TACKLING THE “NEW NORMAL” OF UNCERTAINTY

From growing concerns over protectionism to geopolitical turbulence, global trade continues to be hampered by an environment of uncertainty. In such times, Daniel Schmand, Chair of the International Chamber of Commerce (ICC) Banking Commission, explains why strengthening the rules-based international trade system is critical

Following the release of its latest World Trade Outlook Indicator, the World Trade Organisation (WTO)stated that the trade recovery of 2017 should continue, with solid trade volume growth in the first quarter of 2018. While such positive news is to be welcomed, the rebound in global trade could be short-lived.

From the US’s withdrawal from the Trans-Pacific Partnership (PPP) – as well as its ongoing renegotiations of the North American Free Trade Agreement (NAFTA) – to rising anti-trade populist stances in Europe and elsewhere in the world, the system of rules and regulations that has governed world trade for decades has increasingly come under the spotlight.

At the very least, isolationist policies – such as those espoused by Trump’s “America First” policy – are likely to mean a substantial change in the way international trade is organised. In the worst case scenario (although far from certain) there is the danger of an all-out trade war, as tensions continue to escalate between the US and China.

But, of course, protectionism is neither new nor a US monopoly. In fact, according to international law firm Gowling WLG, research into global protectionism shows that, in net terms, 60 of the world’s top economies have adopted over 7,000 protectionist trade measures since 2008. Such figures are a cause for concern.

A recent example is India. Despite Prime Minister Modi’s “open-economy” speech at Davos last month, the country has recently introduced tariffs across a range of imports – including automobile parts, cameras, televisions, electricity meters and smartphones. Indeed, such has been the scale of India’s protectionist turn that import duties are now at their highest in three decades. And the risk of trade disputes is likely to rise.

Meanwhile, geopolitical turbulence continues to cast a long shadow over global trade. In Europe, both Brexit – particularly ongoing negotiations over the UK’s transition arrangements – as well as prevailing tensions with Russia have the potential to pose a serious risk to the outlook for trade. Additionally, tensions in the Korean peninsula involving four of the world’s largest trade champions (China, South Korea, Japan and the US) could also have a spillover effect on global trade.

And third, with some 80% of the world’s trade flows underpinned by some sort of credit,a growing trade finance shortfall – estimated at US$1.5 trillion by ICC and the Asian Development Bank – continues to affect those markets and companies that need it most. While there are a number of reasons behind the shortage in financing, ongoing “derisking” by international banks – in turn, resulting in capacity constraints – continues to be a drag on global trade growth.

Finally, compared to 10 years ago, the market has arguably become more constrained by regulation and compliance requirements that have – albeit indirectly – impacted trade volumes. That said, such oversight responsibilities and requirements have been deemed crucial to the overall, long-term health and maintenance of the financial system.

The case for open and inclusive trade

In the face of such uncertainty, it is important that the benefits of trade and its positive impact on jobs, investment and economic growth are not forgotten. The ICC has steadfastly maintained a strong stance against protectionism – and will continue to do so. And while legitimate concerns about trade should not be ignored, the proven power of open markets to drive extraordinary increases in prosperity and economic opportunity should also be stressed.

Open economies grow faster than closed economies. This is a fact: according to figures from the World Bank, per capital real income grew more than three times faster for developing countries that lowered trade barriers (5.0% per year) than other developing countries (1.4% per year) in the 1990s.

Nowhere is this more apparent than in East Asia and the Asia-Pacific, where those countries that have embraced outward-orientated development strategies have witnessed growth in both trade and GDP, as well as an equally impressive reduction in poverty.

Strengthening the rules-based, multilateral trading system to further democratise trade and support business growth should also be a priority. Certainly, the promotion of a system that reflects an inclusive, fair and progressive approach – and a level playing field benefitting all – would go a long way in defending global trade against rising protectionism.

This is precisely why ICC is working with the WTO to establish new trade recommendations for all nations. What’s more, each year ICC published its Open Markets Index (OMI). Representing 90% of trade and investment worldwide, the OMI seeks to highlight the level of trade openness in different economies across the globe.

