Marsh Credit Specialties’ growth leader, Rob Cooper, and Christopher Coppock, vice-president of political risk analysis, explore strategies for mitigating the growing complexity of trade risks, from climate disruptions to political instability, to ensure business resilience.

 

By nearly any metric, managing the risks to international trade has become more complex in the last five years, driven by issues such as government trade policy, the impact of climate change and worsening insecurity. Compounding the situation is that many trade-related factors are interconnected, with events in one area often impacting others.

Trade policy: According to Global Trade Alert, disruptive trade policies by governments have tripled since 2019. While trade interventions involving goods are lower year-to-date in 2024 than in 2023, the rate of new interventions remains the second highest seen in decades. Furthermore, several major trading countries have signalled their intention to continue using policy to shape trade flows in an effort to protect domestic producers, suggesting that an elevated frequency of intervention is here to stay.

Climate change: Three of the world’s most commercially significant waterways – the Mississippi River in the US, the Rhine River in Germany, and the Panama Canal – have all recently experienced shipping disruption caused by climate change-exacerbated droughts. For example, daily transits via the Panama Canal fell by 50% between October 2023 and July 2024. With 80% of global trade in goods done via waterways, the likelihood of more disruption is significant, and the potential impacts are widespread.

Insecurity: While the frequency of state- and non-state-based conflicts has grown relatively little over the past five years, the intensity of conflicts has risen dramatically. According to the Uppsala Conflict Data Program, fatalities from conflict rose by 40% between 2018 and 2023.

Insecurity affecting global trade is evident in attacks by Houthi forces on commercial shipping in critical Red Sea routes, which have reduced transits in the Suez Canal by two-thirds since December 2023. Several shipping companies have had to divert their routes, adding time and costs. The impacts have rippled out to individual countries, such as how it decreased a vital source of revenue and foreign exchange for Egypt. Worldwide, at least five other chokepoints are at risk of disruptions that could threaten global trade.

 

Identifying and mitigating risk

For risk managers tasked with identifying, measuring, and mitigating risks to global trade, the current situation can appear daunting. Add to it the macroeconomic context – in which the short-term trajectory of debt and production costs, supplier viability and demand are unusually uncertain – and the difficulty of formulating the ideal trade risk mitigation strategy increases.

Fortunately, Marsh’s Credit Specialties practice works globally with clients across industries to take steps to facilitate trade and protect investments. We have seen impressive adaptability from many businesses in the current environment and work to share best risk management practices that have supported ongoing investment, trade and demand capture.

 

Improved use of data for risk identification

Using data and models to help identify potential security, climate, economic or political risks to trade is not a new phenomenon. However, in today’s risk environment, identifying links between datasets is especially valuable in showing countries most at risk of a specific disruptive event.

For example, regarding political stability, in January 2024, Marsh Credit Specialties’ proprietary country risk model identified five countries at the greatest risk of experiencing unrest over the rest of the year.

The high scores for “strikes, riots, and civil commotion” (SRCC) are not the only reason the model identified them. According to the model, 44 countries had a SRCC score above 6 (out of 10) in January 2024. The other component that narrowed the focus to this group of five countries was an assessment of macroeconomic imbalances. All five countries face significant imbalances, such as high debt/GDP ratios, foreign exchange shortages or large fiscal deficits, that their governments are under pressure to resolve.

The rationale behind this link was that an already tense domestic environment (shown by a high SRCC score) may lead to disruptive unrest caused by the short-term negative impacts of any expected economic reforms. Since January, in the five listed countries:

  • Bangladesh and Kenya have experienced civil unrest;
  • Ethiopia has recently initiated economic reforms;
  • Egypt has secured tens of billions of dollars in foreign assistance, reducing the pressure to swiftly implement the economic reforms previously expected; and
  • Argentina has seen limited labour unrest, but austerity measures could dent President Milei’s popular support.

 

Such models cannot predict the future with certainty, however, they can play a role in resilience strategies.

Consider an international clothing company with garments being manufactured in Bangladesh, or a coffee shipper sourcing from Ethiopia. For such companies, identifying the links between data points may provide a clearer, data-driven perspective as they develop their risk and business strategies.

Marsh McLennan’s Sentrisk, an AI-powered platform, helps businesses uncover and manage their supply chain risk exposure. By supplying the insights that can lead to reduced volatility and loss avoidance, Sentrisk can turn these risks into business opportunities. Sentrisk integrates best-in-market data capabilities to deliver cutting-edge risk analytics with unparalleled precision to help businesses manage risk outcomes.

 

Risk transfer

Knowledge and awareness of risk transfer solutions are also crucial to adopting appropriate risk mitigation methods that support trade and investment opportunities.

With over 850 colleagues in more than 55 countries, Marsh’s Credit Specialties practice focuses on tailoring payment, performance, and country risk solutions. We assist clients in identifying economic, political, credit, liquidity and ESG factors that may inhibit growth, and arrange solutions related to their contracts, assets and security arrangements to mitigate risk and volatility and assist them in securing finance, increasing sales, and achieving sustainable returns.

Marsh can work with you to manage some of the risks highlighted so that you can:

Make business and investment decisions with greater confidence. Political risk insurance can better prepare you to manage and recover from government actions or events that might affect your global assets and investments. It can also act as a safety net against political violence and riots, reduce country risk premiums, and enhance internal rate of returns, allowing investment decisions to proceed positively.

Mitigate supply chain risks. Trade disruption insurance can help address supply chain vulnerabilities and protect your balance sheet if you suffer losses resulting from supply chain disruption. While the terms of policies vary, they can include coverage for natural catastrophe, marine, security and political perils and, in certain cases, supplier insolvency, and provide reimbursement net profit lost due to contracts cancelled by buyers or additional expenses incurred in delivering elsewhere or sourcing new goods.

Be prepared for the unexpected. Contract frustration covers losses resulting from a cancelled or frustrated contract as a result of political events.

Drive growth. Trade credit insurance can safeguard your cash flow and help you unlock access to financing and optimise your business’s working capital.

In a time of significant uncertainty, with major shifts in the structure of international trade and global geopolitics increasing the scope and variety of potential risks, businesses that can understand, accept, and appropriately manage their risks may be best placed to maintain growth going forward.

For more information on trade risks, and how to mitigate them, please contact:

Rob Cooper, growth leader, Credit Specialties, Marsh Specialty: Robert.Cooper@marsh.com

Christopher Coppock, vice-president political risk analysis, Credit Specialties, Marsh Specialty: Christopher.Coppock@marsh.com