26-05-2025
Tariff uncertainty triggers scramble for cash: IFR
When US president Donald Trump announced tariffs of up to 145% in April, exporters around the world scrambled to react. Vessel tracking sites showed ships being turned around in the middle of the ocean as their cargo was redirected to alternative markets. Within days, the container port in Los Angeles normally the busiest in the US – was unusually quiet after a third of bookings were cancelled.
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Less visible – but no less significant – were the shifts in trade finance, the US$9trn market that makes the movement of goods around the world possible. As realisation set in that assumptions that had underpinned global trade for a generation or more had suddenly been thrown out the window, banks began to see a scramble for liquidity, with companies drawing down revolving credit facilities and asking for additional lines of credit as they hoarded cash for the uncertainty ahead.
'People are thinking about how they hedge against uncertainty, and how they are doing that is by making sure they've got enough cash in the right places to weather the storm – to buy themselves breathing room so they can make intelligent, strategic decisions about what their supply chains are going to look like in future,' said Natasha Condon, global head of trade sales at JP Morgan in London. 'We've seen an uptick in demand for our working capital and liquidity products.'
But while the scramble for cash has been noticeable, it has been orderly so far – and certainly nothing compared to what was seen during the worst moments at the start of the pandemic. Liquidity demand has increased by about 20% compared with normal trading conditions, said bankers. During the pandemic, the stampede for cash led to a roughly three-fold increase. Indeed, that experience was a wake-up call for many risk managers, forcing change that has, in fact, helped this time around.
'A lot of clients had big liquidity buffers already coming into this and so were well prepared,' said Condon. 'I have not seen any uptick in demand anywhere near big enough for it to cause alarm – as yet. But we're still in the 90-day pause period. Nobody's quite sure what tariffs they're going to be facing at the end of that. Until people have some clarity, you may not see the sort of the reconfiguration and the response to stresses that could become apparent.'
Be prepared
The tariff announcements came after a particularly gruelling five years for supply chains, during which trade has had to endure one disruption after another: the pandemic, multiple wars, sanctions and one-off events such as the closure of the Suez Canal. That experience has put many companies on the front foot when it comes to understanding their supply chains to map the potential stress points caused by tariffs – and figuring out possible workarounds.
The timing of the announcement was also well flagged, even if the magnitude of the tariffs came as a surprise. Many US companies frontloaded deliveries, with US imports up 41% during the first quarter compared with a year earlier.
While big capex spending on new plants is on hold, core strategies are largely unchanged.
'Most of the global corporate clients I've been speaking to remain in a wait-and-see mode,' said Atul Jain, global co-head, trade finance and lending, at Deutsche Bank in Singapore. 'Despite knowing there's risk embedded in both the known and unknown-unknowns, in the absence of having any better information from which to make decisions, they're electing to press ahead with their existing core strategies.'
Banks are also in a holding pattern – and that means risk-off for many. Given the uncertainty ahead and the heightened risk of defaults, many are raising the cost of funding for some clients – and cutting it off completely for others. The trend risks worsening the 'trade finance gap', the gap between requests and approvals for financing to support imports and exports, recently estimated by the Asian Development Bank at around US$2.5trn.
'Tightening credit availability intensifies borrowers' default pressures, leading to a negative spiral of shrinking financing and trade volumes,' the International Monetary Fund warned in its Global Financial Stability Report in April. 'Tariffs can also reconfigure supply chains and require new compliance processes, raising banks' costs and reducing their underwriting appetite – hence, perhaps, focusing on larger, better-known client base.'
Creative solutions
But markets adapt quickly. Companies have begun to get creative in recent weeks to ensure their supply chains don't fall apart because a supplier further down the line isn't able to access vital sources of finance. Supply chain finance programmes, in which buyers provide credit to their supply lines, are nothing new, but many have onboarded more suppliers over recent weeks. Some even see it as a shrewd move given that there may be some delicate conversations ahead over tariffs.
'What the supplier is getting is funding against the buyer's credit lines, so it's very efficient from a capital stack perspective,' said Condon. 'Because it is something that's often offered by stronger buyers to smaller suppliers, that funding often comes at a very favourable cost. And then, for the procurement team – having offered this benefit to their supplier – that supports them in all kinds of different negotiations, whether about payment terms, or the cost of goods, or who pays the tariffs.'
Other trends in the trade finance market have also begun to intensify. Bankers say there has been a big pivot into factoring, through which companies sell on their unpaid invoices to a third party, and into other asset-based financing. The shift is part of the general scramble for liquidity to create agility. Demand for letters of credit, where a bank underwrites a trade deal and commits itself to paying up if the buyer is unable to, has also increased.
'We've seen a significant increase in volumes on the flow side of the business,' said Jain. 'That's really been driven by clients wanting to optimise their working capital, shore up liquidity, and accumulate dry powder. So we've seen top-ups on existing RCFs, factoring of large receivables and an increased interest in asset-based and inventory finance – these pre-emptive moves, mainly by larger clients, have been the tactical responses to increased uncertainty.
'But this increase in liquidity is almost entirely going to the top end of the pyramid,' Jain said, warning that the 'flight to quality' has left a broad base of the pyramid 'relatively underserved'.
Opportunities
The caution from global banks comes partly as a result of a macroeconomic backdrop that was already beginning to become more bleak. Global default rates have been ticking up steadily in recent years. Last month, Moody's warned that tariffs could push current default rates of around 5% above 8% within a year. Banks, understandably, have focused their support on their strongest client relationships.
Complicating matters are regulatory reforms forcing banks to move away from internal models in calculating the amount of capital needing to be held against trade finance activity towards standardised models that are more capital intensive.
But some banks are spotting opportunities. Local banks – including Japanese banks – are trying to make the most of the moment to win market share from their global rivals. They also point to the US Department of Defense's decision to blacklist companies such as Tencent, CATL and CXMT. They are reminding such clients that US banks cannot be seen as reliable partners because of the risk that they might – under pressure from the US government – suddenly have to cease business with them, even though CATL's Hong Kong listing involved US banks at the top of the syndicate.
Regardless of what happens with the specifics of tariffs, bankers said the past few weeks have been a turning point for global trade – with the big impact taking time to appear.
'Nobody's making any big moves, but the big moves are coming,' said Condon. 'There will be a reconfiguration of global trade – it will flow through the path of least resistance. We just don't know what that path is going to be. What we do know is that there is going to be a big medium-term reconfiguration of trade. And when that does happen, there will be an impact on corporates across the globe because people will have to move supply chains.'