Facilitating better access to trade finance

While trade is an essential component of sustainable economic growth, complementary policies are also needed in order to realise its full benefits. Among the most fundamental is the need to ensure that trade is adequately financed.

As the ICC continues to reiterate, trade finance and export finance are critical banking products that are essential to the facilitation and growth of international trade.Not only do these products provide importers and exporters with multiple methods of financing and a range of proven risk mitigation options, they also allow them to transact with confidence across borders – often with unfamiliar counterparties in distant markets.

Yet as the banking environment continues to evolve –particularly in light of increased regulatory scrutiny and compliance measures – what has become clear is that the rules governing trade finance and export finance will also need to adapt and evolve. Indeed, this context makes it more critical than ever for banks to understand and stay up-to-date with the risk profiles of such products.

In response to these changes, in 2009 ICC established its annual Trade Register to provide banks and regulators with objective,fact-based support to the narrative of favourable credit risk and default experience in trade finance and export finance. Based on over US$10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016 – approximately 40% of global traditional trade finance flows – the report uses a data-driven approach to consistently show that trade finance and export finance contains a very low probability of default, which makes it an excellent asset class for banks.

More importantly, the report’s data-set forms the basis of dialogue between ICC Banking Commission’s Advocacy and Regulatory Working Group and the Basel Committee to substantiate the case for an appropriate treatment of trade products from a regulatory perspective.

In addition to its Trade Register, ICC also publishes its Global Survey on Trade Finance. An accurate snapshot of market trends, the Survey enables bankers, traders and government officials to gauge global trade expectations, as well make informed, forward-looking decisions.

In an uncertain landscape, the benefits of a policy mix – that addresses concerns over protectionism, further strengthens the rules-based international trading system and promotes the advantages of maintaining open markets for trade, while equally stressing the need for trade to be financed – must be better articulated.

This article provides a preview of one of the discussions due to take place at ICC Banking Commission’s 2018 Annual Meeting on the 3-6 April 2018 in Miami. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape.

From growing concerns over protectionism to geopolitical turbulence, global trade continues to be hampered by an environment of uncertainty. In such times, Daniel Schmand, Chair of the International Chamber of Commerce (ICC) Banking Commission, explains why strengthening the rules-based international trade system is critical

Following the release of its latest World Trade Outlook Indicator, the World Trade Organisation (WTO)stated that the trade recovery of 2017 should continue, with solid trade volume growth in the first quarter of 2018. While such positive news is to be welcomed, the rebound in global trade could be short-lived.

From the US’s withdrawal from the Trans-Pacific Partnership (PPP) – as well as its ongoing renegotiations of the North American Free Trade Agreement (NAFTA) – to rising anti-trade populist stances in Europe and elsewhere in the world, the system of rules and regulations that has governed world trade for decades has increasingly come under the spotlight.

At the very least, isolationist policies – such as those espoused by Trump’s “America First” policy – are likely to mean a substantial change in the way international trade is organised. In the worst case scenario (although far from certain) there is the danger of an all-out trade war, as tensions continue to escalate between the US and China.

But, of course, protectionism is neither new nor a US monopoly. In fact, according to international law firm Gowling WLG, research into global protectionism shows that, in net terms, 60 of the world’s top economies have adopted over 7,000 protectionist trade measures since 2008. Such figures are a cause for concern.

A recent example is India. Despite Prime Minister Modi’s “open-economy” speech at Davos last month, the country has recently introduced tariffs across a range of imports – including automobile parts, cameras, televisions, electricity meters and smartphones. Indeed, such has been the scale of India’s protectionist turn that import duties are now at their highest in three decades. And the risk of trade disputes is likely to rise.

Meanwhile, geopolitical turbulence continues to cast a long shadow over global trade. In Europe, both Brexit – particularly ongoing negotiations over the UK’s transition arrangements – as well as prevailing tensions with Russia have the potential to pose a serious risk to the outlook for trade. Additionally, tensions in the Korean peninsula involving four of the world’s largest trade champions (China, South Korea, Japan and the US) could also have a spillover effect on global trade.

