Trade finance in a climate of trade wars and nationalism

Global trade volumes are around US$18trn to US$19trn a year, and, according to the ICC Banking Commission, around 80% of that financed by some form of credit. In other words, the interconnection is obvious

For this reason, we were delighted that Dr Rebecca Harding, CEO of Coriolis Technologies, a business providing data as a service to the trade finance sector, to share her perspective on trade growth, the geopolitical landscape, and in particular, her take on a year of ‘trade wars’.

As co-author of the acclaimed The Weaponization of Trade: the Great Unbalancing of Policy and Economics, she is particularly well placed to talk about verbal conflict around trade, and the creation of uncertainty with the impact on investment.

Our second interview features a fireside chat with Deutsche Bank’s Global Head of Trade Finance, Daniel Schmand, and Sean Edwards who, in addition to his day job as Head of Legal at Japan’s SMB chairs the International Trade and Forfaiting Association.

They discuss how to make sense of the uncertainty in trade in the light of trade wars, and how trade will always find its way and financiers will go getting finance to those that need it most.

They talk about how the secondary market has grown to include private credit insurance and plays a huge part in helping banks adjust their liquidity, despite being relatively “silent”.

As chair of the ICC Banking Commission in addition to his day job, Daniel Schmand provide an update on creating trade finance as asset class, and both take viewers through how industry rulemaking and common standards support this. 

Transcript of interview:

Clarissa Dann Welcome to Trade Finance TV. This is your insight into the global trade climate for importers, exporters and their financiers. I’m Clarissa Dann.

In this episode, we have international trade economist Dr. Rebecca Harding, Daniel Schmand, chair of the ICC Banking Commission and Global Head of Trade Finance at Deutsche Bank. And Sean Edwards, chair of the International Trade and Forefaiting Association and head of Legal SMB. They’re in the studio to talk about the dynamics impacting global trade finance and the industry’s response.

Rebecca, lovely to see you again.

Dr. Rebecca Harding Lovely to see you.

Clarissa Dann Thanks for coming into the studio, today and welcome to Trade Finance TV.

Dr. Rebecca Harding Thank you, Happy New Year.

Clarissa Dann And to you. Is trade in good shape right now? What do you think, Rebecca?

Dr. Rebecca Harding On some levels trade is OK, I mean, we saw pick up in 2017 in global trade, partly because of commodity prices going up. But the World Trade Organization is forecasting that trade is going to grow by 3.7% this year, which is OK, but you have to remember that that’s actually a downgrade on its April forecast, so that was April of last year. So in actual fact, the World Trade Organization itself is seeing some reasons to be cautious about world trade during 2019.

Clarissa Dann But 2018 was the year of rhetoric, wasn’t it?

Dr. Rebecca Harding Exactly. And I think this is one of the things that’s actually been a real cause for concern for trade practitioners, because it creates a layer of uncertainty around trade and the environment for financing or trading with other countries. So what’s happened over the last year is that obviously the US and China, but also US and Canada and Mexico, the US and all of the G7 as well, and then the US and European Union; there’s been a lot of conflict, verbal conflict rather than actual conflict around trade. Now, an awful lot of that is rhetoric, as you say, but while there’s that type of rhetoric around, it creates uncertainties so it holds back investment, and it starts to have a real impact on markets and on trade itself.

Clarissa Dann All rather worrying isn’t it? And it don’t get any better when you look at Brexit? It’s all looming now, how do you think that’s going to play out?

Dr. Rebecca Harding So Brexit, I don’t think is going to be a big concern for the global trade economy. So in volume and value terms, it’s very unlikely to make a huge amount of difference. What is happening, though, and what’s been happening over the last 18 months already, is that there’s uncertainty around the UK trade deficit and trade performance. Actually, ironically, we’ve seen UK trade go up and the deficit widened, partly because of fluctuations in the value of sterling against the dollar and the euro. But over the whole period since the financial crisis, the deficit has stayed roughly fairly constant. So we’re not seeing a big impact at the moment, but it will all depend on the extent to which we see commodities trade, i.e. merchandise trade and supply chains shift around Europe. And then it’ll also depend on how services trade pans out as well, because that’s a very important factor for the UK economy.

