LIBF’s David Morrish: Trade Finance in a Time of Protectionism
The financial crisis of 2007/2008 triggered many after-shocks. One was the knock to global trade. Research at the Bank of Canada suggests that perhaps half of the slowdown in the growth of global trade was the result of muted investment in equipment: firms cut capital investment, so the trading of the ‘intermediate goods’ fell too. However, that is only part of the picture. The other is that the globalisation boom of the 1990s and early 2000s is over – at least for now. As Stephen S Poloz, Governor of the Bank of Canada, has pointed out: “China can only join the WTO once.” We heard from David Morris, Relationship Director at The London Institute of Banking & Finance for his views.
Protectionism, Globalisation and Productivity
If the slowdown were not enough, markets also now face protectionism. Of course, this too has roots in the financial crisis. Though specialisation boosts productivity and productivity boosts wealth, the benefits of global specialisation have not been evenly distributed. That means that the political case for trade is sometimes hard to make, even though the economic case is clear: we all need the enhanced productivity that trade brings. Ageing economies in developed markets need a good return on investment to support their pensioners. Developing markets need to create well-paid, purposeful jobs for their young people. Just as importantly, the planet needs us to ensure that all of this is sustainable.
What has that got to do with trade finance? Global trade has a lot of moving parts – and I do not just mean the goods in transit. It has political, cultural, legal, ecological, and, of course, financial dimensions. In the past, trade finance was largely about documentary credits and various forms of bank guarantee. If you were sending a shipment of goods, a bank could make sure that you would be paid and it could offer working capital to underpin continued production. In the wake of globalisation, many firms became integrated into extended supply chains and moved to ‘open account’ financing – payment was triggered by, say, delivery of a part. Firms no longer relied on a trade finance bank to get their money because shipments were no longer discrete events. Open account was simpler and cheaper for the firms, but it also carried risk – risks that slowdowns and protectionism have now brought into sharp relief.
Open Account Financing
The rise of open account financing saw trade finance banks begin to offer clients more than payment guarantees. To really assist firms, they developed a deep understanding of the overall trade ecosystem. A post-crisis tightening of regulation raised the stakes further. Global regulators made banks responsible for ensuring that their clients were not engaged in money-laundering or financing terrorism. This was not popular with the banks. However, regulators understood that banks are the global hubs of trade information. Banks deal with myriad regulators, trade bodies, law enforcement and, of course, make and take payments for buyers and sellers across many industries right across the globe. They have a unique insight into the flow of goods and data, across multiple borders, within supply chains that can involve many thousands of exporters and importers. Each of these can be subject to changing political whims, face natural disasters and get into economic difficulties.
It’s no surprise that law enforcement is interested in learning what trade banks know, but how do banks use their wealth of knowledge to help their individual clients? Technology is valuable in wrestling down the amount of data involved. However, the best support and advice comes from experienced bankers who understand the needs of their client and the context in which they operate. Good trade bankers have many years of experience – and up-to-date expert knowledge.
The sort of knowledge they have is not necessarily intuitive. The International Chamber of Commerce’s Incoterms, for example – standard terms used worldwide in international and domestic contracts for the sale of goods – are not bed-time reading. Qualified trade finance specialists have to understand the nitty gritty of principles of payments, of demand guarantees and supply chain finance – and much more besides. That’s why courses like those offered by The London Institute of Banking & Finance, which partners exclusively with the International Chamber of Commerce on trade finance education, are so important. Trade finance is easy to get wrong, and it has to be right.
Unlike their clients, who are necessarily focused on their own trades – and perhaps the trades of their suppliers – trade banks look across and down into supply chains. They can take the “ecosystem” approach that not only their clients but also regulators, law enforcement and sustainable development, demand. They help firms to be productive, to focus on what they do best, by trading with the partners that compliment them – and all within the rules.
In an increasingly fraught global environment, expert trade finance safeguards the productivity on which we all rely.