And third, with some 80% of the world’s trade flows underpinned by some sort of credit,a growing trade finance shortfall – estimated at US$1.5 trillion by ICC and the Asian Development Bank – continues to affect those markets and companies that need it most. While there are a number of reasons behind the shortage in financing, ongoing “derisking” by international banks – in turn, resulting in capacity constraints – continues to be a drag on global trade growth.

Finally, compared to 10 years ago, the market has arguably become more constrained by regulation and compliance requirements that have – albeit indirectly – impacted trade volumes. That said, such oversight responsibilities and requirements have been deemed crucial to the overall, long-term health and maintenance of the financial system.

The case for open and inclusive trade

In the face of such uncertainty, it is important that the benefits of trade and its positive impact on jobs, investment and economic growth are not forgotten. The ICC has steadfastly maintained a strong stance against protectionism – and will continue to do so. And while legitimate concerns about trade should not be ignored, the proven power of open markets to drive extraordinary increases in prosperity and economic opportunity should also be stressed.

Open economies grow faster than closed economies. This is a fact: according to figures from the World Bank, per capital real income grew more than three times faster for developing countries that lowered trade barriers (5.0% per year) than other developing countries (1.4% per year) in the 1990s.

Nowhere is this more apparent than in East Asia and the Asia-Pacific, where those countries that have embraced outward-orientated development strategies have witnessed growth in both trade and GDP, as well as an equally impressive reduction in poverty.

Strengthening the rules-based, multilateral trading system to further democratise trade and support business growth should also be a priority. Certainly, the promotion of a system that reflects an inclusive, fair and progressive approach – and a level playing field benefitting all – would go a long way in defending global trade against rising protectionism.

This is precisely why ICC is working with the WTO to establish new trade recommendations for all nations. What’s more, each year ICC published its Open Markets Index (OMI). Representing 90% of trade and investment worldwide, the OMI seeks to highlight the level of trade openness in different economies across the globe.

Facilitating better access to trade finance

While trade is an essential component of sustainable economic growth, complementary policies are also needed in order to realise its full benefits. Among the most fundamental is the need to ensure that trade is adequately financed.

As the ICC continues to reiterate, trade finance and export finance are critical banking products that are essential to the facilitation and growth of international trade.Not only do these products provide importers and exporters with multiple methods of financing and a range of proven risk mitigation options, they also allow them to transact with confidence across borders – often with unfamiliar counterparties in distant markets.

Yet as the banking environment continues to evolve –particularly in light of increased regulatory scrutiny and compliance measures – what has become clear is that the rules governing trade finance and export finance will also need to adapt and evolve. Indeed, this context makes it more critical than ever for banks to understand and stay up-to-date with the risk profiles of such products.

In response to these changes, in 2009 ICC established its annual Trade Register to provide banks and regulators with objective,fact-based support to the narrative of favourable credit risk and default experience in trade finance and export finance. Based on over US$10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016 – approximately 40% of global traditional trade finance flows – the report uses a data-driven approach to consistently show that trade finance and export finance contains a very low probability of default, which makes it an excellent asset class for banks.

More importantly, the report’s data-set forms the basis of dialogue between ICC Banking Commission’s Advocacy and Regulatory Working Group and the Basel Committee to substantiate the case for an appropriate treatment of trade products from a regulatory perspective.

In addition to its Trade Register, ICC also publishes its Global Survey on Trade Finance. An accurate snapshot of market trends, the Survey enables bankers, traders and government officials to gauge global trade expectations, as well make informed, forward-looking decisions.

In an uncertain landscape, the benefits of a policy mix – that addresses concerns over protectionism, further strengthens the rules-based international trading system and promotes the advantages of maintaining open markets for trade, while equally stressing the need for trade to be financed – must be better articulated.

This article provides a preview of one of the discussions due to take place at ICC Banking Commission’s 2018 Annual Meeting on the 3-6 April 2018 in Miami. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape.