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Everything you wanted to know about tariffs and trade finance

(but were afraid to ask)

Insight
19 February 2025 |
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A new trade war between the US and China could have unexpected consequences.

Fast reading

  • Federated Hermes’ Trade Finance Strategy experienced minimal disruption during the previous round of US-China tariff hikes and we expect to see little impact this time around, despite the recent rise in trade tensions.
  • However, a renewed trade war still has potential consequences. It would likely force the US and China to seek new suppliers for imports, opening a window to explore new avenues for financing deals.
  • A significant change over the last decade has been the rise in so-called south-south transactions between emerging economies and a reignited trade war would likely increase momentum behind this trend.

US President Donald Trump has threatened to impose a flurry of tariffs since his inauguration in January.

Punitive tariffs on Mexico and Canada have been actioned, then rescinded. China has been issued with a 10% tariff on all goods exported to the US, leading to a raft of retaliatory measures. While a 25% import tax on all steel and aluminium entering the US is set to come into force in March.

This sharp upturn in tit-for-tat levies has unsettled some investors, amid concerns about what impact these disputes might have on global trade.

Global trade flows

Trade finance – short-term loans to facilitate physical cross-border transactions – plays a vital role in facilitating global trade flows.

It should be noted that amid a huge gap for global trade finance opportunities – valued at US$2.5tn by the Asian Development Bank in 2022, up from US$1.7tn two years previously– there is a wide range of potential transactions that completely avoid trades that could be impacted by the Trump administration’s tariffs – such as trade flows between the US and Canada, China or Mexico.

The Federated Hermes’ Trade Finance Strategy does not finance container shipping – such as mass-produced manufactured goods – and the majority of our transactions involve bulk shipping.

To mitigate risk, the portfolio contains a wide and diverse range of loan structures including supply-chain finance, financial institution trade loans, structured corporate term loans, and project finance. This approach helps ensure that any risks to the transaction are likely to be idiosyncratic rather than macroeconomic.

The Federated Hermes’ Trade Finance Strategy – which launched in 2009 – thrived during the first Trump presidency (2017-2021) which saw duties of either 7.5% or 25% imposed on US$300bn worth of Chinese goods. We can, therefore, say with some confidence that a new rise in trade tariffs will not affect our ability to either source or finance deals.

Not our maiden voyage

Trump’s policies can, at times, be unconventional and unpredictable ­– making it difficult to speak with great certainty. But we can also say that we have seen some of this act previously: when it comes to trade wars it’s not our maiden voyage and for the most part, we believe we will be unaffected by an increase in tariffs.

That’s because we have never financed direct US-China trade, and with good reason. For one thing, such flows tend not to require much financing and, if they do, they are priced at levels that are too low to be of interest to our Trade Finance Strategy. Furthermore, US-China trade generally focuses on manufactured goods – and, again, these are not a focus of the Strategy2

We have never financed direct US-China trade, and with good reason.

For this reason, the Federated Hermes’ Trade Finance Strategy experienced minimal disruption during the previous round of US-China tariff hikes and so would expect to see little impact, despite the escalation in trade tensions between the two countries.

That’s not to say, however, that a renewed trade war would be consequence free.

New avenues to explore

During the previous trade ructions, one market we watched with some interest was the US-China soybean trade. China is the world’s largest consumer of soybeans and was the US’s largest export market until the US brought agricultural products into its tariff policy. Over the course of one year (2018), the US-China soya trade flow fell from approximately US$20bn annually to just US$3bn3.

The fall in US soy exports caused many ripple effects; not least forcing China to diversify its soya imports and seek new suppliers. So, while we never took part in the US to China soya trade, this shift opened a window for us to explore new avenues for financing deals. Indeed, it’s exactly this type of south-to-south transaction that requires a trade finance solution to de-risk it, while still leaving room for attractive returns. 

The bigger picture

Another effect of the first Trump administration’s focus on trade was the popularisation of terms such as nearshoring, friendshoring and ally-shoring. We believe this is just a step in a larger and longer-running macro trend with wider ramifications for the trade finance space as a whole.

Global merchandise trade volumes have grown from approximately US$14tn in 2007 to US$24tn in 20234. It is interesting to note that within this growth, the expansion in emerging-economy-to-emerging-economy trade has outpaced its peers. At present, so-called south-south trade (between developing countries), is already forecast to represent 40% of global trade by 20305.

Our view is that a reignited trade war would increase momentum behind this trend and that this, in turn, could lead to further opportunities for the Federated Hermes’ Trade Finance Strategy.

To conclude: if a new US-China trade war were to develop, we expect the negative impact on our Strategy to be minimal. Indirectly, a redistribution of trade flows would likely be a good thing for our Strategy as it would provide the additional avenues for us to offer our solutions to new suppliers.

This article was amended on 19 February 2025

For more information on Trade Finance.

1 Global Trade Finance Gap Expands to $2.5 Trillion in 2022 | Asian Development Bank 2 The one major exception to this rule is agricultural goods which are the largest US export to China  (accounting for approximately 20-25% of overall trade) but, even here, our main focus is on agricultural machinery. (As an aside, this is one of the main reasons the Strategy was largely unaffected by post-Covid supply-chain disruptions: with agricultural machinery the main exception, we tend not to finance containership goods.) 3 Soy Growers, Still Bruised by 2018 Trade War, Talk China Before House Ag – American Soybean Association 4 UNCTAD 5 World Trade Organisation

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