By: Tim Staheli
Ask the trade finance industry how big it is, and it will tell you. The number is usually around $10 trillion, and always rising. Eighty per cent of world trade, according to IMF BAFT surveys conducted between 2007 and 2010, relies on some form of trade finance – letters of credit, loans, guarantees – to get goods from seller to buyer. These figures circulate at conferences, appear in regulatory submissions, and are repeated until they take on the quality of fact.
Marc Auboin has spent longer scrutinising them than almost anyone else. As the Head of the Trade and Macro-Finance Unit in the Economic Research and Statistics Division of the WTO – and the person who follows trade finance in the institution’s Secretariat – he has expertise on what the data behind these numbers actually shows. His assessment is not reassuring: “There’s no consistent source of data in international trade finance.”
The 80% back story
The figure most often cited as foundational – that roughly 80% of global trade relies on some form of trade finance – dates from before the 2008 financial crisis. It emerged from an IMF-BAFT survey that used crude categories: cash in advance, bank-intermediated trade finance, and open account. The logic was simple. Cash-in-advance payments represented about 20% of trade at the time, so everything else was, by implication, “financed”.
The problem with this reasoning is that cash in advance is not the opposite of trade finance. It is a payment arrangement in which the buyer, usually because they have little market power, pays before receiving goods and bears the full financial and transactional risk. It is, if anything, a failure of trade finance: risk fully borne by one party, with no intermediary or mitigation. E-commerce is the most familiar modern version. When a consumer buys something online, they pay first and receive it later. “In e-commerce, there’s no trade finance for the buyer,” Auboin says.
Subtracting 20% and calling the remainder “financed” was always a rough inference. The treatment of open account transactions adds a further complication. When goods are delivered before payment (as open-account contracts specify), the seller effectively extends credit to the buyer until the invoice is settled. Whether that constitutes trade finance is, at best, a matter of interpretation. Auboin’s view is that it qualifies as trade finance only if the receivable is insured, discounted, or the credit risk otherwise mitigated by a third party. An implicit credit sitting on a balance sheet is not the same thing as a financing arrangement.
Today, Auboin doesn’t believe the 80% figure will hold. But critically, he cannot prove or disprove it. “We’re probably no longer on 80%, if we ever had been,” he says, “although – well, let’s take a step back. Actually, we don’t know.”
A statistical system not up to the job
The reason no one knows is structural. The two international bodies whose frameworks should capture trade finance, the IMF’s Balance of Payments Manual and the BIS’s locational banking statistics, both include trade finance instruments in their definitions. In principle, central banks should collect and report this data from banks. In practice, there are significant data gaps.
Some history may help here. For decades, trade finance data was a by-product of foreign exchange controls. When a company wanted permission to use foreign currency for a trade transaction, it had to declare its payment terms to customs in a specific form. That information flowed into balance of payments statistics automatically, helping reconcile information on the physical transaction and payment. In France, for example, this was standard practice until 1990, when exchange controls were dismantled as part of European single market integration. As exchange controls fell away across country after country through the 1990s, so did the data they produced. “Some of that information was lost, and errors and omissions in the balance of payments increased in parallel,” Auboin says. Hard data was replaced by estimates.
But this is not the whole story. In many countries, trade finance is not reported at all because banks’ internal systems are not designed to produce such information automatically, or because trade finance is not a specific product line. In many developing countries, for example, apart from letters of credit, trade finance is provided as working capital and is blended with overall corporate lending. “Many banks do not have dedicated trade finance departments”, says Auboin.
Trade finance data is easier to collect when the statistical obligation is linked to a prudential obligation – the hard regulatory requirements that actually help distinguish specific trade finance instruments and report them. “Letters of credit are relatively well reported globally, not only because most of them must be processed by Swift to acquire legal status, but also because they are subject to specific off-balance sheet credit conversion rules”, says Auboin.
Identifying trade loans within banks’ entire loan books and other products (such as supply chain finance) is more complex. In the largest institutions, trade finance sits in a specialist transaction banking department. In others, particularly in developing markets, it is buried within commercial lending. Working capital extended specifically for export fulfilment is sometimes not classified as trade finance at all. “They have to go deep into the analysis of what they actually do to know what trade finance is in their bank.”
This creates an almost circular problem: when researchers attempt to survey banks directly, often they cannot answer. “When we conducted our surveys with banks in the Mekong or in Africa, they had to go through their back offices, to their trade department, to the commercial bank, to the corporate banks, when this existed, and they had to do their accounting themselves, from different sources,” Auboin says.
What we have, and what it may miss
One of the most coherent datasets available is the ICC Trade Register, which now tracks about 15 years of large-bank exposures across trade finance products across more than 100 countries. The data is comprehensive and well-maintained. But it, too, comes with caveats. It was built not as a census of the market, but to make a regulatory case during Basel capital framework negotiations, demonstrating low default rates to secure better capital treatment for trade finance assets. Its participating membership, while substantial, is limited.
