As global trade tensions deepen, Luca Corsini, Head of Global Transaction Banking at UniCredit, argues that this doesn’t necessarily spell bad news for trade finance and highlights new opportunities arising as economic influence shifts to Asia.
Global trade tensions are escalating. Growth in trade has decreased from 4.6% in 2017, to 3% in 2018 – and the World Trade Organisation anticipates a further drop to 2.6% this year.But how does this affect trade finance?
Despite high tariffs arising from tense trade relationships, and the subsequent drop in trading volumes, there has been no clear impact on trade finance revenues. In fact, trade finance revenues increased by 3% last year.
This could be due to the fact that, against a backdrop of rising tariffs and high-risk perception, security and trust is pushed higher up corporates’ agendas. Indeed, security is exactly what trade finance offers – with banks able to foster trust between buyers and suppliers. So, even when trade flows drop, trade finance is likely to stay in demand – since the causes of low trade flows are also factors that necessitate finance for those trades that do go ahead. As such, we may have reason to remain optimistic for trade finance revenues this year, despite the difficult climate.
A shifting centre of gravity
Beyond the corporate need for security and trust, concrete government initiatives are emerging that will further stimulate global trade – not least of which is China’s Belt and Road Initiative (BRI). This expansive project was first announced in September 2013, and joined by Italy in March 2019 – when both countries signed an agreement that locked in a total of 29 infrastructure deals worth EUR 2.5 bn.
The BRI may be indicative of a turning tide. Europe, once considered the world’s economic centre of gravity, is seeing influence shift to Asia. It is now down to banks to capitalise on this potential and help spearhead a rejuvenation in global trade.
Perhaps one of the most promising areas in the region is Asia’s strong stock of small and medium-sized enterprises (SMEs). If banks are to effectively stimulate trade between SMEs, innovative solutions will need to be devised to facilitate quicker and smoother transactions. More robust digital processes may be the key to bridging this gap.
To meet this need, a cultural change is occurring within banks that has seen inter-bank collaborations and consortiums become more commonplace. The aim of this co-operation is simple – to devise solutions that facilitate trade transactions between corporates. A promising advancement in this area is we.trade – a digital trade finance platform that allows corporates (particularly SMEs) to negotiate and execute trade transactions in a secure environment. UniCredit was among the pilot banks to pioneer this platform, which not only simplifies interactions between trading counterparties, but also enables them to layer on a number of financing solutions to facilitate the deal. Setting records ever since its inception, UniCredit successfully executed its first transaction in Italy via we.trade in March this year.
More recently, a proof of concept has been set in motion with a view to connecting we.trade with eTradeConnect – a corporate-to-bank trade finance portal managed by the Hong Kong Monetary Authority. If successful, this project will allow we.trade to expand into new markets – connecting Asia with Europe, and generating important trade flows between these regions.
Projects like this give us a glimpse into the future – one that will see banks and non-banks working in harmony, not just to pursue new opportunities stemming from Asia, but also to support the continued health of global trade in the face of rising tariffs and geopolitical tensions.