Clarissa Dann Particularly in financial services?

Dr. Rebecca Harding Well financial services are a very important part of the UK. If you look at the proportion of service trade in relation to GDP, it is actually very large. It’s over 20% of our overall contribution to GDP from trade is in services, which is the highest anywhere. But what we are seeing is that Germany and France are beginning to pick up on all of this. So what that means is that maybe we’re losing that type of competitive edge in the UK. So there are some risks to the UK economy around Brexit, which are well documented, and the biggest risk of all is actually just political uncertainty.

Clarissa Dann Let’s move on to the US and talk about trade wars. It’s almost a perjorative word, and there is this temporary truce that’s going on at the moment. What’s the outlook on that? Do you see it getting better?

Dr. Rebecca Harding So I’ve never been one of these people that says we’re going to have a full blown trade war. And I think the reason why is very simply because a full blown trade war would incorporate Europe and China and the biggest economies in the world. It’s the economic equivalent of pushing the nuclear button. So everybody is going to be very keen to avoid that at all costs.

Now I think the more material point is, has it damaged relations? Is it actually about trade? So has it damaged relations? Yes, it has. Everybody is talking about China almost as the enemy across the table these days. People are a lot less certain about China and its role in intellectual property and its role in national security. And it’s kind of increased the rhetoric that’s negative about China. Not necessarily justifiably so, but it’s happened anyway. And I think the concern that I would have is that actually in the end for the United States, this isn’t about China necessarily. It isn’t about trade necessarily. It’s about national security. It’s about intellectual property. And it’s about Chinese technology and the extent to which the US can see that infiltrating its own national security systems. So it’s actually an existential problem for the United States.

Clarissa Dann Would you say that was one of the main areas that will determine trade growth or lack of it in other areas during the coming year? What do you see as the three main determinants?

Dr. Rebecca Harding So the three things that are going to happen during the course of this year, I would say, number one, we have to find out what’s going to happen with the US/China relations, because it’s impossible to move ahead. There’s too much uncertainty in the market. And actually, I’d say that is far more important because it determines global growth. It determines global investment. We’ve seen foreign direct investment in 2017-18 fall back. If that trade war stops, there’ll almost be a huge sigh of relief and everything will pick up again. So, I mean, bizarrely, it’s almost too hard to call what’s going to happen. Most economists are giving three forecasts out, at the moment, per economist. So that’s important.

Second thing that’s really important as well, I think, is the extent to which we’re going to be able to see the reallocation of supply chains around the world. So it’s kind of a corollary to all of the trade war stuff that’s going on. So how are supply chains going to shift? For a long while it’s been apparent that we’re seeing supply chains actually become more regional and local, so the flip side of globalization is actually localization, and that’s been the case for a very long time. So how that pans out during the course of the year will be very interesting. One Belt ONE Road (OBOR) is a very interesting development as part of all of that. Who invests in that? And it’s a very exciting opportunity and one where actually there are opportunities to gain control rather than lose control.

The final thing, I think, is just how we measure services and digital trade. It’s become a real issue for the financial services sector and a real issue for companies as well, to understand how ideas and money and support and things like digital printing transfer across borders. And that’s actually the biggest way in which trade is likely to change during the course of the year.

Clarissa Dann And how we measure it.

Dr. Rebecca Harding And can we measure it? Exactly.

Clarissa Dann Thank you so much. It’s been lovely talking to you.

Dr. Rebecca Harding Lovely to talk to you, too.

Clarissa Dann We’re now speaking with Daniel Schmand, chair of the ICC Banking Commission and Global Head of Trade Finance at Deutsche Bank, and Sean Edwards, chair of the International Trade Information Association and head of legal at SMB. They’re here in the studio to talk about why trade finance is so important to the growth of world trade and economic well-being, and also what the industry is actually doing about ensuring that trade finance reaches those that need it most.

Daniel and Sean, thanks so much for coming in to the Trade Finance TV Studios. It’s so lovely to see you here.

Sean Edwards Very pleased to be here.

Daniel Schmand Thank you so much.

