International trade is lucrative but fraught with several risks at the same time. While companies who do domestic business only have to care for regulations and policies framed by the local government, international trade involves a complex web of external and internal factors like global market volatility, fluctuations in foreign currency, and shipments of goods.
Since there are severe financial risks involved at every stage, goods and service providers need to agree on contracts with foreign parties that spell out terms of payment, performance warranties, and maintenance and service obligations to avoid legal disputes in the future. Customized products with unique specifications involve a manufacturing risk, so there should be clarity between both parties on guarantees and readjustments of payment during the design, production, and delivery stages. Once a product is ready for shipment, cargo insurance must protect the seller and the buyer from any eventuality during transportation.
Bonds, credit insurance, sureties, and claim management play significant roles in mitigating financial risks and maintaining the growth of international trade. However, the commercial trade financing market has recently been hit hard by the COVID-19 pandemic. Thus, trade finance programs – which fill market gaps for trade finance by providing guarantees and loans to commercial banks – are being utilized at record levels despite heavily depressed trade flows. These early signs of volatility call for further public interventions to ensure small and medium-sized enterprises (SMEs) can access cost-effective credit once demand returns to the global economy. Luckily, the International Chamber of Commerce (ICC) has recently announced the creation of a new Advisory Group on Trade Finance (ATF), which will work on policy reforms and interventions to help the trade credit ecosystem make a rapid economic recovery from COVID-19.
Trade finance underpins an estimated 80-90% of global trade flows, but its supply has proven highly vulnerable during economic crises in recent decades. With up to $5 trillion needed to restore trade to levels from 2019, ICC, the B20, and the World Trade Organization (WTO) recently called for proactive measures to mitigate the risk of trade finance shortages deepening the economic crisis caused by the global pandemic. To limit negative impacts on jobs and poverty across the globe, the World Bank has also called for boosting trade flows by supporting trade facilitation and logistics, implementing trade-friendly policies, and relaxing transit controls.
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