Of the four major US banks, only two participate. Of China’s six largest banks, only one is currently included[MA1] [MA2] [TS3] . The register’s current figure, somewhat below $2 trillion in outstanding exposures, is likely to be significantly under the real bank-intermediated total, not because of any failing on the part of participants, but simply because participation remains incomplete. The ICC and other partners, including the Multilateral Development Banks, are working to expand the register to additional developing-country banks. As Auboin notes, the register was never intended as a comprehensive statistical exercise. It exists because banks needed to make a regulatory case, and the industry is fortunate that it does.
A serious attempt by the BIS to estimate the full market appeared in a 2014 paper that examined 2011 data. It put bank-intermediated trade finance at roughly $6.5-8 trillion, against $17 trillion in global merchandise trade for that year. Merchandise trade has since grown to around $26 trillion, but the methodology relied on rough country-level estimates for most of the world, and the exercise has not been repeated at scale.
Market-size estimates from consulting firms attempt to fill the gap, but Auboin raises methodological issues. “They estimate trade finance revenues generated by the industry, and then infer flows out of the revenues, based on a whole set of assumptions,” he says. Auboin cites no other specific source of information but says he would not be surprised that, based on the earlier BIS estimate, the overall market is “at least $10 trillion now”, noting that his own “guestimate” is no better than anyone else’s. “One would need to aggregate bank-intermediated trade finance, credit insurance, and factoring volumes”, he notes. There is, however, significant overlap between these sources, which makes precise aggregation difficult.
The services blind spot
If the goods-side data is patchy, the services side is more or less invisible. Services now account for roughly a quarter of global trade by value in official statistics – and the real figure is likely considerably higher, since much services trade is routed through local subsidiaries that do not register as cross-border transactions. Digitally delivered services such as software, media, consulting, and financial services are growing faster than almost any other category of trade. And yet the trade finance industry’s infrastructure, products, and data frameworks remain built almost entirely around the documentation of physical goods: bills of lading, letters of credit, and purchase orders for tangible merchandise.
Services, particularly those delivered digitally, do not generate that documentary trail in the same way. Services trade, even when it clearly involves cross-border credit risk and liquidity timing identical in structure to goods trade, tends not to be handled by trade departments at all.
Deepesh Patel, who conducted the interview with Auboin, offered an illustrative example. Trade Treasury Payments sells media services (interviews, articles, research) to major financial institutions. Purchase orders come from banks or their overseas agencies; invoices follow; outstanding receivables mount up. The business has a quarter of a million pounds in outstanding receivables at any given time – a sum that, in principle, could be financed against. Whether it would be processed through a bank’s trade department is another question entirely. For Auboin, this is symptomatic of a broader failure. “The service element is completely ignored,” he says. “The trade finance industry has not completely thought through the implications.”
Why it’s more than academic
The absence of a fully integrated set of global data has consequences. The clearest example came in 2008, when trade finance markets seized, and the G20 assembled a $250 billion emergency support package to prevent a complete collapse in cross-border trade flows. Data was patchy and not collected regularly at the time, though market participants, the IMF-BAFT surveys, and feedback from governments and large corporates helped piece together an estimate. Progress has been made since – Swift, the Berne Union, and the ICC Trade Register have all improved their data collection – but the underlying problem remains.
The trade finance shortfall itself faces an analogous problem. Officially estimated at $2.5 trillion and concentrated in developing markets, it represents the unmet financing need of exporters and importers who cannot access it. Gap studies typically measure rejected applications, which sounds reasonable until you consider that roughly half of all rejections are of non-creditworthy applicants.
The demand being suppressed is not the demand that appears in rejection data; it is the demand that never materialises at all. “If you’ve been rejected once, you may not come back to the banks anymore,” Auboin says. A good measure of the shortfall is also to estimate the total share of trade supported by trade finance — which, as Auboin notes, appears to be lower in developing countries than in developed ones, even as trade in those markets is growing fastest.
The cost of not knowing
Trade finance sits at the intersection of several pressing policy questions: how to extend finance to small exporters in developing markets, how to regulate new supply chain finance platforms, how to accurately measure the trade finance shortfall, and, increasingly, how to finance the service economy that is reshaping global trade. None of these questions can be answered well with the data that currently exists.
The picture is getting clearer, but slowly. The ICC Trade Register is valuable and improving, but it is a voluntary exercise aimed primarily at prudential objectives and covers only a fraction of global bank exposure, with efforts under way to extend it to more developing-country banks. FCI’s factoring statistics are the most rigorous available for their segment but reflect only FCI members’ reporting. The Berne Union has expanded its database but similarly relies on member reporting. The IMF and BIS frameworks theoretically capture what is needed, but inputs remain inconsistent. Consulting firm estimates fill the void with assumption-heavy methodologies.
The trade finance industry, for all its sophistication, is working with an incomplete map, and the territory it has barely begun to chart is the service economy reshaping global trade.
“Despite some progress, what we know,” Auboin concludes, “still remains relatively patchy.”
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Marc Auboin is Head of the Trade and Macro-Finance Unit at the WTO.