Clarissa Dann Right. now that I’ve got you here. We’ve been hearing all about how the only thing in trade that is at all certain is uncertainty. So how is that all playing out in the demand for trade finance?

Daniel Schmand Well, let me take this one first. So I think it’s very important to have predictability and particularly in trade and to have a positive sentiment around what is going on. Yes, there is a lot of uncertainty playing around at the moment. People speak about the trade war and there is a big discussion between the US and China, and I think they need to come to terms. Having said that, there is a second important point; it’s a global economy and trade and trade flows, as long as there is underlying business, will find its way. And we as banks are a follower of those trade flows and their needs to be financed.

Clarissa Dann So we are following the business aren’t we, Sean?

Sean Edwards Yeah, we’re doing it globally and I think that’s the big thing. We’re all obsessed with Brexit and that’s a small part of the picture. We’re talking about global finance and that the challenge for us really is in trying to penetrate that finance into the parts of the globe where we haven’t done it so well in the past and that’s always the challenge for every bank.

Clarissa Dann Just coming on to this whole business of banks and how they finance trade; the relationship between the banks and the secondary market and what is actually sold on to actually help generate value, which is so important, isn’t it? Can you tell us a bit more about it mean how does it all work?

Sean Edwards That’s what really my association deals with, really is pushing out trade finance risk into all sorts of off-takers, if you like. So it’s evolved considerably from pure sales of legal title to the debt which could be very simply represented. And now, of course, we’ve got the huge growth of private credit insurance, which is a huge part of the market. But there’s still the traditional market, the bank-to-bank, sub-participation market. It’s a silent market in the sense it doesn’t get picked up by stats very often, but it’s a huge part of how banks adjust their liquidity and finance, themselves. And it’s also very scalable; you can move it up or down depending on your needs.

Clarissa Dann What do you think, Daniel?

Daniel Schmand I can confirm what John has said, but let me add a certain angle. Next to the bank-to-bank as well as the PRI market, what we see is a much larger demand from institutional investors to invest into the trade finance asset class. I think also the ICC, with the trade register, has greatly helped to show the low default ratios of that asset class. What I feel is that we are at this inflection point of really creating trade finance as its own asset class with very, very, very low default ratios, which is highly attractive to investors. As we still shouldn’t forget, there’s ample liquidity in the market and there’s still a lot of appetite and liquidity which needs to be invested.

Clarissa Dann Let’s just pick up that subject of liquidity. There’s a lot of liquidity in the market and the whole quantitative easing thing as that’s played out has contributed to that. But those poor old SMEs, they can’t get trade finance. That gap is still a monster 1.5 trillion. So what on earth are we going to do about it?

Sean Edwards Well, one of the things we’re going to try and do is to make it easier to push that trade finance out to those SMEs, because you’re right, the trade finance gap was 1.6 trillion and it’s still 1.5 and hasn’t really dropped. Why? There’s a lot of reasons for that, but one of them is that it’s very difficult to actually service those clients cost effectively, so I think that’s certainly where digitization has a very big part to play. It also deals with one of the big problems that you have with those sorts of clients, which is the KYC/AML aspect that you can link in to your digital platform, all those sorts of utilities, and that’s in a way which you haven’t been able to do before.

Daniel Schmand I think, John, you’re spot on, on that point. I think there is ample liquidity, as we pointed out earlier, so there needs to be something else. And I guess where we need to focus more on is: know your client, the famous KYC question. And even more important next to that is: know your transaction. Because once you know your client and you’ve successfully done your client adaption, you also need to fully control the flows and make sure you do that in a safe and sound environment, because the regulatory pressure, I guess for the right reason, is on avoiding money laundering and terrorist financing. So we have to live with that dilemma and SMEs need to come to a better place and we are also in that game again, the facilitator, next to the financial risk, also to help them to deal with the non-financial risk aspect of the trade flow.

Clarissa Dann And of course, the SMEs do slot into some of the supply chain finance platforms, and that helps get some access to liquidity. Do you want to tell us a bit more about those?

