were to halve “under a worst-case scenario,” they forecasted that it “would cause Australia’s total merchandise exports to decline by 20 per cent […] causing a sizeable 3.8% hit to nominal GDP”.

For Australian businesses, the kinds of levies and tariffs that China has implemented can create a type of political risk that greatly affects their accounts receivable – particularly when they are enacted quickly or unexpectedly. In the view of Kirk Cheesman (pictured), managing director of NCI Trade Credit Solutions, this type of liquidity, for many companies, is “the lifeblood of their business”, and incurring unexpected bad debts can greatly inhibit their continued prosperity.

“Naturally some of the recent tariffs placed on certain products going into China will have an impact on trade credit risks, product demand and credit insurance cover needs,” Cheesman told Insurance Business. “However, we have not really seen a major upswing in any political risk issues such as trade supply at this point.”

Read more: What form of insurance are Australian businesses overlooking?

A trade credit specialist, one of NCI’s areas of expertise is in dealing with export and political risks for its clients. For Ewan Berkemeier, head of trade credit, Marsh JLT Specialty for the Pacific region, these risks have been intensified by both the COVID-19 pandemic and China-centred political upheaval.

“Trade credit insurance provides coverage for losses arising from non-payment for goods or services sold on credit,” he told Insurance Business. “Coverage for exporters is typically extended to include non-payment triggers for contract repudiation and political risks such as inconvertibility and transfer risk, government intervention, foreign public buyer default and war and civil violence.”

Berkemeier confirmed that Marsh had experienced “an increased interest on trade credit matters” during recent months.

“As countries closed their boarders and shutdowns were enforced by governments [during the pandemic], global trade flows were crimped and exporters and other trading participants faced elevated risks associated with non-payment,” he continued.

“The risks of non-payment within cross boarder supply chains has been further exacerbated by trade finance outflows that have constrained liquidity. Similarly, risks have been exacerbated by political instability, particularly associated with China and their trading partners, notably Australia and the United States.”