As we get further into 2025, many questions swirl as to what we can expect from the proposed increases in tariffs stemming from the recent U.S. election results. While it’s not entirely clear yet how the incoming administration’s policies will play out, there are proposed tariffs on China, Canada, Mexico and other U.S. trading partners.
This is not the first time in recent history the U.S. has seen a rise in tariffs. When President Trump was first in office from 2016 to 2020, he focused on reducing the trade deficit, implementing tariffs and renegotiating trade agreements.
Let’s examine the proposed changes and what they mean for trade finance.
A Look at the Numbers
Trump’s proposal moving forward includes:
- 10-20% tariff on all imported goods
- 60% tariff on all imports from China
- 25% tariff on all imports from Mexico and Canada, except for U.S. automakers importing vehicles from Mexico who are poised to face a 100% tariff
How Will Trade Finance Be Impacted by Increased Tariffs?
While it may seem like international trade will come to a screeching halt, historically, trade finance has bent, but not broken from tariff increases. In fact, numbers show trade finance has continued to grow in most parts of the world throughout the years of turmoil. To understand why, we can point to different contributing factors. One of those is trade finance’s broadened scope today. It’s expanded to encompass both domestic and cross-border transactions, giving businesses the flexibility to manage the change. They’ve been able to pivot to pursue other markets and forge connections with fresh buyers and suppliers when necessary.
In line with this agility, trade finance has demonstrated its ability to accommodate economic and geopolitical uncertainty. Tariffs often lead to supply chain disruptions and reconfigurations. Trade finance has emerged as a key player in risk mitigation among these market fluctuations. This is due to its low volatility, especially when compared to more traditional asset classes.
Trade finance has proven it can plug otherwise gaping holes in global trade among challenges with trade protectionism. Its role is that critical to facilitating trade.
Understanding the Opportunity for Financial Institutions
Higher costs for goods, delayed payments and longer payment cycles as businesses renegotiate trade arrangements all create struggles for businesses.
Since the first wave of tariff increases, corporate treasurers have increasingly relied on trade finance programs for recurring working capital needs. This has created added opportunity for financial institutions to be able to solve cash flow problems by providing trade finance programs to their corporate clients.
Moving into 2025, programs like supply chain finance and accounts receivable will continue to be of particular use in managing businesses’ cash flow and weathering the storms ahead. Here’s how:
- Payables programs allow buyers to extend payment terms while suppliers receive early payments, enhancing working capital for both parties.
- Receivables programs enable businesses to convert their receivables into immediate cash, offering more financial flexibility to navigate volatile times.
- Both of these types of programs offer financial stability allowing businesses to continue operations even during times of crisis.
- As traditional lending becomes more restrictive during troubling periods, working capital programs offer attractive alternatives.
- Working capital programs strengthen supplier relationships, which is particularly beneficial during challenging times when there’s a lot of fear swirling.
- Working capital programs improve liquidity, enabling companies to not only ensure business continuity, but also fund innovations and explore new market opportunities.
LiquidX is the market’s only single-source solution for empowering an entire trade finance business. Combined with our partner Broadridge, we empower financial institutions to provide working capital solutions to their corporate clients in a single, intuitive interface.
To request a demo of our end-to-end digital solution, click here.
