- The global trade market is dominated by a few large players protected by competition by steep barrier to entry for new firms, despite accounting for a smaller portion of national GDP.
- New inroads in the policy world have begun to open the global trade door for micro, small and medium sized enterprises (MSMEs).
While economist Adam Smith pioneered the concept of “absolute advantage” in 1776 and David Ricardo expanded the field of economics to include comparative advantage in 1817, international trade has influenced economic growth and reduced global poverty for centuries. Trade, which is the sum of imports and exports of goods and services, accounts for over half of global GDP, according to the World Bank and its impacts are measurably higher when taking into account wealth creation and poverty reduction.
There are also harder to measure effects such as social impact through improved international relations and cultural exchange, which can, in turn, contribute to world peace. However, without trade finance, there would be no trade activity, as evidenced by recent World Trade Organization statistics. In 2017, trade finance facilitated over 80% of world trade.
Moreover, most of the companies that have access to trade finance tend to be larger multinational corporations. According to the United Nations Conference on Trade and Development, 80% of trade is linked to transnational corporations, which tend to be larger in size. There are multiple reasons for this skew in participation such as the high costs of payments, upfront collateral requirements, and delays resulting from cross-border payment and settlement latencies. That said, micro-, small- and medium-sized enterprises (MSMEs) in high-income countries contribute as much as 50% to overall GDP on average.
In developed economies, that contribution can be substantially higher, as is the case with India, which contributes 95% of total industrial units produced. MSMEs also pack an outsized punch in their impact in regards to employment opportunity creation, accounting for 50-70% of employment across regions.
Finally, lack of access to a simple bank account and formal identification requirements is also a barrier for smaller entrepreneurs in poorer countries to access the global trade market. Improving and disintermediating access to trade finance for smaller companies and entrepreneurs has the power to transform the world.