The institution responsible for setting global standards for trade finance transactions has warned that proactive government interventions will be needed to ensure the market can power an economic rebound in the wake of the COVID-19 crisis.
In a new paper issued today, the International Chamber of Commerce estimates that as much as $5 trillion in market capacity will be needed to return trade volumes close to 2019 levels in 2021.
With the World Trade Organisation projecting that the effects of COVID-19 could cause merchandise trade to drop by over 30% this year, ICC has cautioned that a rapid economic recovery will only be possible if sufficient credit is available to bring trade close to its pre-pandemic trend over the next 18 months.
Despite impressive early actions taken by commercial banks and public bodies in response to the initial phase of the crisis, ICC has called on policymakers to proactively scale support for trade finance transactions to prime the market ahead of demand returning to the global economy. To this end, the global business organisation has identified four priority interventions that, if properly calibrated, could immediately bolster financing capacity – ranging from large scale purchases of low-risk trade assets to free up banks’ balance sheets to providing targeted capital relief for trade transactions under global financial stability rules, known as Basel III.
ICC Secretary General John W.H. Denton AO said: “We see a risk that the impacts of COVID-19 could compound longstanding gaps in the provision of trade finance – potentially leading to a chronic shortage of the very credit that will be needed to power a rapid economic rebound. The scale of financing needed to support a 2021 recovery is truly unprecedented, with our estimates suggesting that as much as $5 trillion will be needed to restore merchandise trade close its pre-pandemic level. While governments are naturally focused on the immediate dimensions of the COVID-19 crisis, decisions taken in the coming months will determine the shape of any future recovery.
“We see a strong case for proactive interventions to prime the trade finance market in anticipation of demand returning to the global economy. Such measures should form a central part of on-going efforts to help small businesses weather the COVID-19 crisis – given that access to cost-effective trade credit is a vital lifeline for many entrepreneurs. To achieve the scale of support potentially needed, we are calling on G7 leaders to turn their attention to this agenda at their virtual summit meeting next month.”
ICC has also called on policymakers to enact emergency legal reforms to avoid delays in the processing of bank-intermediated trade finance products. Building on an earlier memo to central banks and governments, the new paper urges all governments to immediately void legal requirements for trade documents to be presented in hard-copy – with banks facing difficulties maintaining the in-person staffing needed to process paper-based transactions in the context of public health measures to contain the spread of the virus.
Denton added: “COVID-19 has exposed the arcane reliance of global trade flows on physical documentation. With social distancing requirements expected to continue for the foreseeable future, it’s imperative that policymakers enact emergency reforms to allow trade transactions to be processed using digital documents. Unnecessary delays in cross-border trade can strain small companies at the best of times – in the current environment they risk proving fatal. Several governments – including Algeria and India – have already shown exemplary leadership in taking paper out of international trade: it’s now time for others to follow their lead.” -- Tradearabia News Service