Though there are serious threats to global trade from potential trade wars, it continues to flow. Like clean drinking water, trade and the trade finance that secures it, are crucial to the health of the global economy and to that of individual nations. How can trade and trade finance be nurtured, especially in the face of costs and tensions that threaten to turn off the tap?
Trade finance fuels trade; if firms are unable to access it, this can have significant consequences for business development and global commerce. The current US$1.5 trillion gap between the demand for and supply of trade finance is undeniably a substantial barrier to economic growth. A recent BNY Mellon survey canvassed industry participants to discover what steps they think should be taken to close the gap, and the results point to two potential sources of relief: technology and regulatory revision.
For Better or for Worse: The Linkage Between the US Economy and the Major Economies of the Western Hemisphere
The US economy is on track to break its own record; its current 115 months of expansion is only five months shy of the record set in the 1990s. The next recession will come, maybe soon, as the economy succumbs to factors such as policy errors, foreign growth and corporate profit. And the United States will not fall alone; other Western Hemisphere countries will be dragged down with it.
Since trade finance is lifeblood of global business, it has a positive role to play in driving sustainable practices. Here, banks can lead by example: through collaborative efforts, they can play a crucial role in encouraging a diverse network of counterparties to safeguard environmental, social and governance (ESG) principles, while also stimulating growth. So, how can “sustainable trade” be fully realized to meet these ends?
In spite of the recent rise of protectionism amongst major trade partners, international trade growth is strong, with emerging markets providing the main impetus. Trade growth could be even stronger if not for the shortfall in trade financing supply relative to demand, a gap that is partly due to regulation compliance. Technology is coming to the rescue, not only in addressing the trade finance gap but ameliorating operations throughout trade channels.
Money laundering and terrorism financing are serious issues that banks must address, especially as too many financial institutions are complicit in enabling the flow of unlawful funds. Unfortunately, the need to act decisively has also resulted in a disabling tightening of trade finance, sorely needed for economic growth. The new Asian Development Bank Scorecard seeks to ameliorate the inadvertent consequences of AML and CFT compliance.
The push on global trade to continue accelerating has not let up; but without sufficient trade finance, it will be restrained from keeping up the pace. With increasing appetite for purchasing pools of receivables—but a keen awareness of the associated risks—a growing number of banks are turning to Excess of Loss (XoL) trade credit insurance. How are banks leveraging this type of insurance to grow their trade-finance portfolios?
The digitalisation of the trade-finance industry is still very much a work in progress. The findings of the ICC Banking Commission’s latest Global Survey on Trade Finance, “Rethinking Trade and Finance”, shed light on the extent of the progression up until now and suggest what still needs to be done to accelerate the journey toward transformative innovation and its attendant benefits.
Financial managers need to know what to expect, but in the UK with the inevitability of Brexit there are as many or more unknowns as there are knowns, especially in relation to trade and trade finance. To reduce risks, policymakers who negotiate the terms of the Article 50 process should consider from the start how their decisions will affect trade and its finance.
Global trade growth depends on trade finance, which is not meeting demand. Regulatory compliance, protectionism, costs and complexities of technology have restricted banks’ willingness to provide trade finance. Measures such as collaboration, innovation, improved attitudes are a must if this fuel for the global trade engine is to be adequately supplied.