The global banking system has faced mounting disruptions in recent years, from the 2008 financial crisis to the Covid-19 pandemic. Now, another force is threatening to reshape the financial landscape: the rise of reciprocal tariffs and protectionist trade policies.
The idea of reciprocal tariffs appears straightforward: if a country imposes tariffs on US goods, the US will respond in kind. While framed to correct trade imbalances and protect domestic industries, its effects extend far beyond manufacturers, exporters and importers. It also threatens to reshape global banking, distort financial flows and force banks to rethink risk models to maintain prudential resilience.
Trade finance, valued by some at $9.7tn in 2024, represents a critical yet often invisible infrastructure that funds over 80% of global trade transactions. (Estimates vary based on different definitions and methodologies used.) Traditionally, this was considered a low-risk sector with default rates below 0.5%. Banks play a pivotal role in this ecosystem. They underwrite transactions through instruments like letters of credit, supply chain financing and export credit guarantees. Banks and financial institutions must now reckon with a new, uncertain trade finance landscape.
As trade policies become increasingly protectionist, banks confront three new realities in which global trade finance faces heightened risks. One of the primary concerns is the potential for tariffs to disrupt supply chains, compelling banks to reassess corporate creditworthiness and trade finance exposure. Second is the macroeconomic impact of tariffs, which tend to raise consumer prices without necessarily boosting economic activity. Finally, while some see opportunities in this shifting environment, there is a growing recognition that trade finance must adapt to an era of economic fragmentation.
The need for diversification, alternative payment mechanisms and resilient financing structures is becoming more urgent. These three developments point to a future in which banks that finance global trade must recalibrate their risk models and trade finance strategies.
History suggests that when global trade undergoes structural shifts, trade finance adapts. Two significant transformations in trade finance have occurred in the past century, both driven by seismic shifts in international trade patterns. The post-second world war era saw the emergence of structured global trade finance.
Institutions like export credit agencies helped finance trade for post-war economies. This era saw the formalisation of letters of credit, providing a standardised framework for banks. The globalisation and digitalisation era introduced Swift messaging for trade transactions, Basel-driven prudential norms and digitalised trade finance platforms. Banks began integrating trade finance into capital markets, leading to innovations like trade receivables securitisation and blockchain-based settlement systems.
With reciprocal tariffs, supply chain realignments and the emergence of alternative trade finance models, we could enter a third major transformation in trade finance – one not driven by financial innovation but by geopolitical realignments and statecraft.
There is also a risk of unintentional consequences. Though designed to shield US industries, reciprocal tariffs may adversely affect American banks. For example, during the 2018–19 US-China trade war, China slashed US soybean imports by 75%, triggering loan defaults and bankruptcies among American farmers. Regional banks, particularly in the Midwest, saw increased non-performing loans tied to agricultural lending. Another looming concern is inflationary pressure and interest rate hikes. Tariffs increase the cost of imports, leading to inflation and potential US Federal Reserve rate hikes. Higher interest rates could raise business borrowing costs, increasing default risks across multiple industries, including manufacturing, real estate and retail.
This could have regional and global implications. As traditional trade regimes get disrupted, new trade finance centres may emerge. Financial hubs like Hong Kong and Singapore must adapt to intra-Asian trade, just as European banks, including Deutsche Bank and HSBC, are shifting towards intra-European and emerging-market trade finance. At the same time, alternative trade finance systems are growing. China, Russia, India and the United Arab Emirates are increasing local currency trade settlements, bypassing the dollar. If this trend accelerates, it could erode the dominance of US banks in global trade finance.
There is little doubt that reciprocal tariffs, once seen as a temporary trade correction tool, will reshape global banking and trade finance if implemented. Large banks traditionally involved in international trade might have business and strategic ingenuity, apart from having a closer axis to governments and policy-makers. The middle segment of the banking industry might be unable to adapt to this shifting landscape and risk collateral damage in the broader battle over trade and financial dominance.
The world must act swiftly to mitigate risks to the existing trade finance order, strengthen trade finance mechanisms and ensure financial stability – or face a future in which trade finance becomes another battleground in the geopolitical struggle for economic influence.
Udaibir Das is a visiting professor at the National Council of Applied Economic Research, senior non-resident adviser at the Bank of England, senior adviser of the International Forum for Sovereign Wealth Funds, and distinguished fellow at the Observer Research Foundation America. He was previously at the Bank for International Settlements, the International Monetary Fund and the Reserve Bank of India.
This article was originally published in ORF America.
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