Perspectives 2019 2020 Public Sector

68 New Perspectives on Trade Finance Nevertheless, at a macro level, globalization is evolving to accommodate the new environment. There is evidence of trade substitution taking place; U.S. imports from China are falling while imports from the euro area, the rest of Asia, and Latin America are growing. The rapid realignment of supply chains and trade flows is a reminder that globalization, although under threat, is more powerful than contemporary political developments. While politicians may choose to put up barriers, the world around them is reacting creatively. Indeed, trade route disruption has, in some cases, increased trade flows. Soybeans are a high-profile example of this trend. China is the world’s top soybean consumer and for many years has relied on U.S. farmers to meet demand. In 2015 and 2016, it imported more than $14 billion worth of U.S. soybeans, according to U.S. Census estimates. The escalating trade dispute with the U.S. has seen the collapse of Chinese imports of U.S. soybeans to just $2 billion in 2018. Instead, China is buying from South American countries such as Argentina and Brazil, according to John Ahearn, Global Head of Trade at Citi. Argentina and Brazil are in turn buying soybeans from the U.S. to meet their domestic needs. Overall, supply and demand are largely unchanged, but geopolitical events have created new trade routes that require financing services. Citi’s presence in these countries — and nearly 100 others — enables the bank’s trade finance business to take advantage of these new opportunities, in some cases financing the same trade flows twice. The evolution of trade finance Trade finance, traditionally a simple means of protecting a seller from the payment risk of an unknown buyer — has innovated in response to changing trade and business dynamics. An exporter in the UK might once have requested a letter of credit from a new customer in South Africa, or sought a financier to discount its receivables from that customer to mitigate the buyer’s credit risk and improve liquidity. More recently, the primary drivers of trade finance have mainly been improvement of working capital (this was especially important during the last economic downturn). Now exporters are seeking balance sheet efficiency from non-recourse trade finance solutions that reduce days sales outstanding and improve free cash flow. Globalization has led to an increasingly competitive landscape. The 21st century treasurer now looks at trade finance solutions as a means of managing FX volatility, customs disruption risk, and driving sales growth. An exporter can offer extended payment terms to an importer in order to make its sale offering more compelling; it can then discount the extended term receivables, facilitating an improvement in sales without negatively impacting working capital. Importers find this proposition attractive, especially when there are expectations of increased trade tariffs or FX volatility. Such trade finance solutions are also generally favorable for export economies as they drive increased exports. Digitization and leveraging data Technological advancement, disruptive innovations and improvements in logistics management are impacting the pace and makeup of trade flows. They are making global flows of physical goods increasingly agile and responsive to change. The world’s trade hubs must compete to remain relevant or risk having business re-routed elsewhere. In the future, customs authorities will have to oversee drones and driverless trucks crossing their land borders, while their seaports will receive tankers containing hundreds of thousands of individual items tracked from raw materials to finished goods via electronic tagging. “Because of Citi’s global footprint, we are financing both the export of soybeans from Brazil and Argentina to the Chinese, and also financing the exports of soybeans from the U.S. to Argentina and Brazil,” Ahearn told Business Insider in an interview. “As our clients adapt and need financing through these new routes, we get to finance the same transaction throughout the entire lifecycle, which has helped our profitability.”