Global shipping and trade are entering a turbulent era, and trade finance instruments are feeling the strain. According to the United Nations Conference on Trade and Development (UNCTAD), increased geopolitical tensions, notably in the Middle East, ongoing Russia-Ukraine conflict, and instability in the Red Sea corridor, are causing dramatic shifts in shipping routes and freight costs.

UNCTAD data show that average shipping distances have increased sharply (from roughly 4,831 miles in 2018 to about 5,245 miles by 2024), reflecting longer detours to circumvent hotspots. The cost implications are immediate: longer sailing times, higher fuel consumption, and increased insurance payments. For a bank or insurer underwriting trade finance, this inflates the "cost of cover" for documentary credits, standby facilities, and supply chain guarantees. Delays on the sea translate to higher transaction risk, exposing financiers to possible non-performance or default.

Moreover, shipping volatility further fragments supply chains, especially as cargoes are re-routed via the Cape of Good Hope instead of the shorter Suez route. The consequence is mismatched lead times and increased uncertainty in delivery schedules. In response, buyers and sellers may seek stricter trade finance terms (e.g. higher margins, shorter repayment periods, or greater collateral). The combination of squeezed margins and elevated risk may drive some smaller players, already undercapitalised, out of international trade altogether.

In emerging and developing markets, where trade finance availability was already constrained, the situation is especially precarious. UNCTAD warns that exchange‐rate volatility and tighter capital flows may further impair access to credit, and the uncertainty could permeate risk models used by banks. Institutions that had prided themselves on low cost or flat pricing for trade finance may need to recalibrate their pricing models, adjust credit lines, or reduce exposures in high-risk trade corridors.

In practical terms, exporters in East Africa or South Asia shipping bulk goods may see their cost of credit rise by several basis points, or face more conservative credit limits. Meanwhile, the major financing corridors (e.g., shipping between East Asia and Europe) will likely bear the brunt of renegotiated terms.

Summarising, trade finance is no longer just about credit risk and document checks. It is now deeply interwoven with geopolitical risk, maritime insurance dynamics, and supply chain fragility. For banks and insurers in trade finance, staying ahead will require dynamic route risk models, agility in pricing, and deeper scenario planning across conflict zones.

Further information: https://unctad.org/news/uncertainty-new-tariff-costing-global-trade-and-hurting-developing-economies

This article represents the views of the author and not necessarily those of ICC.