Bridges Weekly Trade News Digest • Volume 12 • Number 39 • 19th November 2008
Financial Crisis Threatens Global Trade Flows, WTO Says
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The market for trade finance - what many consider the lifeline of cross-border commerce - is deteriorating, the head of the WTO said last week, and with the situation not likely to improve anytime soon, there could be serious ramifications for international trade.
Director-General Pascal Lamy gathered 30 representatives of private banks, financial institutions and export credit agencies in Geneva last week to take stock of the effects of the international financial crisis on trade finance.
Following the meeting, Ambassador Bruce Gosper, the Head of the General Council, chaired an informal briefing for WTO delegates to report on the morning meeting and to discuss the effects of the international financial crisis on trade and trade financing, particularly with regard to developing countries’ imports and exports.
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 are now hard to come by.
The experts at last week’s meeting confirmed that “the market for trade finance has severely deteriorated over the last six months,” Lamy reported in a briefing for WTO delegates later that day. And the situation is expected to worsen in the months to come.
But affordable access to trade financing in such crises is crucial to ensure that international trade can help absorb the shock of a global economic slump, Lamy said. Over 90 percent of all trade transactions involve some sort of short-term credit, and the liquidity that such loans provide has underpinned recent growth in world trade.
Trade finance is widely considered one of the most secure modes of finance, a point that Lamy stressed to delegates. The loans have a short maturity, their execution is relatively routine, and the traded goods themselves can serve as collateral.
“The basic message is that trade finance is the most secure, the safest, the least toxic asset which you can trade in banking and insurance,” Lamy told delegates, Reuters reported.
But since the Asian financial crisis in the late 1990s the supply of trade finance has become extremely sensitive to liquidity squeezes, such as the current sub-prime mortgage crises.
The international financial crisis affects trade financing in two chief ways, the participants of the expert meeting found. First, the crisis exacerbates a shortage of liquidity to finance trade credit: the gap between supply and demand in trade financing is currently estimated at US$ 25 billion. Second, the credit crunch and economic slowdown have made banks averse to financial risk.
But the consequent drop in trade finance has a huge multiplier effect, in terms of keeping trade afloat, Lamy said.
These problems are being felt most intensely in developing countries, many of which struggle to qualify for international loans in other contexts. Indeed, growth in trade in emerging market economies - which are most vulnerable to the detrimental effects of a limited supply of trade financing -is needed to sustain global economic growth as developed countries reel from the blow of the ongoing crisis.
“A priority task is to enhance capacity to mitigate the effects of the increased perception of risks and to provide the market with earmarked liquidity for trade finance,” Lamy told delegates at the briefing. To do so, a number of public authorities, like governments and central banks, will have to provide even more support than what they have already offered, in order to mitigate risks more complex than trade finance.
Over the medium term, Lamy suggested improved mechanisms of information sharing, risk assessment techniques and data collection on trade finance. While this is not a responsibility of the WTO, Lamy expressed a desire to work with individual actors on these issues.
The trade finance practitioners at last week’s meeting outlined the practical steps that are already being taken to address the situation and shared ideas on how to further mitigate the deteriorating situation. World Bank President Robert Zoellick has announced his intention to triple the ceiling of trade finance guarantees to US$ 3 billion under the trade facilitation programme. And export credit agencies grouped in the Berne Union have increased business by more than 30 percent over the last few months - a move actively backed by several governments, including China, Germany and Japan.
Lamy’s briefing to WTO delegates allowed the officials an opportunity to provide their take on the crisis in the hope that Lamy would accurately represent their concerns at the G20 meeting in Washington, which took place later that week (see related story, this issue).
Not since the aftermath of 9/11 had so many calls for international solidarity been made by WTO Members, according to a source present at the briefing. Speeches were uncharacteristically decorous, undoubtedly because of the timing and topic of the meeting.
The consensus among Members was that it was time for a new approach to world finance. Egypt declared that it was time for a new “economic menu,” and Brazil insisted that increased international participation, supervision and transparency were required. Canada said that the global financial system needed to contribute to overall stability.
Many Members called for renewed efforts in negotiation the Doha Round of trade talks, expressing the hope that modalities in talks on agriculture and non-agricultural market access could be concluded before the end of the year. The EU urged the Director-General to finish modalities by the end of the year, stipulating that it was time to bring the ministers to town. The US stood out as the only country to add the qualifier “if possible,” to that goal, according to a source in the WTO. Finalising modalities would send a stabilising and confidence-boosting signal to international markets, analysts say.
Delegates reaffirmed their commitments to continuing liberalisation of the global market, warning against the consequences of protectionism, but also calling for increased regulation of international financial markets. Suggestions and requests for the creation of a WTO structure to examine trade finance, public policy and the effects of the current situation were quite common as well, coming from several delegations including Cote d’Ivoire and Tanzania, who spoke on the behalf of the African group and Least Developed Countries, respectively.
Many delegations explicitly addressed the predicament of developing countries. Canada voiced its concern that bailout plans could put Aid for Trade or public finance at risk, and Egypt wanted policy space for developing nations.
China offered itself as a model for other countries, citing its stimulus plan for its domestic market, the source said. Realising that falling exports could not lead to any improvements for its economy, China said that it was ready to discuss any way that it could help the global economy.
ICTSD reporting; “WTO chief warns trade finance situation deteriorating,” XINHUA, 12 November 2008; “WTO meet discusses ways to ease trade finance,” BUSINESS-STANDARD, 13 November 2008; “Cost of some trade finance deals up sixfold - WTO,” REUTERS, 12 November 2008; “WTO warns trade finance ‘deteriorating’ amid financial crisis,” AGENCE-FRANCE PRESSE, 12 November 2008.
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[...] The global financial crisis has put pressure on the system of trade credit that underpins world trade, making exporters and importers pay far higher prices for the loans that allow them to transport goods globally. Important players like banks either lack funds or are too risk-averse to extend export credit in times of economic uncertainty (see Bridges Weekly, 19 November 2008, http://ictsd.net/i/news/bridgesweekly/33962/). [...]