Treasury Today Country Profiles in association with Citi

A spotlight on global trade

Isolated spot light shining

The ICC’s annual Trade Finance report puts the industry under the spotlight and finds it in the midst of a great shift.

The trading ecosystem is going through something of a revolutionary shift at present. This is driven by a changing economic climate, the proliferation of new technology and a wave of innovative thinking passing over the industry. These trends are very much to the fore in ICC’s latest Trade Finance report – the organisation’s yearly deep dive into everything trade related.

2016 in review

Global trade activity has been “anaemic” in recent years. This continued in 2016, a year that saw the lowest volume of trade activity since the global financial crisis. The ICC report cites a “cyclical inventory drawdown across advanced economies and contracting imports in China and major commodity exporters” as the main cause.

Trade restrictions were also on the rise in 2016, creating further barriers to recovery. The report notes that in 2016 such restrictions reached a post-crisis high. They link to a broader trend towards protectionism and may stunt any hope of growth in the coming years.

From a regional perspective, trade continues to move east. However, trade flows involving countries in Asia Pacific contracted slightly last year. The ICC expects this to pick up though, led by China’s belt and road initiative and the increasing importance of the China-led Regional Comprehensive Economic Partnership (RCEP), following the failure of the US-led Trans Pacific Partnership (TPP).

Documents in decline

With China set to become even more central to global trade, there might be some interesting shifts in the use of documentary trade. “Growth of trade involving China is also a good sign for documentary trade products,” states the report. “The Chinese government tends to favour documentary to open account trade as it is easier to track actual imports and exports and detect capital flight.”

However, as one might expect, documentary trade continues to show a downward trend globally. SWIFT data shows that LC and Documentary Collection traffic declined in 2016.

The waning in documentary trade and the rise of open account is driving increased interest in supply chain finance. “SCF is clearly the high-growth area in financing cross-border commerce,” the report says.

This statement is reflected by the fact that 28.6% of respondents to the ICC’s survey said that developing a supply chain finance product is the most important area of development and strategic focus for the trade finance industry over the next 12 months. Thirty eight percent said that it was the area of greatest potential for growth and evolution in the financing of international trade.

The focus on SCF product development also shows that this market is still maturing. Those banks and SCF providers at the head of the pack are focused on developing viable solutions for the provision of pre-shipment financing, says the report. Significant focus is also being put on the “provision of financing support for the so-called ‘last mile’ in complex global supply chains”.

Disruption and cooperation

Digitisation and the impact of fintech heavily feature in the report. Nearly 44% of respondents identify priorities linked to these themes, including fintech and the development of – or adherence to – fast-emerging platform propositions, as areas of strategic focus.

The results of the survey seem to suggest that traditional providers of trade finance are no longer treating fintech as a threat. “This may be reinforced by a widely-shared view that many high-potential fintechs lack the required domain expertise to translate a good idea into a sustainable business, and that some form of collaborative dynamic will necessarily evolve,” ponders the report.

Despite this focus on digitisation and fintech, 38% of respondents believe that only limited progress has occurred in recent years. That fact that 18% of market participants think that the technology is ahead of the market might indicate that trade is still viewed through a traditional lens. An evolution in thinking may also be required.

It is clear though that the trend towards digitisation is irreversible and will pick up the pace soon. This is reflected by 50% of respondents saying that 60% or more of all trade flow processes will be digitised in less than ten years. Once the inevitable change does occur, a third of respondents believe that advanced Asian economies (Singapore, Hong Kong, Japan and Australia) will lead the charge, followed by Western Europe.

A brave new world?

Despite all the promise that technology offers to broaden and deepen access to finance, demand still outstrips supply, with funding concentrated at the top end of the market.

The result of this is a trade finance gap estimated to be US$1.6trn. This represents significant untapped potential, unrealised economic value and lost opportunity in terms of development impact and economic inclusiveness. Whether technology can close this gap remains to be seen.

It also remains up for debate as to what the future of trade might look like once this wave of technological innovation subsides. The report hints that the advent of 3D printing represents a potentially disruptive force unlike no other; one with the power to transform the physical and logistical supply chain, demanding radical changes in the financial supply chain.

Who will respond to these changes fastest? Will it be the incumbents, or will new market entrants walk away victorious? It is likely to be a combination of both.

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