Home Finance Trade Financing: Enabling Trade-Based Economic Recovery

Trade Financing: Enabling Trade-Based Economic Recovery

by internationalbanker

By Alexander R. Malaket, President, OPUS Advisory Services International Inc. (Canada) and Founding Partner, ESG Validation LLP (UK)




The COVID-19 crisis is unprecedented in reach, speed of contagion and spread—and in the depth of economic impact that will result. COVID-19 is devastating human beings, families, communities and businesses across the globe. It is doing so within the context of a persistent focus on trade wars, troubling evidence of narrow self-interest in international activities, and increasing disrespect from various circles for multilateralism and the norms of international engagement.

International trade is one of a very small number of commercial and policy areas of which the effects can ripple around the world to generate positive economic outcomes.
Despite all of this, it is clear that international trade is one of a very small number of commercial and policy areas of which the effects can ripple around the world to generate positive economic outcomes. Thoughtful observers are likely to agree that trade works best when it takes place on the basis of goodwill and genuine intent to trade to mutual benefit. Even in more adversarial postures, a rules-based approach is demonstrably most effective.

When trade is viewed through a holistic lens that recognises the increasingly interconnected nature of the human experience, its potential to advance recovery is perhaps even clearer. Interconnectedness is a reality that the COVID crisis itself has brought sharply into focus, showing, very clearly, how interdependent we are on multiple levels. To the degree, in fact, that ICC (International Chamber of Commerce) Secretary General John Denton stated at a recent (virtual) APEC (Asia-Pacific Economic Cooperation) meeting that “none of us are safe until all of us are safe”.

The most pessimistic discussions related to trade, which focus on reshoring and protectionist responses to the crisis, by implication also recognise how central trade is to the recovery. Where we diverge is in the vision of how this should happen.

COVID-driven lockdowns and sudden, drastic slowdowns in commercial activity in critical sectors will have a global impact that we cannot yet begin to quantify, with a timescale that we do not yet understand. The global financial crisis of 2008 was arguably significantly simpler, yet it took us a decade to recover, with clear lessons emerging about the limits of fiscal- and monetary-policy mechanisms.

In the current circumstances, one useful lesson to draw must be that the tools and mechanisms of economic recovery must be carefully but decisively deployed on a foundation that assures their efficacy and enduring positive impacts over the coming several years. Trade is just such a policy tool and commercial mechanism. Those in business, government and elsewhere entrusted with leading our collective economic recovery must work collaboratively to ensure that trade rests on the strongest possible foundation to help businesses of all sizes survive through—and thrive past—the COVID crisis.

It will not be sufficient to support and enable a return to the pre-COVID-19 “normal” definitions of success, and, indeed, what some considered poor policy then (such as deficit financing) may be critically necessary in the current circumstances. Fundamental processes of leadership and management, such as planning budgets for nations or companies, will prove challenging; regulatory standards around the definitions of financial or commercial default may require a rethink…and the list goes on.

A few things are clear, however.

The role of banks and the financial sector will be critical, and the linkages between financial firms and the societies they serve and in which they thrive will be further highlighted as we work through the crisis. To date, responses have been swift and constructive, with regulatory authorities such as the Basel Committee on Banking Supervision likewise promptly reacting to provide some degree of capital relief in the early days of the crisis.

The WTO (World Trade Organization) and others have noted repeatedly over the last decade that trade is heavily dependent on the availability of trade financing and related risk mitigation, with 80 percent or more of merchandise trade requiring underlying financing to take place. The availability of trade finance, both classical trade finance and supply-chain finance, is indispensable in assuring the aforementioned solid foundation that must be created for trade to be an effective engine of recovery. The work of the ICC Banking Commission and various industry partners, as well as the UN Inter-Agency Task Force and the B20/G20 (the Business Twenty of the Group of Twenty), are at the heart of this element of the foundation for trade; however, they must be complemented quickly by regional and national measures to assure access to trade financing for companies of all sizes.

Pre-COVID-19 business models, including on trade, are inadequate as the crisis runs its course and must evolve if we are to take this difficult moment in history as an impetus for transformative evolution—which we must.

The initial days of the crisis saw trade financiers responding well and effectively, as reported during the annual WTO Expert Group Meeting on Trade Finance in Geneva, one of the last in-person meetings prior to COVID-related lockdowns. Even the challenges posed by piles of trade documents stuck in warehouses, impeding the flow of financing and payments as well as the ability of importers to claim their goods, saw leading trade banks responding with commendable agility to implement digital or quasi-digital solutions to help clients conclude their transactions. “Problems” that had seemed intractable over the course of a 30-year discourse on digitisation and dematerialisation of documents gave way to urgency and necessity, allowing trade to flow through the arteries of commercial relationships and supply chains.

The creation of a solid foundation for trade as a mechanism of COVID-19 recovery demands that we do not backslide on this and that all influential actors move decisively to advance digitisation and digitalisation in international trade and trade financing. This has long made sense.

