The Evolution of Global Trade

Reintegrating Banks in Global Trade - the world’s largest business

There is nothing more essential to national economic development than a dynamic global trade.?I propose that banks can play a trusted role in trade but first the techies have to understand how all this works and be disabused of their “Fake it til you make it” ethos. Nothing will substitute for the “deep knowledge” in trade finance and logistics, which I call “Financial Logistics,” required to propagate this process.?In the U.S, the role of banks in global trade has been supplanted since 1979 by what is now GTInfor/Nexus, the privately owned global trade finance enterprise of Charles Koch;

Koch bought a process initiated @ 1979 by Guy Tozzoli of World Trade Center Associates - a process which has morphed into GTNexus/Infor.

How GTNexus/Infor Works

GTNexus/Infor’s process is based on the conception of Guy Tozzoli of World Trade Associates. This conception is that as long as trade receivables are insured against non-payment by credit insurance, straight-through-processing of their payment or financing is practicable.?

ERP

The ERP or Enterprise Resource Planning?systems of enterprises describe the need to finance the various stages wherein components are converted into final products of the business.

As receivables occur, financing can be performed in an automated fashion with or without recourse to the seller. This applies to both domestic and export receivables. Many EU countries perform the financing of export receivables by using export credit insurance and lender guaranties of 3 of the major credit insurers. EU countries utilize forfaiting which provides them an enormous advantage as it is so much simpler and user-friendly?to finance exports this way than through the elaborate and inefficient methodologies used in the past.

In the U.S, the same services for export credit insurance and lender guaranties are provided by the Export-Import Bank of the United States;

The Forfaiting Advantage

I have surveyed the international operations of Societe Generale at its headquarters at La Défense in Paris and the international operations of Santander in Madrid and Bancaixa and fully understand their use of forfaiting; of the discounting without recourse to the seller in financing the export of capital goods.

European banks are often asked to finance exports destined for their former colonies. Forfaiting provides these nations with an advantage because many of their target markets are their former colonies and getting credit information is not as difficult a process as it is for U.S.?banks.

To use on example, the British East India Company once conducted 70% of global trade and so one can realize that it is not comparatively as difficult for the UK to garner credit information about enterprises located in its former colonies.?

Another development that affects the “disintermediation” of banks in the global trade process is the TSU/BPO process of SWIFT/TSU. This concept does not sufficiently consider the rapid changes in e-commerce and global trade. Considered too late were the needs of SMEs and as a result, these processes are in danger of becoming obsolete.?

Process, as Deming noted, is now crucial because it affects job creation and the economic development of every country, including India with its 1.4 billion people;

?A Simpler Way of Conducting Global Trade?

“To reach a port we must set sail –Sail, not tie at anchor--Sail, not drift” - FDR

Update; To reach port, we can fly as we did for a surrounded Berlin! After WWII, the U.S. Army invented EDI (Electronic Data Interchange) in order to provide the isolated Berliners everything they needed to survive.

SWIFT/ICC Collaboration

The apex of global trade innovation was reached when SWIFT/ICC;?

now ICC 2020, used a common, standardized language which established a base for a process intended to replace the Letter of Credit. The principal document for this purpose is?the MT798.

This is used in a matching process as the base in its Trade Services Utility (TSU);

on which basis to issue the?Bank Payment Obligation or BPO;

a means of paying, financing and settling a global or cross-border trade transaction. Such transactions totaled $19 trillion last year.?

The SWIFT/ICC collaboration also provided for the arbitration of global trade disputes by special masters of international business and logistics—using Incoterms (International Commerce Terms 2020);

This was the culmination of a process begun in 1934 with the United Nations Convention for the International Sale of Goods.?

These were all brilliant ideas but they failed in not being flexible enough to accommodate and embrace SMEs and such new ideas as e-commerce — the most disruptive advance in domestic and global trade in our time.

From Digitization to Visualization?

Visualization in global trade has been partially achieved by Denso Wave, the subsidiary of Toyota whose talented employee Masahiro Hara, was inspired by the game of Go to imagine the QR Code:

This development has provided Toyota, Denso Wave’s parent, the ability to avoid the supply chain dilemma involving such items as semiconductors and the economic catastrophe being experienced by so many other auto makers.?

Transition to EVs and Chips?

The transition to EVs, along with the commercialization of green hydrogen as a global form of energy and the “Full Stack” in financing will be America’s extraordinary contribution to the economic growth of the world and to a shared prosperity that advances cultural, racial and global equity as the world becomes carbon-free.

America’s Regional, National and Global Interests?

