Figure 1: World merchandise trade volume 2015-2022

Source: WTO Secretariat.
Note: Figures for 2021 and 2022 are projections.

The scale of recovery, however, is dependent on several factors. For trade itself, as well as the wider economy, “there are positive and negative scenarios” concedes Koopman. “The positive outlook relies on the continued roll-out of vaccinations, as well as the success of these vaccinations on the various virus mutations.”

Michael Dietz (Deutsche Bank) and event Chair, Bertrand de Comminges (Santander Asset Management)

The pandemic has underlined the need for flexible supply chains – and among the many difficulties of the past year there have been some positives too. “Covid-19 delivered a brutal lesson in the need for a flexible supply chain. I don't remember a time when people talked so much about supply chains. All of a sudden, they have become a common topic,” reflected Michael Dietz, Global Head of Trade Finance Flow, Deutsche Bank in his keynote talk. In fact, corporate discussions of supply chains have steadily increased over the last six years, even before the strong growth of the past 12 months (see below).

Figure 2: Growth in mentions of “supply chain” in global corporate documents

Source: AlphaSense, Deutsche Bank. DB Research report – May 4^th, 2021

One perennial issue for the trade finance industry is the importance of digitalisation, put into sharper focus by the pandemic rendering many of the day-to-day manual interactions impossible. “You may be surprised to hear that a quarter of our clients still use faxes to send trade finance documentation” said Dietz. “Digitalisation is generally not driven by client demand; it is driven by banks looking to make their processes leaner, simpler and more efficient to combat the rising costs of maintaining manual processes.”

“Digitalisation is generally not driven by client demand; it is driven by banks looking to make their processes leaner, simpler and more efficient to combat the rising costs of maintaining manual processes”
Michael Dietz, Global Head of Trade Finance Flow, Deutsche Bank

Though Dietz believes that any digital solution will always come with some degree of manual processes, as supply chains grow larger, digitalising them is becoming an essential. “Going from a cotton ball in rural India to having a T-shirt on the beach in Portugal is a long process – and involves a long chain of financing,” he added. “The question is, how do you make sure that you know the product reached its destination? How do you make sure each stage of the chain is sustainable? How do you ensure quality is maintained? This is where having a digital chain in place is proving its worth.” 

Maintaining liquidity also became a major issue early in the pandemic. In the first weeks, hedge funds and capital sources began to pull back their liquidity to safeguard their investments., The ability to secure liquidity was suddenly no longer a given. “Two years ago, if you went to a client, they would tell you that having access to a bank’s balance sheet was low on their list of priorities,” Dietz noted. “This has changed significantly – it is now very important, and banks have a crucial role to play.”

As the crisis escalated Deutsche Bank, in partnership with Germany’s state development bank KfW, stepped up – to ensure lending reached the businesses that desperately needed it. Since its launch in March 2020, the KfW programme has received more than 96,000 loan applications, with Deutsche Bank not only offering lending support to new and smaller businesses, but also leading the way on syndicated loan demand – supporting on more than half the applications received.³

With conditions still uncertain, partnerships and continued investment in new technologies will be an integral part of business going forward. “Banks have to rethink how they look at fintechs,” said Dietz. “They are not the enemy, they are not even a competitor, they are a partner – one that is able to deliver solutions much quicker than a bank could”. Deutsche Bank’s investment in the Frankfurt-based dynamic discounting and reverse factoring fintech Traxpay is just one example of such a partnership.”⁴

Pictured: Bertrand de Comminges, Santander Asset Management, David Henig, ECIPE, Juliette Lascoux, SEB, Peter Mulroy, FCI, Bob Koopman, WTO, Danae Kyriakopoulou, OMFIF

That said, government policy remains important – especially when it comes to investment flows. Danae Kyriakopoulou, Chief Economist and Director of Research at the Official Monetary and Financial Institutions Forum (OMFIF), explains that “the pandemic has affected different regions asymmetrically – and this has accentuated the ‘my country first’ principle”. For example, the EU, the US and China have each made a series of strategic investments during the crisis – and have even begun to block investments by other nations, including the US’s “buying up” of the Covid-19 drug Remdesivir in June 2020.⁷ This policy, according to Kyriakopoulou, is not something that is going away. “It is not just a pandemic-driven trend, and will be relevant to a host of other investment flows going forward.”   

As a result, the changing US position towards China – from constructive engagement to strategic competition – has led many companies to put a greater emphasis on geopolitical risks. “When it comes to tariffs, the impact on the supply chain has been very limited,” said Juliette Lascoux, Head of Bank and Regional Management, Corporate Coverage International, SEB.  “It takes a number of years to build up the kind of supply chains that US companies have built with China in the past decade. Change does not happen overnight”. Indeed, trade with China amounted to about 15% of US exports and imports in 2020, a level it has maintained for more than a decade.⁸ 

But the impact of the US-China trade war has been much more direct when it comes to technology. “US measures towards the technology sector have been very effective – and have already translated into sanctions and export controls, meaning that technology within certain critical sectors can no longer flow through China,” said Lascoux. This shouldn’t just be seen as a carryover from the previous administration either, with Biden recently expanding a Trump-era ban on US investment in dozens of Chinese technology firms, she added.⁹ 

US-China relations remain fraught, noted Peter Mulroy, Secretary General, FCI “especially in the open account space, a strong trend towards regional trade in Asia.” Regional trade has grown significantly over the last decade – a trend that is set to continue, with projected annualised growth for intra-regional trade between 2019 and 2023 standing at 4.3%, compared to 3.1% for extra-regional trade.¹⁰ But, he added, this is not the only trend to keep an eye on. “Whether the significant rise in transportation costs, the effect of inflation on commodity prices or the growing importance of ESG, there are a number of factors at play.” Each of these are playing a significant role in supply chain decision making – and will continue to drive the trade transition for years to come. 

BCR’s 21^st Receivables Finance Convention was held virtually on 18 to 20 May 2021