Globalisation and its impact on cross-border trade and P2P links- The VUCA without the R

Handling corporate clients and managing the all-important Financial Value Chain (FVC) has become a key element for Treasurers anno 2017.

Corporates or conglomerates and similar players in international trade are today forced to handling vital contacts and contracts with the utmost care and in a timely manner, around the clock. There can be no letting down, all deadlines, physical as well as financial, must be met on the spot, on a 24 x 365 hourly basis.

It remains certain, however, that to perform such elegance in trade, the different entities, partners and individuals will have to gain and fuel the People-2-People (P2P) relations. Even this is an ongoing thesis, due to difference in time zones and indeed cultural understanding.

Obstacles such as the VUCA (Volatility, Uncertainty, Complexity and Ambiguity) can all, individually or at the same time, be handled with care and thereby to a large extend be eliminated.

Cross-border trade is, unfortunately, partly defined by VUCA. If you as a trade partner are not considering VUCA to be something worth worrying too much about you have already lost out on goods, services, financing and payments - and indeed you may endure risks beyond imagination!

Cross-border trade involve trade patterns that you as a trader will need to gain knowledge about. If you trade with clients located in multiple jurisdictions, you will be subjected to VUCA in its worst appearance. Not only will you find the complexity extremely circumstantial in documentation terms, but indeed also in terms of logistics. There will be added uncertainties as to despatching and arrival of goods, and the risk of ambiguity in understanding written and not to speak of verbal instructions or communication will have to be factored in.

To sum this up: Communication, documentation, transportation, logistical  obstacles. But the ONE factor that is missing from this equation of recurring issues in international trade is the… yes, you guessed it, the financial RISK factor. In other words, the VUCAR!

In international trade, you will need blessings like “May the force be with you” should you wish to go about your international trade without considering the financial risks involved.

This is where the Financial Value Chain re-emerge. The best friend of Treasurers. If you control the FVC you de-facto control (most of) your VUCAR. Global trade is all about Risks handling but cannot be left standing entirely on its own. Communication patterns, cultural understanding - all part of cross-border trading. But risks control stand out among what will bring your business down or will make your day.

Financial Institutions (FIs) may hold the key to eliminate the risks in trade. Yes, it may cost you a fee or similar, but gambling on your trade being fail-proof and smooth sailing is the same as deliberately avoiding taking out an insurance on your car or home or even an accident insurance on your kids. Only difference is, that leaving Risks in trade laying around your business will surely, sooner or later, make you wish you had never gone down that the path of ignoring trade Risks.

Even in the globalized landscape of shifting trade patterns, Inter-European, US-European, Inter-South American and to a certain degree Asia-European/US, the major trade volumes is shifting to be somewhat US-Asia (including China) and Inter-Asian trade related.

Consider for a while – the Inter-Asian trade relations. A lot of Asian inter-trade is directed and driven by exchange of drafts, the so-called Bank Acceptance Draft (BAD). This is so common a payment instrument that most receivers of a BAD does not even dream of payment risks related to the goods or services exchanged. Fact is that even this highly used and trusted payment instrument contain a clear element of risk as defined in this quote by Bank of China:

If the holder of a BAD should find any doubts about the BAD itself, when received, he or she should promptly inquire about it and review the procedures of the bank that “endorsed” the BAD
In case the BAD is lost the beneficiary, who lost the BAD should report the loss to the acceptor - in this case the applicant or business establishment that originally issued the BAD. The beneficiary should apply for the procedure of a loss report and payment suspension

Again, considering the widely use of the BAD in Asia, especially in Chinese trade, it seems obvious that the trust in this payment instrument if monumental. Yet, the risk is monumental as well. Unless you simply trust your counterpart, know him or her very well, go golfing together every so often, etc, etc. So, you see, the value of this instrument is perhaps close to zero if there is a mismatch in delivery of goods or services or even a misunderstanding or disagreement between the trading partners.

Hence, the risk factoring-in could seem highly essential, despite you may have an excellent P2P relationship, perfect communication channels or even a zero-mistaken trade history with your usual trading partners.

In my mind, the 'R' in VUCAR is the most important in international trade of today. As an exporter, you may be unaware of the pitfalls and omissions of your trading partner or you may even have performed exports or imports to or from the same purchaser or seller, but for emerging international trade, as since the 1900s onwards, the Risk factor is something you will always need to control. Every mindful treasurer these days are aware of the FVC and the usually negotiable and reasonable risk mitigation factors in finance – and they use every means to ensure the Trade and Funding. Today’s market place will cater for risk elimination factors and ensure your trade. Any financial institution with clients trading cross-border will supply you an overview of risks and suggestions how to erase these. But to fully understand risks and still consider not to cover them the most would be like playing Russian roulette with your esteemed company and values. Hence, the VUCA does not come without the R and that leads to another 'R'  that is 'Resilience'.

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​​Mr. Flemming Lippert ,

Senior Trade Finance Advisor

Nykredit
Copenhagen, Denmark.

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Flemming Lippert is an international trade financier and has been employed within the financial sector for 30+ years, amongst others with ABN AMRO Bank and global Nordic banking institutions.

Flemming has directed a most differentiated scope of clients with their global perspectives on trade and finance and has played a significant role in setting up Trade Finance establishments in a broad scale of institutions domestically in the Nordics and abroad.

Flemming has developed several trade papers on specified customs and issues within international trade, amongst others heading off the larger Bankers Payment Obligation (BPO) vs Letters of Credit discussions in regards to risk factors and choice of funding instruments - https://www.linkedin.com/pulse/follow-up-extinction-revolution-letters-credit-jacco-de-jong?trk=prof-post