There is no more poignant example of the contention among American states, regional, national, geopolitical and geostrategic interests than that of the automobile. The automobile, the principal expression of our energy independence, is moving in the direction of BEVs or Battery Electric Vehicles, which depend on China and other countries for 14 of the elements considered?by the U.S. Dept. of the Interior to be critical to U.S. economic independence.?

At the moment, S. Korea, France, Japan and China are racing ahead with the development of green hydrogen but among auto manufacturers it is Toyota that has most benefitted from QR Code innovations. This innovation has greatly aided Toyota in dealing with the supply chain chaos resulting from the Covid pandemic. Toyota in 2021, sold more cars in the U.S. than did GM.?

India

In the meantime, India with its 1.4 billion people, decided at COP26 to defer de-carbonization from coal until 2070.

Solution and Process

QR Coded purchase orders from the buyer and select invoices from the seller can be matched visually with serialized QR manifests, matched at a trusted entity as is done now with the SWIFT Trade Services Utility or TSU, using the XML or the extensible markup language. We propose that this matching of certain receivables become the replacement for the letter of credit process.?

Visualization will work by use of the serialized QR or Quick Release Code manifest for trade settlement.?

Motivation

The inclusion of Supply Chain Finance and Dynamic Discounting?in this process which I call Financial Logistics, benefits the many vendors to the exporter. It likewise benefits the exporter by providing a higher return on cash reserves than simply leaving the money in the bank —in a low-interest rate environment. The discounts availed to exporters by paying their suppliers early, figure largely in this formula.?

A Little History

The European model of trade finance and settlement had advanced to?"four-corner interoperability." The collaboration of SWIFT and ICC was the crowning achievement of this effort once headed by André Casterman. This was?exhorted as the solution to the secure conduct of global trade. It failed to incorporate the “full stack” of trade finance, credit insurance, logistics, ease of use, accessibility and network effects and the democratization of these processes so as to include SMEs and e-commerce. It also did not include?Supply Chain Finance (SCF)/Dynamic Discounting (DD), the domestic receivables insurance provided by insurers and the export credit insurance and guaranties to lenders provided by the Export-Import Bank of the U.S;

Antecedents?

EDI or the Electronic Data Interchange system created by the US Army Air Corps to resupply a Soviet-surrounded Berlin with everything its residents needed to survive. EDI and geolocation form the basis for today’s logistics tracking and verification systems. What the process is missing are Serialized QR Code Manifests;

Today, the manifests declaring what is being shipped to the US is transmitted to Customs and Border Protection (CBP) upon wheels up of aircraft or upon ships leaving foreign ports. At the moment, test and certification of the quality and quantity of goods being shipped is provided by such inspection companies as Saybolt for oil shipments and SGS, the Swiss-based??Societe‘ Générale de Surveillance, which has inspection stations located in some 450 cities of the world. In addition, certification of the quantity and purity of commodities is provided by such documents as phytosanitary certificates.

QR Code Manifests

As far as QR Codes are concerned, just as the menu of a restaurant can be displayed by using the polynomial structure of scanned QR codes, so can the manifest of ships or aircraft. The QR Coded manifest of a ship or aircraft can then be transmitted to a trusted entity. I propose that banks can play this trusted role in providing the “deep knowledge” in trade finance and logistics, the “Financial Logistics,” required to propagate this process.?

The QR Coded manifest can also be watermarked or encrypted to ensure its security. A trusted entity can then be used to arrange payment, settlement or financing. The trusted entity can be the buyer in the case of inter-company transactions. In the case of non-inter-company transactions, the trusted entity can be a bank or a branch of SWIFT/ICC as agreed to by the underlying buyer and seller agreement. We at The Following Sea have solved this problem.?

The QR code can at origination be encoded with a watermark to which only the trusted entity is privy or entrusted. At the depository, the?transmitted and geolocated QR coded manifests related to the seller’s invoices are compared to the QR coded item descriptions of the buyer’s purchase orders.?

Geolocation and the constant monitoring of shipment location serve to verify the position of shipments. The matching of encrypted manifests provided by the seller?to the chosen invoices of the buyer trigger payment, settlement or financing. The receivables can be insured, as is done now with Infor/Nexus and Coface, so that commercial and political risks are covered.?

Differences between what is described in P.O.s and that which is described in invoices would be referred for reconciliation and resolution or fraud detection. Disputes would be resolved by the existing arbitration processes of the ICC.?

This system or process requires use of a new common language as well as the continuous communication of geolocation by the particular aircraft or ship on which goods are laded as is done now with EDI.?This is done as a means of confirming not only what is aboard but also where both the shipment and carrier are located.?The language used for this purpose is visual and is contained in the serialized QR Code manifest.?

Next: The U.S, Saves India - Again!

All rights reserved 2022 by William A. Laraque