Lies, Damn Lies and Tradetech/ ESG. What’s next for the future of trade finance?

Following the ICC Mexico’s three-day virtual event on The Digital Future of Trade and Supply Chain Finance, here’s a summary of what went down.

We’re at an inflection point when it comes to the future of trade and trade finance. There’s no doubt that trade, supported by good trade policy and the effective deployment of capital into this low-risk asset class, will help bring nations out of poverty, and support MSMEs, particularly women-owned businesses, and those in emerging and developing markets, during a time when they need support the most.

COVID-19 has been a wake-up call for the global trade community. It has revealed the extreme fragility of global supply chains, the challenges of supplier concentration risk, and the opacity and complexity of supply chains. But to get out of the pandemic, we need the global distribution of vaccines, and to get vaccines for all, we need international cooperation, innovation in medical supply chains and the equitable distribution of vaccines in poorer economies. A recent ICC study found that there is a $9.2 trillion USD potential economic loss if governments fail to ensure developing economy access to COVID-19 vaccines.

But for Mexico, and Mexico’s role in the global ecosystem, what does this actually mean? The past 3 days have been a SWOT analysis (so, strengths, weaknesses, opportunities and threats) on what the future for trade in Mexico is.

This week’s webinar has seen four major themes:

That Mexico stands at an economic advantage over the course of the next 12 monthsThe roadmap for digital trade is laid out, we’re now moving from proof of concept to realityThe call to action for sustainable trade finance is right at the top of the agendaRegulatory frameworks and good trade policies are crucial enablers for the digitalisation of trade finance transactions – it’s not just about the tech.

When America sneezes, the rest of the world catches a cold
Mexico’s recovery looks positive, as a result of recent actions in the USA, since when America sneezes, the rest of the World catches a cold. The inverse is also true. As Carlos Capistran, Gabriel Casillas and Kenneth Smith Ramos highlighted, the global economy is on track for growth for the remainder of the year, driven largely by the US. The US has implemented a huge fiscal stimulus, some 27% of GDP, as well as massive monetary policy, keeping interest rates close to 0%, which of course, has helped its now biggest trading partner – Mexico. 

Mexico has overtaken China as the US’s biggest trading partner, which once accounted for 33% of global goods, as companies have near-shored their supply chains. The USMCA region (US, Mexico and Canada) remains the largest trade region in the world. Despite export controls and a lot of hot air towards the end of the Trump administration, Mexico, also a global manufacturing hub, will fare well as a result of the US economic recovery post-pandemic. Nearshoring and reshoring is happening, moving production and value chains from Asia to North America, as the world becomes more polarised and supply chains continue to adapt to global challenges.

Building the roadmap for truly digital trade
As the USMCA reaches the 1 year mark, with 12 new chapters, the real focus on digital and e-commerce trade is a blueprint for other nations looking to update trade agreements to the 21st century.

But truly digital trade is still the holy grail for the trade community. As Oswald Kuyler, Gunnar Colin, Alisa DiCaprio and Michael Vrontamitis highlighted, we’re no longer at the MVP or POC phase of trade digitalisation. We’re moving towards scale, mass adoption, and survival of the fittest. But digital transformation means different things to different people. For some, it’s upgrading the antiquated, paper-based processes by iteratively improving trade operations. For others, it’s building new islands, networks and partnerships to break down industry siloes and reinvent trade operations. But for all, digital transformation is complex, and digitising trade has many different facets. But new technologies promise better risk and fraud management, MSME financial inclusion and credit scoring, according to Emmanuelle Ganne, Inwha Huh, Isabel Mendex and Muis Fernando Mendoza. From recreating bills of lading on the blockchain, to using AI and robotics to fight duplicate invoices and counter terrorist financing, from rethinking the concept of trust with Central Bank Digital Currencies to tokenising trade assets, the digital train has departed the platform – let’s hope you’re on board.

Sustainability – what is the pathway towards greening trade finance?
Lies, damn lies, and ESG, something we have to be mindful of, as we heard from Andrew Wilson and Roberto Leva. We need to stop SDG-washing, green-washing and ESG-washing. That said, and despite what the short-termists in the room might say, there is long term profitability in sustainably financing infrastructure, energy and projects That’s why, according to Gema Sacristan and Juan Pablo de Botton, multilateral agencies, international financial institutions and development banks must step up their game, particularly to assist correspondent banks in developing and emerging economies, build back better in a sustainable way. Rating agencies can also help, helping to build a framework for providing preferential capital ratings and regulatory treatment on sustainable trade finance assets, making green trade finance as sophisticated as the green bonds market.

Podcast: Sustainable Trade Finance

The regulatory framework for Trade and Supply Chain Finance Transactions
Geoffrey Brady and Alexander Malaket also discussed the implications of the recent changes by the International Accounting Standards Board (IASB), deciding to create new standards for Supply Chain Finance, due of concerns from investors and regulators that they were unable to gain a clear picture of a company’s finances when such arrangements are not reported.

Then there’s the regulatory framework around digital trade. If sustainability and blockchain aren’t the biggest buzzwords in trade finance right now, it’s MLETR.

Fireside Chat: Human to machine – democratising trade finance with semantic models and JSON

Luca Castellani, Geoffrey Wynne, Roocio Robles, Carlos Valderrama and Ivan Roldan Moderno discussed the realities of implementing the United Nations Model Law on Electronic Transferable Records into local markets. But to do this, we need to be able to interoperate with different entities, and to do this, we need a common language, a set of global trade standards.

There are workarounds, and an incredible amount of progress, thanks to the English Law Commission and the Digital Negotiable Instruments Act, as highlighted by ITFA’s Sean Edwards.

In summary, and in the words of Roberto Leva, we’re trying to redecorate the bathroom whilst the kitchen is on fire. The priority right now is the global health and economic crisis as a result of the pandemic. Nations must come together to innovate, support and aid recovery. But along the way, and at this very big inflection point, it’s important to remember what we’ve achieved in the past 15 months, in terms of rapidly advancing global trade, a 3000-year-old industry that once relied on IOUs written on Mesopotamian clay tablets. There are, currently, an estimated 4 billion paper documents lodged in the trade system, and a $2-4 trillion USD trade finance gap. I think the end-goal is pretty clear, and the roadmap is clearly laid out.

The new role of banks in closing the trade finance gap sustainably

Trade Finance Global is proud to have to partnered with ICC Mexico to bring you this insightful and thought-provoking virtual event.


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