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Border closures and the focus on fulfilling domestic demand have naturally affected global trade volumes and, by proxy, the demand for trade finance. Yet with risk mitigation now more important than ever – as both importers and exporters feel the strain on their cashflow and activities – the availability of trade finance products remains essential.
Chinese importers unable to procure the necessary components to continue production have naturally looked to working capital support, such as short-term loans and receivables finance, to help them stay afloat while economic activity is subdued. Those that do have access to the parts they need, meanwhile, are still exposed to delays in payment from end customers, whether domestically or from overseas, representing a further growing risk to business continuity. Again, trade finance can step in to mitigate the impact – with traditional instruments such as letters of credit and guarantees providing critical risk mitigation, for instance.
As it has been for Chinese corporates, so it will be for those in Germany. When it comes to trade finance provision, adjustment and adaptability remain the key themes. Social distancing measures present new and significant barriers to day-to-day business in trade, prompting another adjustment – this time accelerating the shift towards digital processes.
China has notoriously complicated export processes and, with courier services out of action or overwhelmed by demand, a paper-based approach threatens to consign businesses to irrelevance. The difficulty is that the physical exchange of trade finance documentation is embedded at the very heart of the trade finance industry’s processes and, in many countries, it remains illegal to use electronic trade documents.
Change is already underway, albeit slowly across the industry, with increasing numbers of digital solutions and platforms appearing over the past several years. However, with the current circumstances imposed by the Covid-19 outbreak, businesses, regulators and finance providers are increasingly recognising the need to accelerate this transition away from paper-based processes.
This has been supported by industry organisations, such as the International Chamber of Commerce (ICC), which recently released a series of guidance documents to support business continuity – notably including advice on the modification of ICC rules and statements to governments and regulators encouraging them to void any legal prohibition on the use of electronic trade finance.5
Digitalisation will enable a range of processes to be streamlined and improved for greater efficiency across the lifecycle of a trade. In China, on a domestic level, initiatives have been put in place to facilitate document handling, while the growing interest in blockchain-based technologies is also surging.
The question remains as to how such platforms and processes could be extended at cross- border level, while differing or prohibitive legal and regulatory frameworks remain in place. Yet one thing is clear: if businesses and the financial industry embrace change, they will come out of this crisis intact, and perhaps even in a more robust shape than when they entered it.
First published in German by ExportManager online on 13 May 2020 and reproduced in English by permission from the publishers