Essay On Global Trade

Introduction

In order for a multinational company to operate in business today, cross border transactions are a vital component to enable them to expand into new markets and optimisation of a lean efficient supply chain. As small and medium companies increase their global trade, this has led to an increase in business customers seeking trade financing. The aftermath of the financial crisis in 2008 led to the introduction of Basel III. It is an attempt to strengthen the banking sectors’ ability to cope with financial and economic stress. Its aim is to improve the risk management and the transparency among banks.

How does a bank facility global trade?

The importance of trade finance in the world can be seen by the level of imports that grew by 11% in 2011 to reach $18 trillion. Trade finance facilitate the movement of goods with the use of a letter of credit from a bank.

A letter of credit

If companies are unable to access this facility it would lead to exporter reluctant to sell their goods to any unfamiliar party and obstruct international trade. A letter of credit enable two unfamiliar parties to complete a transaction by removing payment default risk. It enables the importer to abscond from making a payment in advance to the exporter and gives the exporter comfort that they will be paid for their goods. It minimise their credit risk, as it is a guarantee payment will be met from a bank. From a bank perspective a letter of credit is a contingent liability until it is presented for payment. On presentation the bank will facility payment from the importer accounts. In the event that there is a shortfall the bank will pay the exporter and reclaim the funds from the importer. The ICC report shows that the conversio...

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... at the expense of the global trade. As the world economies try to continue their growth since the financial crash the implementation of Basel III impact on their recovery. There are many strong arguments for the alternation of Basel II regarding trade finance, low risk, categorised as risky as a credit default swap and giving banks no incentive to trade in trade finance as the capital requirement for a low risk product (letter of credit) is the same as a high risk product (credit default swap). With the European Commission currently reviewing the implications of Basel III, we may see an amendment to Basel III in the future. Currently as it stands the implementation of Basel III will have a substandially negative impact on corporate treasury function within a multi-national as access to trade funding will be excessively expensive or extremely hard to acquire.