By Steven Beck, Head of Trade and Supply Chain Finance Program, Asian Development Bank
We’re living through a critical inflection point in the history of trade and supply chains. While the gap between supply and demand for trade finance is growing, so is the need to shore up trade and supply chains. We need stronger and more resilient supply chains, both to fix current weaknesses and better handle the challenges to come.
The Asian Development Bank’s “2021 Trade Finance Gaps, Growth and Jobs Survey” estimated the trade-finance gap grew to $1.7 trillion in 2020 from $1.5 trillion in 2018. Since then, inflation has eaten away at lending limits, meaning that the gap has likely grown significantly. ADB’s Economics Department estimates the global gap—the difference between companies’ demand for financing to support their import/export activities and the sum committed—has grown to at least $2 trillion.
It is important that the finance industry as a whole works to lower that gap, especially regarding facilities to support food- and agriculture-related imports. Inflation in food has called into question food security, which is a big concern. Enhancing limits to compensate for the impact of inflation on available credit limits, especially for food, should be seriously considered by the financial industry. Credit losses for short-term trade finance in food are extremely low, as evidenced by the International Chamber of Commerce (ICC) Trade Register1, which ADB helped establish more than 10 years ago. So, increasing these limits—180-day credit facilities for food imports in emerging markets—is a reasonable consideration for the private sector.
As the pandemic showed, significant gaps in global trade and supply chain strength and resiliency must be fixed. This task isn’t just a simple upgrade to fix a few problems. It represents an opportunity to dig deep into the global trading system for solutions to other problems as well. Those responsible for the various industries that rely on or operate within global supply chains were already aware of the fragility of the global trading system before the pandemic. Efforts to offset those deficiencies had been ongoing before the first case was recognized.
The spotlight that the pandemic shone on supply chains has now added to the urgency of those efforts. What’s more, it has highlighted the opportunity to use trade and supply chains to improve a range of vitally important issues. The pandemic is like a line in time, with a clear “before” and “after” the changes it wrought—changes that continue today. Now that we are hopefully emerging on the other side of that line in time, the pandemic can be a marker for the moment we started to get serious about the list of challenges we face.
Many would rank climate change at the top of that list. A 2016 study by McKinsey2 estimated that more than 80 percent of greenhouse-gas emissions and more than 90 percent of the impact of consumer-good companies’ operations on air, land, water, biodiversity and geological resources came from their supply chains. Supply chains need to be a focus for any serious climate-change alleviation. If we don’t focus on the environmental implications of activities throughout supply chains, we won’t be able to meet the emissions targets and other commitments that governments and companies have made, and the situation will only worsen.
At ADB, we prioritize support for equipment that helps offset climate change, lengthening maturities to accommodate the longer financing tenors required by some green-capital equipment. We are also helping to train staff from our client banks on sustainability issues. But other globally important issues must also be addressed through supply chains. Better run and more transparent supply chains will also help guarantee that unfair labor practices are weeded out of the global trading system, as one example.
One of the first and most important steps in using supply chains to deliver progress on these issues is to learn more about how they work. Even the multi-national companies at the top of supply chains don’t control or fully understand them. That needs to change if we are to get serious about fixing the issues we face as a society.
A 2020 study on environmental and social standards within supply chains by Verónica H. Villena and Dennis A. Gioia published in the Harvard Business Review highlighted that need. It pointed out that while large companies at the top of supply chains may have committed to sustainability in their operations, they can find it virtually impossible to extend that commitment to the outer reaches of their supply chains.
As the report noted, big companies frequently don’t even know who their lower-tier suppliers are, let alone where they’re located or what their capabilities are for change. For their part, the small suppliers at the outer reaches of supply chains are often unaware of sustainability requirements or lack the capability to address them. Increasing the transparency of supply chains is key to improving them. We need to know more about who is involved and what is happening at all points in the process.
Improving trade and supply chains was the goal of the Asian Development Bank’s Trade and Supply Chain Finance Program (TSCFP)3 before the pandemic arrived. The program is deeply involved in digitalization, making trade and supply chains greener and more socially responsible, and using them as a tool for a wide range of issues. But as it has for many, the pandemic triggered a re-think of the program’s priorities and a pivot in our thinking, from concentrating on filling finance gaps to addressing the underlying weaknesses in the system itself.
Trade and supply chains can be a vehicle for substantive change for the environment and inclusive workplaces where social and governance issues are respected. Just counting the number of deals we do and how much they are worth isn’t enough.