It is now imperative.

There is significant talk about the notion that our familiar pre-COVID-19 realities are unlikely to return and that one option is to actively seek to come out of the crisis collectively, “better” than we entered it. Without diminishing the human toll and tragedy of COVID-19, much has been made of the accidental positive outcomes for the environment, conservation and some sort of reset of the priorities of humankind.

Before COVID-19, issues of sustainability were gaining increasing attention and beginning to sit alongside more mature topics linked to conservation and climate, with environmental, social and governance (ESG) considerations seeping into the consciousness of even the most die-hard market-driven business leaders, corporate boards and global investment managers. There certainly were concerns that ESG, like some of its predecessor constructs, would fall victim to hollow PR (public relations) exercises and empty corporate pronouncements. Greenwashing has been observed and called out, and those who genuinely wish to see ESG or some variation of it enshrined in definitions of the purpose of commercial enterprises (and certainly, at the core of public-sector decision-making) are actively taking steps to avoid diluting ESG or turning it into an empty promise or a vehicle for cynical manipulation.

In trade, the opportunity is to look at ESG components and their applicability in the context of cross-border supply chains and substantive issues related to sustainable sourcing, supply-chain visibility and traceability, as well as economic inclusion reaching the “long tail” or last mile of these supply chains. Increasing attention is rightly paid to issues of labour safety, the eradication of human slavery in supply chains and the now widely accepted responsibility of buyers for the behaviours of their supplier communities.

In addition to the ESG-aligned nature of these considerations, it is notable that effective and thoughtful strategies around them can contribute directly to risk reduction and, therefore, to attendant savings in funding and risk-mitigation costs. Analysis is underway, but still in its early stages, to determine whether financing that is deemed to be in support of sustainable trade could merit some form of refinement in terms of capital treatment.

Debate continues as to the impact of ESG-aligned behaviour in commercial concerns as well as to the performance of ESG-linked investment portfolios relative to more conventional alternatives. Given the nascent nature of ESG and the need to address fundamentals such as issues of definition and lexicon, to say nothing of data and related analytics, it is natural to find that there are leaders and laggards in advancing ESG and sustainability in trade and trade financing. Some portfolio managers will argue that their fiduciary responsibilities to investors demand that the overarching criteria for investment decisions relate to returns as opposed to ESG or social good for their own sake—further noting that so-called “sin” portfolios must be in the frame if they better meet the investment targets at play.

Parallel attempts to weave social good, sustainability, climate and other related considerations, perhaps well illustrated by the UN Sustainable Development Goals (SDGs), can be found in fair-trade initiatives, in sustainable sourcing efforts in palm oil and other commodities, and in the drive to fundamentally redefine corporate performance as being about more than financial ratios and conventional measures of return and performance.

In the end, it comes down to fundamental questions about the types of societies—and the character and quality of the human experience—that we decide to commit to creating. Trade, and therefore trade financing, are linked across all these areas and can play a determining role in the direction we take to get through the COVID crisis and the path that we will chart beyond it.

Concretely, industry, regulatory and reporting authorities, auditors and others can come together to define and promote (perhaps mandate to some degree?) appropriate practice and behaviour in emerging trade-financing techniques, such as payables-finance programs that could play an important role in driving liquidity to SME (small and medium-sized enterprises) suppliers. Or they can allow questionable practices to continue unchecked, with the ultimate outcome of destroying what might otherwise be a promising mechanism to enable trade-based economic recovery and inclusion.

In addition to clarity around trade as a driver of recovery and increasing attention to ESG, sustainability and related considerations, it is worth highlighting that trade can be a conduit for unscrupulous, fraudulent and even dangerous conduct from a criminal or terrorism perspective. While much effort has gone into dispelling the perceptions and myths around the degree of money laundering linked to trade finance (as opposed to trade-based money laundering, or TBML, which is a broader category), it is apparent that the COVID crisis has spawned unconscionable efforts to prey on the fears of millions to raise or launder illicit funds.

The creation of a robust foundation for global trade as a mechanism of recovery and post-recovery prosperity demands decisive action by authorities and the full collaboration of industry.
In this respect, the creation of a robust foundation for global trade as a mechanism of recovery and post-recovery prosperity demands decisive action by authorities and the full collaboration of industry to deal with financial-crimes compliance and similar considerations related to trade and global supply chains. As with advancing the frameworks necessary to facilitate digital trade, the urgency of addressing financial crimes must be taken seriously across jurisdictions on a collaborative basis.

Trade and its architecture are imperfect. Trade-related wealth and quality of life are not equitably distributed across the globe; however, there is no question that trade powered the reduction of global poverty pre-COVID-19, and every reasonable expectation is that it can and should be a central pillar in our shared global recovery.

We know what needs to be done; there is no mystery to the most urgent steps required. What we need is vision, leadership and principled courage to move us in the right direction, and finance—including trade financing—can and must play its part.

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