Time for the West to Look East on Trade Finance?
Published: February 23, 2021
Trade finance has developed beyond recognition in recent years. Much of this stems from the digitisation of legacy processes and specialised technologies entering the market. The other significant shift is that trade finance developments are increasingly coming from emerging markets – several of which are in the Asia-Pacific region (APAC).
Developing economies’ exports to other developing economies have exceeded exports to developed economies since 2011. In 2018, trade between developing countries was already worth $4.28tr. It’s high time that financial institutions and governments started looking to smaller trade routes for innovative trade developments – and this includes trade finance.
A more connected APAC
The establishment of one of the largest free trade deals in history – the Regional Comprehensive Economic Partnership (RCEP) – marked a major step towards a seamless trade landscape in APAC, akin to that of the European Union.
This agreement enables increased trade and cooperation between nations of different sizes – RCEP counts five G20 countries among its 15 members. One member, Vietnam, has made inroads asserting itself as an alternative manufacturing hub for investors typically drawn to China. Between 2008 and 2018 Vietnam’s exports of electrical machinery increased almost 30-fold. Where trade increases, trade finance follows – participating Vietnamese banks have provided billions of dollars in trade finance guarantees through the International Finance Corporation’s Global Trade Finance Program.
Another key RCEP member is Singapore. Despite garnering significant attention for a string of trade fraud scandals last year, Singapore has quickly established itself as a contender for the status of Asia’s ‘Silicon Valley’. The World Bank considers Singapore to be one of the world’s easiest places to do business and the country is determined to learn from last year’s fraud scandals. As a result, the Monetary Authority of Singapore has called for a phase-out of paper-based trade, in order to reduce fraud in trading transactions. Singapore’s pro-active attitude has attracted trade finance innovators keen to engage with its government and financial institutions to implement better trade fraud prevention practices.
Digitisation leads the way
According to the World Trade Organisation, 80-90% of global trade relies on trade finance yet a lack of digitisation leaves modern-day trade finance open to fraud. Fraud costs the global economy $5.127tr. – 6.05% of global GDP. Now is the time for financial institutions and governments to explore new solutions to tackle fraud – this means digitising paper-based legacy systems.
One such technology that is ideally suited to enable fraud prevention in trade finance is blockchain. Distributed ledger technology enables huge amounts of paperwork to be automated and verified. An immutable ledger could provide complete transparency over the transportation and processing of physical and online goods. Cross-border data flows could be tracked from start to finish, and the need for paper could be eliminated entirely. Double financing could be eradicated.
A good example of trade digitisation through blockchain is in India. Since 2018, India has been running a live trade fraud prevention platform. And as of September 2020, the blockchain-powered platform had processed more than one million transactions enabling financial institutions to mitigate the risk of fraud through double financing.
The platform hashes data upon receipt to create a unique ‘fingerprint’ for each trade document, which is then registered to a private ledger. The platform also authenticates trade documents against available tax information and verifies the underlying goods being financed through waybill information. Blockchain’s intrinsic features of immutability, transparency and its network effect mean that financial institutions have visibility and can prevent double-financing fraud in real time.
It is clear that innovative technology and cross-border cooperation at the regional and international level has created a thriving trade finance industry in APAC. Many countries in the region are now recognised as trailblazers in the adoption of new technologies and the quest for digital transformation.
Although no discussion of global trade can avoid the Sino-American relationship entirely – more than two-thirds of the world now trades more with China – the rest of the world did not sit idly by while the two giants exchanged sanctions. President Joe Biden’s ‘Build Back Better’ campaign is encountering a very different global trade landscape compared with when he was in the Obama administration four years ago.
Now is the time for investors, trade professionals and governments to delve deeper into cutting-edge trade finance, to challenge themselves to deliver the best for their stakeholders and create ecosystems where innovation can thrive. This requires implementing secure, efficient solutions to give antiquated, paper-based legacy systems a much-needed update. APAC is leading the charge in this – there’s no better place to look for innovative trade finance.