The shifting currents: major trends, challenges and opportunities
As head of Institutional Clients & Transaction Banking Sales and a Divisional Board Member, Commerzbank’s Brigitte Réthier offers her perspective on the key trends shaping global trade
As the last few years have demonstrated, market shocks are becoming more unpredictable, more frequent and potentially more impactful. Complex supply chains are unravelled and reconfigured, yet we see them become stronger and more resilient, continuously evolving in the face of challenges and long-term transformations. Trade is the lifeblood of global economies. And, as it transforms and adapts, trade itself drives wider change across businesses, industries and markets.
When it comes to European trade, Germany is an undisputed heavyweight, accounting for more than a quarter of the EU’s exports and a fifth of its total imports. As the facilitator of around a third of Germany’s foreign trade, Commerzbank has extensive experience and trusted expertise in trade finance and in the forces driving change, such as the sustainability agenda and digitalisation. This puts Commerzbank in a unique position as we support our clients, affording us a ringside seat when it comes to understanding the latest trends in global commerce.
Here I outline what I consider to be the three key trends shaping global trade dynamics.
Energy security and diversification: green hydrogen on the agenda
Many of the changes taking place within global trade come in response to the global transition to a more sustainable economy. Most notably, this is driving a fundamental reconfiguration of the sourcing of commodities and energy, as economies look to limit and eventually end their longstanding reliance on oil and gas.
The conflict in Ukraine amplifies the impetus to move towards greener sources of energy. This has forced many European nations to consider where their energy comes from, with energy security and diversification, including renewables, high on the list of priorities.
Green hydrogen is one avenue being explored in this respect, and the market is expanding fast, with a number of high-profile, sizeable investments in this technology. This includes projects by energy giants such as BP, and funding from major global economies including the US and China. The green hydrogen market is projected to reach US$850 billion by 2050, according to some estimates.
North Africa is rapidly becoming the world’s foremost producer of green hydrogen, making use of vast areas of uninhabited land for solar farms and repurposing existing pipelines. The region's proximity to Europe makes it a logical alternative source of reliable energy. European nations are actively investing in renewable energy production projects, including most recently a financing deal between the Netherlands and Morocco to improve the African nation’s green hydrogen infrastructure.
In anticipation of these developments and the international business they are set to attract, Commerzbank will be opening two representative offices in the region later this year – in Morocco and Jordan – and will be closely monitoring these burgeoning markets and the opportunities they can present to us and our clients.
Nearshoring and closer alliances: securing supply chains
Beyond its role in driving a shift to new energy supplies, the conflict in Ukraine reaffirms the precariousness of complex supply chains (something which also became vividly apparent during the pandemic) and further highlights the need for diversification. As we’ve seen, geopolitical tensions can have far-reaching consequences for today’s international, multifaceted supply chains; a prime example being the wiring harness shortage that impacted the automotive industry. Manufacturers and suppliers had to work together to find an alternative solution. This led to reallocation of production to certain facilities in North Africa. The repercussions for trade go beyond the direct impact on Ukraine’s exports; overland routes between Asia and Europe have been indirectly obstructed.
Subsequently, while costs will remain a primary factor in the sourcing of goods, businesses are now also taking measures to help minimise potential supply chain instability. Trade corridors are therefore shifting as businesses increasingly implement nearshoring strategies to keep at least some of their production or operations relatively close by. For instance, a US-based manufacturer may choose to keep production close to home by maintaining plants closer to its border in Mexico. These shorter trade corridors will become more common in the coming years as economic pressures mount and markets become more fragmented.
Alongside the trend towards nearshoring, we see economies looking to strengthen existing ties with reliable trade partners and geopolitical allies. For example, battery producer PowerCo, part of German car maker Volkswagen, is due to open its first overseas gigafactory in Canada. In previous decades, this new production operation could well have been located in China but growing political tension with the superpower has led to a re-examination of globalisation. In Canada, Volkswagen has a stable, reliable trading partner, as well as a ready supply of raw materials, including rare-earth metals essential to battery production.
Certainly, trade corridors between North America and Europe are growing in importance, with the recent “Atlantic Declaration”, for instance, marking a deal for transatlantic cooperation between the US and the UK. Meanwhile, US and EU officials are also in the process of negotiating their own transatlantic trade alliance. If Washington and Brussels can settle differences over China relations, trade tariffs and emissions targets, these negotiations could establish a first-of-its-kind free-trade agreement – or at least an arrangement that comes as close to one as possible. With respect to Germany, the US is already its biggest export market, accounting for just under nine percent of exports in 2021. And there is potential for further growth, with 74% of German companies that already have operations in the US stating that they intend to expand their activities (according to AmCham Germany’s 2023 Transatlantic Business Barometer).
Such supply-chain developments can only be achieved through a strong worldwide network; indeed, corporates will lean on their banking partners for sector-specific knowledge and market expertise to make such partnerships workable.
Collaboration and digitalisation the answer to industry challenges
In this rundown of the latest trends in trade, it would be remiss not to mention tech. Innovations, including artificial intelligence (AI), application programming interfaces (APIs) and distributed ledger technology (DLT), have the potential to solve many of the challenges facing global trade.
In this respect, collaborating with fintechs offers a range of opportunities for banks, particularly when developing new services and solutions for clients. Commerzbank is actively investing in the fintech space in a bid to expand its network and drive innovation. A recent example is our partnership with T-Systems to develop fully automated supply chains with built-in financial services. The initiative was piloted with logistics company Nagel-Group and is due to launch at the end of the year. The technology will support “event-based” payment automation, utilising 5G campus networks, cloud computing, AI and blockchain. As goods are transported across the supply chain, smart contracts will trigger the release of funds. The aim is to develop additional integrated services that can benefit corporates, such as supply-chain finance.
It is Commerzbank’s belief that trade finance is on the way to becoming more digital, and in turn immeasurably more efficient. But this is certainly not going to happen overnight. Instead, it will require the gradual overhaul of long-established legacy processes, together with the implementation of workable legal frameworks and international standards requiring the coordination of regulators, banks, corporates and tech providers.
Regulation and government initiatives are beginning to drive this transition. The UK recently allowed the use of electronic bills of lading (eBL) for certain transactions, which is a step in the right direction. There is also the recent G20 initiative to facilitate cross-border payments, which will make such transactions faster, cheaper and more transparent. While it is a long time coming and will take several years to be fully realised, this effort will ultimately serve to stimulate international trade and economic growth.
As we look to the future, it should be observed that these challenges and developments are not local or regional but global in scope. This means that any effective solution will require a global approach and must be inherently collaborative. After all, progress in favour of the sustainable transition and the road to digitalisation, for instance, will be possible only if all stakeholders commit and contribute to these endeavours.