In the past year, trade finance has undergone tremendous changes with significant impacts on the Latin American market. Two primary factors have contributed to the rise of trade opportunities in Latin America.
First, advancing technology is simplifying international trade finance and making it more accessible to emerging markets. Second, a changing geopolitical landscape is shifting the attitudes of emerging economies on how they approach international trade.
In this article, we will examine the events contributing to these favorable trade trends, and how international trade finance companies like Tradewind Finance are helping boost cross-border business for enterprises in Latin America.
Shifting Trade Patterns in Latin America
Disrupted trade flows initially precipitated changes in trade patterns in Latin America. With the withdrawal of the US from the Trans-Pacific Partnership, merchants feared negative impacts. However, these events were counterbalanced by the arrival of new regional free-trade agreements.
For example, Chile, Peru, and Mexico are developing new trade arrangements within the Pacific Alliance, established in 2014. The trade protocol within the Pacific Alliance eliminates duties on 92% of goods, which helps rebalance the market.
After the US withdrew from the partnership, the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) emerged to take its place. The deal, now in force, represents about 14% of the global gross domestic product. In addition to Latin America, the CPTPP includes Canada, Australia, Japan, Brunei, Malaysia, Singapore, New Zealand, and Vietnam.
In Asia, China’s Regional Comprehensive Economic Partnership is opening new trade routes. Latin America has already entered the agreement, with 16 countries total, for access to some of Asia’s most influential economies.
Evolving Technology Capabilities
In addition to shifting trade patterns, a technological transformation has enabled better risk management and solutions that bridge gaps in trade financing. Internationally, finance gaps are estimated to be around $1.5 billion. These persistent financial gaps created trade barriers in the past, especially for small and mid-sized enterprises (SMEs) in developing countries.
Trade finance companies are leading innovative initiatives to improve the efficiency of supply chain ecosystems. Currently, blockchain and artificial intelligence (AI) are helping solve the two most substantial barriers to international trade—trust and time.
For example, IBM and Maersk recently developed TradeLens. This blockchain solution connects exporters, shippers, customs offices, and ports via a digital platform. The final step will connect financial institutions for seamless transfer of Letters of Credit, Bills of Exchange, and Bills of Lading.
As another example, the Global Trade Connectivity Network (GTCN), sponsored by the Monetary Authority of Singapore and the Hong Kong Monetary Authority, is establishing a cross-border blockchain platform. The GTCN will act as a hub for trade network connectivity.
Trade Finance and Latin American Banks
Aside from blockchain, AI use is accelerating the introduction of solutions that are drastically altering the trade finance environment. Banks are now using this technology for fraud detection, credit analysis, and financial risk management.
Previously, trade finance followed a bilateral model between the buyer and the seller. Now, the entire supply chain is involved. The trade finance model is evolving in response and enabling SMEs to enter the market with established enterprises.
Small and mid-sized companies populate a majority of today’s global trade landscape. Unfortunately, they lack the reputation and profit margins necessary to receive bank loans. This situation is changing as technology enables more accurate risk assessment.
Technology is also increasing the volume of trade finance requests that a bank can process within a given period. Banks are no longer as reliant on loan supervision professionals and human verification as they previously were. As a result, smaller banks and private financial institutions are now starting to offer trade financing.
International trade in Latin America is expected to grow in the coming years, thanks to shifting trade policies and advanced new technologies. Despite the US withdrawing from the Trans-Pacific Partnership, Latin America’s entrance into several new free-trade agreements has opened new windows of opportunity.
Supply chain finance companies initially enabled flexible financing for SMEs by implementing advanced technology solutions. Now, banks and other financial institutions are utilizing the latest technology to eliminate trade barriers and improve connectivity between all parties involved. Tradewind Finance, a leading international trade finance company, offers its services to businesses in Latin America, providing them with the cash flow they need to compete in the global marketplace.