By: Udaibir Das
The global banking system has faced mounting disruptions in recent years, from the 2008 financial crisis to the COVID-19 pandemic. Now, another force is threatening to reshape the financial landscape: the rise of reciprocal tariffs and protectionist trade policies. The idea of reciprocal tariffs appears straightforward: if a country imposes tariffs on U.S. goods, the United States will respond in kind. While framed to correct trade imbalances and protect domestic industries, its effects extend far beyond manufacturers, exporters, and importers. It also threatens to reshape global banking, distort financial flows, and force banks to rethink risk models to maintain prudential resilience.
Trade finance, valued by some at $9.7 trillion in 2024, represents a critical yet often invisible infrastructure that funds over 80% of global trade transactions. (Estimates vary based on different definitions and methodologies used.) Traditionally, this was considered a low-risk sector with default rates below 0.5%. Banks play a pivotal role in this ecosystem. They underwrite transactions through instruments like letters of credit, supply chain financing, and export credit guarantees. Banks and financial institutions must now reckon with a new, uncertain trade finance landscape.
As trade policies become increasingly protectionist, banks confront three new realities in which global trade finance faces heightened risks. One of the primary concerns is the potential for tariffs to disrupt supply chains, compelling banks to reassess corporate creditworthiness and trade finance exposure. A second challenge is the macroeconomic impact of tariffs, which tend to raise consumer prices without necessarily boosting economic activity. Finally, while some see opportunities in this shifting environment, there is a growing recognition that trade finance must adapt to an era of economic fragmentation. The need for diversification, alternative payment mechanisms, and resilient financing structures is becoming more urgent. These three developments point to a future in which banks that finance global trade must recalibrate their risk models and trade finance strategies.
History suggests that when global trade undergoes structural shifts, trade finance adapts. Two significant transformations in trade finance have occurred in the past century, both driven by seismic shifts in international trade patterns. The post-World War II era saw the emergence of structured global trade finance. Institutions like Export Credit Agencies helped finance trade for postwar economies. This era saw the formalization of letters of credit, providing a standardized framework for banks. The globalization and digitization era introduced SWIFT messaging for trade transactions, Basel-driven prudential norms, and digitized trade finance platforms. Banks began integrating trade finance into capital markets, leading to innovations like trade receivables securitization and blockchain-based settlement systems. With reciprocal tariffs, supply chain realignments, and the emergence of alternative trade finance models, we could enter a third major transformation in trade finance — one not driven by financial innovation but by geopolitical realignments and statecraft.
There is also a risk of unintentional consequences. Though designed to shield U.S. industries, reciprocal tariffs may adversely affect American banks. For example, during the 2018–2019 U.S.-China trade war, China slashed U.S. soybean imports by 75%, triggering loan defaults and bankruptcies among American farmers. Regional banks, particularly in the Midwest, saw increased non-performing loans tied to agricultural lending. Another looming concern is inflationary pressure and interest rate hikes. Tariffs increase the cost of imports, leading to inflation and potential Federal Reserve rate hikes. Higher interest rates could raise business borrowing costs, increasing default risks across multiple industries, including manufacturing, real estate, and retail.
This could have regional and global implications. As traditional trade regimes get disrupted, new trade finance centers may emerge. Financial hubs like Hong Kong and Singapore must adapt to intra-Asian trade, just as European banks, including Deutsche Bank and HSBC, are shifting toward intra-European and emerging-market trade finance. At the same time, alternative trade finance systems are growing. China, Russia, India, and the UAE are increasing local currency trade settlements, bypassing the U.S. dollar. If this trend accelerates, it could erode the dominance of U.S. banks in global trade finance.
There is little doubt that reciprocal tariffs, once seen as a temporary trade correction tool, will reshape global banking and trade finance if implemented. Large banks traditionally involved in international trade might have business and strategic ingenuity, apart from having a closer axis to governments and policymakers. The middle segment of the banking industry might be unable to adapt to this shifting landscape and risk collateral damage in the broader battle over trade and financial dominance.
The world must act swiftly to mitigate risks to the existing trade finance order, strengthen trade finance mechanisms, and ensure financial stability — or face a future in which trade finance becomes another battleground in the geopolitical struggle for economic influence.
Udaibir Das is a Distinguished Fellow at ORF America, Visiting Professor at NCAER, Senior Non-Resident Adviser at the Bank of England, Senior Adviser to the International Forum for Sovereign Wealth Funds, Distinguished Visiting Faculty at the Kautilya School of Public Policy, and Senior Advisor at the Toronto Centre. He previously held roles at the BIS, IMF, Reserve Bank of India, and Bank of Guyana.