In recent years, the trade finance landscape has seen immense change, driven by a multitude of factors, including policy, consumers, technology and protectionism. A few years ago we were debating the changing role of banks in trade and how technology is changing relationships. Now we’re talking about a digitalised trade economy with integrated relationships, seamless processes and what this means for practitioners, clients and policymakers.
So, what are the global market trends across trade, finance and inclusive economic development?
What economic sectors are likely to see the strongest growth in the next 10 years?
2017 saw relatively strong trade figures last year, but there has been a significant slowdown this year, particularly in the US and emerging markets.
Trade finance trends
There are three themes which come to play here:
We are probably expecting to see a global slowdown as we’ve been on a good run for a long time and now we’re seeing some tightening in the markets.
Politics and continuing to threaten trade as the emergence of trade wars continue, as well as other protectionist policy such as the UK’s EU Referendum One note on these two themes are the timings. The US China Trade War might not have experienced the full impact on global economics as many of the tariffs have not yet been implemented and shown on the ground impact. Whereas, on issues around Brexit, we’re seeing trade flows already affected even before the UK exits the EU, as companies are investing less in export relationships and looking at import relationships to mitigate risk.
Potential improvements in ECommerce, online trading and open information is likely to continue giving a boost for trade going forward, even in the short term. In the longer term we have ledger based currencies which could have a positive impact on trade, but looking further afield, driverless cars and 3D printing.
What does this mean for financing business and trade finance?
Collaboration between banks and governments continue, to help support businesses export and finance trade.
However, traditional trade is changing, the historic favourable Letter of Credit, promissory note, and bill of exchange has become less common, now replaced by a surge in open account trade and finance. This is often picked up in the insurance market, which is helping provide multi-jurisdictional finance through an insurance wrap.
Escalating trade wars is reducing business confidence, investment and a rise in restrictive policies across different angles of commerce and in particular tit for tat policies between China and the US.
As an example, exports of soybean from the US to China were distinctly down this year. The Economist reported a plunge in soybean exports to China from the US by 98%, a staggering statistic and direct result of unfavourable trade policy. Soybean is an incredibly important food crop in China for pork products, an essential to help feed a 1.3bn Chinese population.
Rising geopolitical tensions and political warfare is also taking place in the cyber world too, not just on the trading of physical goods. This links into services and digital arena, which could cause a dampening in world trade and trade prospects.
Trends at the International Chamber of Commerce:
The Global Dialogue on Trade, an ICC, OECD and WTO initiative launched a couple of weeks ago is a digital platform, which is freely available, to provide complete suggestions and ideas to help tackle trade issues.
4. Frictionless, digitalised trade
Distributed ledgers and digitalised trade can help impact trade. The Digitilisation Working Group of the ICC is involved in changing some of the ICC rules to make them fit for purpose within the remit of a new world of digital trade. As an example, reviewing where electronic documents (eg electronic bills of lading) are not accepted, should be reviewed and addressed to reform policy and allow for more efficient trade.
What about the banks?
As trade and the customer changes, so does the position of larger banks. It’s important for banks to understand the difference between prom notes, insurance, accounting treatment and alternative finance providers / non-bank funders as well as inventory / off balance sheet providers. Often silos may exist within banks which can often cause banks to seem out of touch with the right product for a client, as opposed to trying to fit a restricted product onto a client.