Most Favoured Nation: Trade Finance and Trust Issues

Trade finance, blockchain, MC12 and a load of charts

Jun 13, 2022

Welcome to the 54th edition of Most Favoured Nation. In a slight scheduling change, MFN will now arrive in your inbox at the beginning of the week, rather than the end.

This week’s full post is available for paid subscribers only, but free subscribers can still read the first piece.

Exporting and importing is a risky endeavour. It’s not entirely uncommon to produce something, export it to a foreign buyer, then never get paid for it. Alternatively, you could pay for something upfront only to see the seller do a runner with all your cash, and never send you your products. Even delayed payment, or provision of goods, can create problems.

This leads to traders seeking additional reassurances from financial institutions. An exporter might require the importer’s bank underwrite the transaction with a letter of credit, guaranteeing payment upon provision of the product. Buyers might also take out insurance against the goods they’ve paid for not turning up.

There are also more general financing issues. An exporter might need to borrow money upfront to make things the buyer has already ordered but not paid for. At the more extreme end of the spectrum [*cough* Greensill], someone could lend money to a company on the basis of predicted future exports, gambling that if the company makes lots of the product foreign buyers will inevitably turn up.

But financier have a problem too. It’s not always easy to determine whether an exporter in a far off land will actually provide the goods they said they would. Which could leave the bank or whoever on the hook.

Basically, what I’m saying is that throughout the trade and trade financing ecosystem, trust is low and fraud is endemic. And all of this serves as a barrier to entry for firms thinking about trading internationally.

What traders and financiers really need is a platform that gives trusted counterparts full visibility of the transaction – from when the order was filled to when the product left the factory, to when it left the country, to when it entered the next country, to when it landed on the lap of the buyer – and allows for payments (either from the buyer or the buyer’s bank) to be linked to the completion of certain tasks or stages of the transaction. For example, payment could be automatically triggered the moment the import clears customs.

Such a system would give traders, and their financiers, greater confidence in their counterparts, with potentially large positive spillovers both in terms of increased numbers of companies wanting to trade, and an increased willingness from financiers to back their endeavours.

Enter blockchain. (I’m kinda joking … but am I?)

Low-trust commercial environments are pretty much *the* main use case for blockchain. A platform as described above, underpinned by distributed ledger technology [in English: a decentralised database that is really hard to meddle with], in theory, provides the visibility and additional assurances [that contracts won’t be meddled with] that traders and financiers are looking for, and allows for the introduction of smart contracts which can trigger payments upon completion of specific events.

Backed by loads of big hitters – such as CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Nordea, Rabobank, Santander, Société Générale, UBS, UniCredit and CRIF – and built on the IBM blockchain platform, what I’ve described above is essentially the we.trade platform. [See video for more.]

And, as you can see from some of its case-study slides, a lot of what we.trade does actually makes a lot of sense.

Late payment of invoices? Not a problem.

Buyer not wanting to use a letter of credit? Not a problem. [Note a bank payment undertaking is a commitment from a bank to make a payment upon fulfilment of a pre-agreed action.]

Now, does any of the above strictly require blockchain? Probably not. Does blockchain actually help? Maybe a little. Did blockchain help unlock financing for an initiative which on paper could actually solve a real world problem? Yes.

But (and this is a big but) unfortunately we can’t have nice things.

According to Global Trade Review (h/t Lexmerca’s Craig Atkinson), we.trade closed its doors last week after running out of cash:

In a memo dated May 26 and seen by GTR, the company told its shareholders that it had been “forced to discontinue” its activities.
“In order for any company to increase the adoption of any innovative solution, like blockchain, additional investments are not just important but a necessity,” the memo says, adding that the company had been unable to reach an agreement with its joint venture shareholders on the financing of these investments.

Which, y’know, given trade finance is a problem that needs fixing, is actually quite annoying.

What’s going to happen at the WTO?

I know what you’re thinking. This week’s edition of MFN should have been all about the WTO, given that MC12 is happening this week.

But it’s hard to get excited about the WTO members failing to reach an agreement on fisheries subsidies, failing to reach an agreement on vaccine IP, failing to progress discussions on e-commerce, failing to move forward on agriculture negotiations, failing to agree a programme of substantive WTO reform, and if anything making things worse by quite possibly failing to extend the moratorium on applying tariffs to cross-border electronic transmissions.

Even where there should be movement, questions about Russia’s ongoing participation could scupper things.

Gah.

Anyhow, if you want a more serious rundown of what to expect, Peter is your man: