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Trade Finance Drives Export-Led Growth

by Amit Jain, Vice President, Global Trade and Supply Chain Product ManagementBank of America Merrill Lynch

Exports are an important catalyst for economic growth.  Yet, in times of economic contraction, the actions necessary to grow exports—such as allocating liquidity and assuming risk —  can contradict what companies view as mission critical to survival:  that is safeguarding liquidity and conservatively managing risk. Trade finance resolves this dilemma by helping businesses grow exports to capture the demand of buyers located outside their country, while minimising the impact to their liquidity and risk profile. This, in turn, supports a broader economic recovery.

This article explores:

• macroeconomic dynamics supporting a resurgence in global trade;
• the role of exports in business and economic growth;
• key challenges for companies looking to increase exports; and
• trade solutions that address challenges to export growth.

The savings paradox parallels the exports paradox

The Keynesian savings paradox asserts that what’s good for the individual can be bad for the economy. Namely, where an individual may succeed in saving more, a collective attempt to save — based on lack of economic confidence — will trigger lower demand and a decline in economic output. This creates a downward spiral that thwarts collective success at saving.

The exports paradox is this: liquidity conservation, risk reduction, and cost containment have been tools of survival during the financial and economic crisis. Today these have become an institutionalised discipline for many businesses. However, a commitment of liquidity and capital, risk assumption, and a willingness to spend on regulatory compliance and other supply chain costs are essential to stimulating export-led growth — both for individual firms and the global economy.

Conditions are ripening around the globe for a continued and permanent shift towards more exports.

This creates an ongoing tension for companies seeking to increase exports as a new source of growth. Trade solutions for financing, risk mitigation and process optimisation alleviate this tension by satisfying the challenges and concerns of individual companies, thereby supporting the conditions for export-led economic growth. 

Global economic conditions align to support increased exports

Conditions are ripening around the globe for a continued and permanent shift towards more exports.  At the height of the financial and economic crises, from fourth quarter 2008 through second quarter of 2009, sluggish demand, depressed commodity prices, capital and liquidity constraints and a sudden lack of availability of trade finance triggered a steep decline in global trade.[1]  Today the opposite dynamics — i.e. resurgence in  demand, increasing commodity prices, and availability of credit, liquidity, and trade finance — are coalescing to support a resurgence in global trade.  

High demand coupled with a weak local currency
For a number of years, higher consumer spending in the US bolstered domestic demand and had been providing the fuel for growth. However, in recent years net exports have become an important driver of growth for an economy as the growth from foreign demand has exceeded domestic demand for goods and services. This has been augmented by a sharp decline of the local currency, especially the dollar vis-à-vis other currencies in the last few years. According to the Peterson Institute, a 1% decline in the US dollar’s real effective exchange rate translates into a $20bn increase in US exports after two to three years. This coupled with higher export growth can help offset stagnant domestic demand. This was evident recently as exports from Germany rose 8% in the second quarter of 2010, helped in part by the euro’s approximate 20% drop against the dollar this year to June 2010. There has been rising demand for raw materials such as steel and raw cotton in emerging manufacturing hubs in Asia, which is benefiting natural resource-rich countries of the world like Brazil, the United States, Australia and Russia. Fast developing economies in return are demanding at a rapid pace finished products like high end consumer goods and electronics to meet the vast demand created by a strengthening local currency, and strong growth in income and standard of living in these countries in recent years.

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