Daniel Schmand Well, let me take that one first. I think the point from the post acceptance finance is well catered. What we still have is a gap pre-acceptance or even pre-delivery, and that is where the trick is and nobody really found it yet. I think this is the space where banks, international ones, multilateral organizations, and in particular regional and local banks need to better cooperate rather than compete. I think there is a demand and we need to come together and find one solution. And I think the first major, major step to that one is the network – the trade information network. So the network and the banks coming together is critically important to address a true market demand and need.

Clarissa Dann And picking up on the network, and that was a wonderful example of the industry coming together, as was the definition of the supply chain finance term so we all knew what we were talking about. Is this a sign of a much more move-together, of finding solutions? Are you optimistic?

Sean Edwards I think it is, so you know, you start with the naming of parts because you need to speak the same language, but then rapidly, and Dan and I are both involved in that particular initiative that you’ve talked about, you then need to actually build proper tools and actually do something useful with those definitions that you’ve got which are really a dictionary.

Clarissa Dann The burning question on my mind, as well as quite a few others, it’s all about adoption. We have seen the most wonderful initiatives come and go because people haven’t used them. So how confident are you both that these fantastic things will be used, will be populated and will deliver the data?

Sean Edwards There’s a lot of consortia doing a lot of work at the moment. And when I say a lot, actually, that’s maybe not a good thing, I should rephrase that. There are a number of consortia with a lot of banks and that’s what we need. We need two or three or four groups which have got a large membership, especially geographically, to actually start offering something that is feasible.

Daniel Schmand Let me just come back to the very, very basics. I think with the network, if you look at the technology and what we’ve started with is the simplest common denominator, and what is so critical is that it’s an open network so everybody can join. And we’ve learned that from the FinTechs, we get disenfranchized if we are not open and provide a truly open network where everybody can join. Sure, we need to have certain rules, absolutely, but that is the trick. What it is at the end doesn’t matter actually, as long as it is open and it is catering for the needs, and it is not too sophisticated so actually fit for purpose.

Clarissa Dann Thanks. And the whole digitalization, how that’s going to work, is all about trust, isn’t it?

Daniel Schmand I have a very specific view on the digitization and block chain. Look, we have a distributed ledger, we have block-chains, it’s already been there for years. If it would be the Holy Grail, the one thing which makes the world better by tomorrow, it would have taken off big time. So I think we also need to fix a few fundamentals.

How do you solve a dispute resolution? What are the common standards and rules on the block-chain? And I think we need to get those fundamentals right. I’ve seen block-chain working in a closed ecosystem. On a national basis all on-market participants will agree; the true thing, like the Internet, it needs to be open and needs to have a global standard. And therefore the rule making, the underlying basis is critical. It’s not the technical play, it’s basically the rules which are critically important, so how do you do dispute resolution on the block-chain?

Clarissa Dann But how confident do you feel you’re going to be doing any more business next year?

Daniel Schmand That’s the one-million-question and every bank is going through the budget season, so look, there for me, three fundamental things is: I think we need to see how single economies, currencies and commodity prices go. That’s a driver.

Then we have the geopolitical uncertainty, and I would include that the trade wars, and then I would say it’s a bit the overall sentiment, and we talked about that earlier. I think that the more positive all three of them develop, the more positive it is for trade. And it is the consumer sentiment and confidence, which at the end drives everything. We have Brexit, we have the yellow vests in France, we have the doubts about Italy, I think it needs to come to an end. I think the European Commission also needs to, or the European community needs to play a much stronger role in that area of uncertainty and then the rest will follow.

But that is more a political question, whereas we as banks are more a follower. We can then within the trade volumes which are there, try to make it easier, make it more predictable, find new techniques using digital, but the underlying flows and the confidence needs to be in the market, and that is a political question, not so much a financing question.

Clarissa Dann Well, let’s just see how it all unravels. Daniel and Sean, thanks for coming in to the studio.

Daniel Schmand Thank you so much for the lovely conversation.

Clarissa Dann I’d like to thank Dr. Rebecca Harding, Daniel Schmand and Sean Edwards for their insights into the trade finance markets in 2019. And, of course, to all of you for watching.

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Published on January 28, 2019

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