People tend to think of supply chains as modern high-tech inventions. Elements such as just-in-time inventory systems and state-of-the-art container ships come to mind. But the reality of global trade is that it still reflects the practices instituted when the ships that carried goods were powered by sail. Global trade is still mostly analog. To demonstrate the extent to which this remains the case, note that fewer than 1 percent of trade transactions in 2021 used electronic bills of lading.
Trade digitalization needs to happen. Shift trade and supply chains into the digital world, away from the ponderous process of paper documentation that exists now, and you have a system that can be better measured, monitored and regulated. Digitalization will transform trade and supply chains, but it won’t be an easy task. All participants in the trade eco-system—exporters, shippers, ports, customs, warehousing/logistics and importers—need to agree on the standards and protocols to underpin digitalization. The Digital Standards Initiative4, created by ADB, the Government of Singapore and the International Chamber of Commerce (ICC), is working on this now, in partnership with all stakeholders. Common standards are essential, and governments need to adopt laws recognizing digital trade documents before we can move the needle materially on digitalization.
To that end, ADB is also involved with a new advisory board formed as part of the Digital Standards Initiative: the Legal Reform Advisory Board. It brings stakeholders together to promote and explain the needed measures, such as a model digitalization law designed by the United Nations. An industry advisory board under the Digital Standards Initiative leads the way with private-sector stakeholders.
Replacing paper trails with digital ledgers and QR (quick response) codes rich in information will transform trade by enabling transparency deep into supply chains to ensure they are resilient and ready to handle future challenges. Making trade and supply chains more transparent will also help fight crime. To know whether criminals are using trade finance to launder money, or even to track the illicit trade in animals or the use of underage and slave labor, we need to be able to see deep inside supply chains. We are working with governments and banks across Asia to improve the transaction reports that help regulators and law enforcement identify illegal activities. That work is aimed at both stopping crime and, importantly for banks already laden with red tape, simplifying reporting so that the burden on them is lessened, which, in turn, will hopefully facilitate greater support for small and medium-sized companies.
The list of accreditations, certificates and licenses that companies need to prove that their operations are sustainable is long and growing. Consumers want to know that the products they buy are made sustainably, regulators and government officials want to ensure no rules are being broken, and companies themselves want to publicize their success in meeting those standards.
Buyers and financial institutions are increasingly responsible for understanding how their trade transactions and the companies in their supply chains live up to environmental and social-responsibility standards. It isn’t a stretch to imagine a day when companies will need to put as much effort into reporting on those standards as they now do in reporting their financial information to tax authorities. The question now is how to help them make that happen.
Much of today’s reporting on environmental and social-responsibility standards differs from economy to economy and even from company to company within a single economy. Some of the existing reporting is voluntary as companies try to reap benefits from being seen as green or socially responsible. Without readily available proof of their actions, companies can be liable of the charge of “greenwashing” their actions—over-selling their efforts on the environment to entice consumers. Some reporting is already mandated by law. US and European legislations enforcing environmental standards go back 50 years, for example, and labor standards are enshrined in law in many economies.
ADB is working with GS1, the global non-profit federation that handles the barcodes that currently adorn more than two billion products worldwide, to see if information can be embedded in bar/QR codes to help monitor and verify labor and environmental standards throughout the supply chain. GS1 has more than two million companies and organizations as its members and is now working toward simplifying the complicated tangle of certificates and recognitions involved in those standards, using upgraded QR codes that link to various standards reporting.
Other issues that can be addressed by focusing on trade and supply chains include gender equity in the workplace and better inclusion for people with disabilities. We have efforts aimed at those goals as well.
The pandemic exposed the weaknesses in global trade and supply chains. Fixing those weaknesses gives us the opportunity to get a step ahead on issues that we must face for the good of the planet. While closing market gaps for trade finance remains an important objective for ADB’s Trade and Supply Chain Finance Program, we’ve come to understand, at least partly through COVID-19-related lessons, the importance of broadening our mandate to address core issues.
We’re at a defining moment in the history of trade and supply chains, one that requires a bold move into the future when the trade and supply-chain industry will be key to solving core issues affecting the global conversation about where we need to go. Working with our global partners, our objective is to make global trade and supply chains green, resilient, transparent, inclusive and socially responsible. These are daunting challenges but also exciting opportunities.
2 McKinsey: “Starting at the source: Sustainability in supply chains,” November 11, 2016.
3Asian Development Bank: Trade and Supply Chain Finance Program (TSCFP).