Global trade continues to face a period of widespread uncertainty, characterised by slowing growth in historically prominent corridors and disruption to once-established supply chains.
For Florian Witt, head of ODDO BHF’s international and corporate banking division and a member of its group-wide business executive committee, this uncertainty is rooted in gradual changes in geopolitical relationships and trade strategies over the past three decades.
Witt, who also chairs the International Chamber of Commerce’s (ICC) Banking Commission, tells GTR that corporate behaviour is reacting to these shifts, and discusses the role of the bank in supporting clients as they seek alternative markets in which to source and sell goods.
Witt says ODDO BHF continues to provide a range of trade-related services to its corporate customers, including traditional letters of credit, pre-export and export finance facilities, as well as working capital facilities. Increasingly, he says, the bank is called upon to deploy its specialism in emerging markets, in particular Africa, the Middle East, Central Asia and Southeast Asia.
GTR: Across world trade, the last few months have felt particularly chaotic. How would you characterise the upheaval to trading relationships and supply chains that we’re seeing?
Witt: What we are observing now is a symptom. If you look into trade statistics, you will see that trade patterns around the world have changed significantly. 30 years ago we had a rather dualistic structure, where the majority of trade happened between the US and Europe. Now, we have a multipolar trade structure, and there are three dimensions to this.
First, in pure numbers, trade between the US and the rest of the world is smaller than trade between China and the rest of the world. Trade with Southeast Asia, including India, is equally as large as trade with China, and again larger than the US.
Second, there is a shift happening. Looking at China and Southeast Asia, 30 years ago these markets were dependent on exports and imports to and from Europe and the US. Now, trade between those two blocs – China and Southeast Asia – is significantly higher than trade between the US and those blocs, or between Europe and those blocs.
Also, trade between the US and China, or Europe and China, is not really growing any more, whereas growth rates in South-South trade are at the level where global trade growth was 10 years ago.
GTR: How are your corporate clients reacting to these shifts in trading patterns and relationships?
Witt: First of all, corporates have learned their lessons around dependencies. Here in Germany, we have realised that diversification of supply chains is important. Russian gas is an obvious example, but another is that we had a problem accessing medicine during Covid; there is no production left in Germany or even continental Europe, so we were dependent on India or China.
To give a practical example, European car manufacturers have already realised that producing batteries means having giga-factories in Europe. But having those factories in place is only one part of the equation. You also need the inputs for those batteries, and at the moment, 80-90% of those refined resources are refined in China or in markets where refineries are under the control of China.
At the same time, we have also learned that reshoring does not necessarily make sense for our economy. We have full employment in Germany, so the solution cannot be to build all these factories, at the labour cost level we have, and then try to hire people who already have a job. It may work for strategically important sectors, like defence, where you need your own production.
There is a shift in corporate behaviour that reflects this situation. Corporates used to prefer a centralised, one-size-fits-all approach to bank relationships. Now they realise there is no single bank that can cater to the whole world. In terms of diversifying the markets you source from or sell to, we can show corporates we’re strong in Africa, Asia or the Gulf, but we might not be as good a fit for Latin America.
This is important to us, because we believe we are in front of a renaissance in the European-African trade corridor. Europe is still the largest corridor for Africa in terms of trade, and also the largest investor in the continent. Of course the growth rates with China are higher than Europe’s, but in absolute terms we are still the largest.
GTR: Does this shift in behaviour change what corporates expect from you, as their banking partner?
Witt: We have never had so many questions from corporates that need to diversify than we have over the last three years. They know we are strong in countries in the Gulf region, Southeast Asia or Africa. In Africa, for example, we have relationships with banks, corporates and governments in 40 countries, and we can help our corporates source from there, secure payments and arrange financing schemes.
We can also help by translating geopolitics. A corporate might be unsure about doing business in Côte d’Ivoire, for example, because they are not familiar with the country. But we have an office there, we think there are good things going on in the country, and we can help them meet banks, corporates, ministers or NGOs if that’s what they need.
GTR: Have you also seen a change in the nature of the trade finance products you’re providing?
Witt: Ever since I started in trade finance, I have read about the death of the letter of credit. This does not reflect what I see, and if you look at the facts and figures, the number and volume of LCs being issued is not declining.
Then, when we think about the times we are going through now, a payment production scheme that works as well as an LC is only going to grow in importance. Every time a corporate wants to make a change to supply chains, that creates uncertainty. If you have become comfortable importing from China, but now need to diversify and import from Egypt, solutions like the LC are extremely helpful.
That is not to say I expect banks to take risks across all trade finance products. Issuing LCs is a much more secure product than doing pure supply chain finance or working capital, with collateral that is not well defined or may not be reachable, and where you don’t have the bill of lading. But again, that means for both corporates and banks, the traditional trade finance products will continue to play a role.
Another trend we see is the return of pre-export financing, particularly in critical minerals. If you’re connecting with new clients and want to source something on a long-term basis, the LC may not be the right tool for that. In that situation, the LC is embedded in a pre-export financing facility, which enables you to secure a flow over the next five, six or seven years.