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Global trade is witnessing one of its most challenging years yet. As the ongoing coronavirus outbreak continues to take its toll on the economy, new collaborations will be needed to reduce supply chain disruptions and keep the wheels of trade turning.

In recent months, as the epicentre of the Covid-19 pandemic has shifted west from Asia to Europe and the Americas, manufacturers, exporters, buyers and suppliers across every industry have found themselves facing factory shutdowns, restrictions on activity and shipping delays.

The knock-on effect of this has been immediate: the International Monetary Fund’s (IMF) recently-published World Economic Outlook predicts the global economy will contract by 3% this year, while the World Trade Organization (WTO) has warned of a fall of up to a third in international trade. With little clarity on when the situation will improve, many supply chain players are seeking ways to adjust and adapt to the new normal.

“Let’s be realistic,” says Geoffrey Brady, head of global trade and supply chain at Bank of America. “What we are facing is potentially an entirely new world when we come out of this. There is going to be a serious rethink about how we do things, how we trade, and how economies are set up.”

Global supply chains are made up of numerous actors, often with competing interests: buyers seek the lowest price and longest payment terms; sellers seek the best possible margins and prompt settlement. But what happens when your supplier, or your supplier’s supplier, can no longer access the liquidity they need to manufacture? What happens when your invoices can’t be processed, or couriers can’t deliver documents?

“The coronavirus crisis has brought to the fore various problems of resilience in supply chains around the world,” says Fiona Deroo, head of global trade and supply chain finance sales for North America at Bank of America. “This is new territory, and everyone is finding themselves more vulnerable to the risks of supply chain disruption.”

A push factor for digitisation

With vast swathes of the world’s workforce now working from home, the paper-based trade finance industry is struggling to cope. “A lot of our clients are out of the office and can’t submit documents because the originals need to be sent,” says Deroo. While workarounds are being found to enable parties to use electronic signatures, as just one example, not all companies have these capabilities – and in many cases, differing legal stances in various jurisdictions mean physical documents are still required. “This might be the push that the trade world needed to make day-to-day processes so much more efficient and effective,” says Deroo. “There are still elements that have to move by paper, and unless all parties are on the same level of automation, it doesn’t work, so this brings into focus the need for a broad adoption of automation and technology.”

“Remote capability was never high on the list of anybody’s wish list in trade. All of a sudden, it’s vital,” adds Brady. “Many of our clients have prioritised their budget on R&D for innovative products to take to market, and now they are shifting that focus to looking at ways of investing in stability and infrastructure. Banks, too, are reassessing their resource allocation to areas that will allow them to continue to process transactions in the environment that we are in.”

But it is not only banks and their clients that are coming up with quick fixes to the problem. “Fintechs have long been trying to crack the nut a little bit in terms of getting into some of the larger flows and transactions, while tech firms like Microsoft and IBM have sought to provide capital or talent. Meanwhile, governments are looking at ways to support the endeavour,” says Brady. “There are vast opportunities around collaboration and the inflow of capital, talent and resources from the private and the public sector.”

A good solution in good times, a great solution in bad times

With demand down around the world, a fall in revenues is placing immediate pressure on many suppliers’ working capital needs that cannot be fixed through digitisation alone.

As the coronavirus inflicts rising economic damage and liquidity pressures increase, businesses need to find new ways to keep going. This means the entire supply chain coming together to integrate financial flows with physical flows, spreading risks to enable both exporters and importers to improve cash flow.

Supply chain finance (SCF), which came of age in the wake of the 2008 global financial crisis as a means of unlocking liquidity during straitened times, has risen in popularity as a lower-cost source of funding for suppliers and a means of stabilising supply chains for buyers. “SCF is a good solution in good times, but a great solution in rough times because it supports the continuous flow of goods that needs to be sustained,” says Deroo. “Before, it was an opportunity to complement term extension. In the current environment, it is a vehicle to preserve capital, and to extend the opportunity for suppliers to obtain the financing that they urgently need.”

“Supply chain finance has been through a full economic cycle,” adds Brady. “We’re seeing again today its ability and power to create liquidity, and this is really important.”

Public-private sector collaboration

Governments around the world agree. Last month, incoming Bank of England governor Andrew Bailey pointed to emergency SCF as a likely solution for firms struggling with the impact of Covid-19. Meanwhile, US Exim has also temporarily expanded its SCF guarantee programme, providing incentives for banks to underwrite weaker credits at a time when all credits are being impacted adversely.

“One of the things I see coming out of this situation will be greater public sector intervention – in a good way,” says Brady. “We are used to this coming in the form of regulation and oversight, which is important and necessary. Now, interestingly, a lot of the energy has been around governments saying: ‘How can we help? Can we mitigate risk? Can we inject capital? What can we do to create a buffer for some of the smaller suppliers? How can we make this more accessible?’”

This collaboration between the public sector and the financial sector will go some way to address the pressures brought about by de-risking and stifled US dollar liquidity that challenge funding for international trade. “US Exim, UK Export Finance (UKEF) and the other ECAs have raised their hands and said that they will be this conduit from government to banks, and then the banks can be the conduit to suppliers,” says Brady.

“In the last financial crisis there was a polarisation of regulators, banks and exporters. In this crisis, buyers and sellers are joining forces, tech companies are partnering with financiers and governments are coming together with banks. There is a real recognition that collaboration is the key to finding the solutions everyone needs.”