G20 Executive Talk Series

September 2016

Global Trade

Authored by: Alexander R. Malaket

Financing Global Trade:
The Most Important Branch of Finance You’ve Never Heard of

Trade remains, despite a challenging post-crisis environment, one of very few powerful commercial and policy levers that can influence conditions on a global scale, and it is now widely recognized outside a small group of practitioners who have known this for a very long time, that trade cannot take place without the critical enabling support of trade finance.

This esoteric branch of finance has long been the purview of international bank and is still in part enabled today by instruments and banking practices that date back hundreds of years if not longer. Trade finance by its broadest definition, which now includes fast-growing techniques in the financing of global supply chains, supports perhaps as much as 80% of global merchandise trade flows, currently worth in the range of $20 trillion annually. In addition to providing critical financing in support of cross-border commerce, trade finance (and increasingly, supply chain finance) offer a range of highly effective risk mitigation options, through financing structures, private sector, public sector and international institution sources, that are fundamentally important to enabling trade in and with the most challenging markets on the globe.

The central (if until recently, underappreciated) role of trade financing to the conduct of trade, to the engagement of small business suppliers in international activity, and to economic inclusion and international development, make this perhaps the most important branch of finance that many have never heard of.

Trade finance has been a core area of activity and expertise at the International Chamber of Commerce (ICC) for many decades, and is at the center of the work, thought leadership and advocacy focus of one of the ICC’s largest Policy Commissions, the ICC Banking Commission. The Banking Commission takes a broad view in its mandate, touching on core rulemaking activities, regulatory advocacy, innovation and digitization, standards-setting, market and industry engagement, market intelligence and numerous other areas of focus.

The ICC is an influential strategic partner in the annual G20 process, as well as in related streams such as the business-focused B20, providing a unique channel and platform through which to advocate for a range of issues, with the objective of raising awareness, advancing high-level deliberations and helping to shape informed, effective public policy at the most senior levels of government.

We have accordingly been successful in recent B20 efforts, notably through the Financing Growth Task Force in 2015 and the SME Development Task Force under the current Chinese Presidency, in raising the profile and visibility of trade finance and supply chain finance as a critical enabler of numerous shared commercial, economic and political objectives across the G20.

These efforts, which have resulted in concrete recommendations flowing through each task Force, have been complemented and strengthened by further advocacy through the G20 CEO Advisory Group, and the annual ICC Banking Commission Consultation hosted most recently in Johannesburg, and co-chaired with Steven Beck, Head of Trade Finance at the Asian Development Bank and member of the Banking Commission Advisory Board.

As critical as trade is in the context of OECD and advanced economies (witness the export-driven resilience of Germany during the global crisis), its is perhaps even more important in developing and emerging markets, where trade is, despite its acknowledged imperfections, a major contributor to development, poverty reduction and economic inclusion. Thus, in considering high-impact commercial and policy decisions, trade is a natural priority: even more so, now that trade and investment flows are tightly integrated. Additionally, the role of global supply chains as arteries of commerce and as channels for engagement by SMEs and developing economies demands effective, coordinated and informed action in assuring access to trade finance and supply chain finance across the globe.

The B20 Task Forces and the G20 Consultations and CEO Advisory Group activities have provided excellent, visible and authoritative platforms from which to inform decisionmakers about the critical importance of trade finance and supply chain finance, at a time when trade needs to be reinvigorated, the multilateral system requires support, and we know from analysis by the ADB and the World Bank, that there is currently a global shortage of trade finance. Recent data suggest that unmet demand could be as high as $1.1 to $1.4 trillion annually, with the gap heavily concentrated in export-driven developing Asia. By all accounts, developing economies and SMEs are the most adversely impacted by this global shortfall, with the exacerbating reality that financing for both constituencies tends to be significantly more expensive when it is accessible at all.

Task force recommendations have covered a wide range of topics and options, ranging from technical capacity building around trade financing, to enhancing information flow such as the availability of company credit reports to assist in reducing (actual and perceived) risk during credit adjudication processes, to the application of technology in trade and trade financing. There have even been proposals aimed at establishing a capital market for SME financing.

There are opportunities to shape public procurement, to take measures to enable SMEs in developing or frontier markets such as Myanmar, to successfully pursue internationalization through cross-border supply chains. The work of the various Task Forces is thoughtful, comprehensive and publicly available, and merits, whether its conclusions rise to visibility at the G20 or not, serious consideration in the development of substantive policy and commercial initiatives.

It is completely understandable that each nation taking on the Presidency of the G20, and by extension, leadership across a range of G20-related streams, would wish to put its own stamp and promote its own particular priorities during its mandate.

That said, the proposal for at least some level of year-on-year continuity, first put forward by Australia, is the right path to follow. As the supporting organizations and numerous Strategic Partners and Knowledge Partners adapt to this principle, the next step, at least at the level of the B20 Task Forces, could be the commitment by incoming Task Force Chairs to review the prior year’s analysis and recommendations across all Task Forces, to ensure a holistic view and to avoid unnecessary duplications of research and effort. Such a process will also help to ensure that the most compelling proposals are given a path to execution, even if the G20 may of necessity focus on other priorities.

The financing of international trade, including global supply chains, has been brought sharply into focus in the post-crisis environment, as one of the more impactful branches of finance, and has garnered the most senior attention from the ICC, the WTO, the IMF, the World Economic Forum and numerous other entities and organizations in a position to shape the global architecture of international trade and investment – a stated objective of the joint WEF/ICTSD think tank called the E15 Initiative, which as also picked up on trade finance and supply chain finance as a topic of strategic importance.

Participation in the B20/G20 processes is a unique privilege and a memorable professional and personal experience. Doing so as a Task Force member, and in association with the ICC and the ICC Banking Commission, brings with it the opportunity and the responsibility to ensure that issues of importance to business community are given voice, but also, that senior business leaders consider the wider questions of interest to the communities, nations and G20 member states within which their enterprises grow, thrive, and generate value and impact.

Trade financing, most broadly defined, is a discipline that touches nearly every dimension of the topics under deliberation at the B20, and that has clear linkages to public policy, multilateralism and the economic growth, development and prosperity of G20 Member States. It is therefore appropriate, even imperative, for this branch of finance to be squarely on the radar of business and political leaders across the G20 as a powerful enabler of growth an prosperity, that is, at this moment in short supply.

Alexander R. Malaket CITP, is President of Canadian consultancy OPUS Advisory Services International Inc., established in 2001, focusing on international business, trade and investment with a specialism in trade finance. Alexander has undertaken a range of consultancy assignments, from operational and tactical to technology, to global strategy, for clients around the world and has developed and delivered training seminars and

programs in numerous markets including Toronto, New York, London, Hong Kong, Singapore, Dubai and Taipei among others.

Mr. Malaket is an internationally recognized expert in international business, trade, investment as well as trade finance and supply chain finance, contributing regularly to industry publications like Trade Finance Magazine, Trade & Forfaiting Review, Global Trade Review, Cash & Trade Magazine and Trade and Export Finance. Alexander speaks and chairs panels at top-tier conferences and events around the world, and is the author of “Financing Trade and International Supply Chains”, Gower/Ashgate Publishing, UK 2014.