Bridges Weekly Trade News Digest • Volume 12 • Number 34 • 16th October 2008

Lamy Calls for Summit on Trade Finance amid Global Credit Crisis

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Volume 12 Number 34 PDF • 0.14 MB

WTO Director-General Pascal Lamy has called for the heads of international financial institutions, regional development banks and major commercial banks to meet at WTO headquarters in Geneva next month to discuss how the global financial crisis is affecting developing countries’ ability to participate in international trade.

The Director-General also announced that he planned to set up a task force within the WTO Secretariat to examine how the current financial turmoil is affecting other areas of the organisation’s work.

Many developing countries rely on trade finance - loans tied directly to cross-border trade transactions - to help fund their participation in the global market. But with many banks short on cash, such loans have become harder to come by.

“The purpose of our next meeting will be to review how the international market for trade financing is faring in view of the current very difficult conditions on international financial markets,” Lamy said in a letter to the invitees, which was dated 10 October. The meeting will also consider “how to maintain and improve the availability and accessibility of trade finance facilities at affordable rates for developing countries, especially low-income countries,” the Director-General said.

Lamy extended invitations to the meeting, which is set for 12 November, to the heads of the World Bank, the International Monetary Fund, the Inter-American Development Bank, the African Development Bank, the Islamic Bank, and the European Bank. Five commercial banks - Citigroup, JP Morgan, HSBC, the Royal Bank of Scotland and Germany’s Commerzbank - were also invited, as were several major trade insurance agencies.

Roughly 90 percent of the US$ 14 trillion of world trade involves some type of credit, insurance or guarantee; trade finance is thus considered the lifeline of trade, especially for poor nations that lack other resources to help finance their imports and exports. And because banks are more willing to lend when traded goods are available as collateral, trade finance allows poorer and less creditworthy countries to get greater access to international loans.

But even before the current crisis hit, many poor countries complained of a lack of affordable trade credit, while many emerging economies said that their access to loans was overly vulnerable to shifts in the mood of the market.

Trade finance to developing countries rose sharply in the 1990s, but collapsed when the East Asian financial crisis hit in 1997-98. Many developing countries worry that the current crisis will similarly interrupt trade finance flows.

Brazil was the first to sound the alarm last week, when it sent a letter to WTO Members on 6 October calling for the organisation to address the issue. A lack of trade finance has already hit home in Brazil: data released by the Brazilian Central Bank on 1 October showed a 50-percent drop in export credit available to Brazilian companies for the second half of September. The value of loans taken out to finance exports in the third week of the month amounted to one quarter of the average figure for the first half of September.

Lamy noted in an address to WTO Members that the World Bank had announced that its International Finance Corporation, or IFC, would increase its trade financing programme by US$ 500 million. But while he called the move “a welcome announcement,” Lamy said that more work would be needed.

While the WTO does not itself offer any trade financing, its Working Group on Trade, Debt and Finance, which was created in 2001 after a number of developing country Members expressed frustration with the availability of trade credit, is meant to serve as a sounding board for their concerns.

But the 10 October letter demonstrated the Director-General’s belief that the global trade body should be closely involved with trade finance debates outside its own walls. “Although the WTO does not provide trade finance as such, it is a matter of great interest to many of our member governments and at their request we have offered to play a convening and advocacy role and to encourage international cooperation in this field,” Lamy said in his invitation letter. “Clearly, it is of very considerable importance to the WTO at present to ensure that all necessary steps are taken to facilitate their participation in international trade.”

Doha and the financial crisis

Lamy has also recently driven home the importance of moving forward in ongoing negotiations toward striking a global deal to cut tariffs and subsidies: “The global financial crisis…has given added importance and urgency to our work,” Lamy told WTO Members on 14 October.

A global trade deal could serve as a bulwark to protectionist policies, which countries sometimes turn to in times of crisis, Lamy has said.

“The role of the WTO as a firewall against protectionist responses is thus vital,” Lamy told WTO Members last week. “It is not so much about any direct effect on markets as for sustaining confidence in global co-operation and institutions.”

And such confidence can be hard to come by in times of financial turmoil. In an address to the Finance Commission of the French Assembly earlier this month, Lamy described the WTO as “in short, a global insurance policy for a global real economy.”

The WTO “provides the real economy, the everyday economy, with a collective insurance policy against the disorder caused by unilateral actions, whether open or disguised; a guarantee of security for transactions in times of crisis, henceforth an element of resilience that is vital to the running of a globalised world,” Lamy said.

But multilateral negotiations towards a global trade deal at the WTO have stalled repeatedly in recent years; the most recent setback came with the collapse of ministerial-level talks in July. And although trade officials have repeatedly tried to breathe new life into the talks in recent weeks, those efforts have borne little fruit.

The Director-General acknowledged as much in his address on 1 October. “It is clearly necessary to face the reality that the Round cannot be concluded this year,” he said. But he added that he still believed that Members could reach an agreement on modalities - the skeleton of any deal - by the end of 2008. “The collective commitment to the Round remains strong,” he said. “There should be no doubt - we are working on Plan A, establishment of modalities.”

A New Bretton Woods?

In related news, Lamy on Monday supported a call made by British Prime Minister Gordon Brown for an overhaul of the world financial system, Reuters reported.

“If a new Bretton Woods means re-looking at the governance of the world economy, I’m fine with that,” Lamy said, referring to the 1944 meeting in Bretton Woods, New Hampshire that led to the establishment of the World Bank and the International Monetary Fund.

Earlier on Monday, the British Prime Minister had publicly called for a massive reform of the global financial system. On Wednesday, Brown announced that world leaders would convene before the end of the year to discuss what how such a system might be structured.

“It’s formidably complex,” Lamy told journalists on Monday, Reuters reported. “How can you build a system of international governance in global finance with central banks who are independent from government?” Lamy asked. “Who will sign? Will it be a treaty? What sort of commitment? Who will monitor all this? - plenty of ideas for the agenda!”

But the world trading system might offer some important lessons for financial governance, Lamy suggested last week. “The WTO has over 60 years of solid experience in regulating trade opening,” Lamy said in address to WTO Members. “At a time when there are renewed calls for a better regulation in the financial area, the WTO system provides an example of how the lessons of history and experience have led to the construction of a system of international governance.”

ICTSD reporting; “WTO chief backs call for new Bretton Woods meeting,” REUTERS, 14 October 2008.