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Representatives of international financial institutions, private banks and other experts met at the WTO, 12 November 2008, to analyze the shortage of credit to finance trade and discuss possible measures to address the problem.
Meeting of experts at the WTO 12 November 2008
In total, 30 people representing 19 international and regional financing institutions, private banks, credit insurance agencies and the WTO Secretariat participated at the meeting.
Participants first made a rapid stock-taking on current market conditions; then they focused on the measures that are being taken, and finally they shared proposals, initiatives and ideas that can contribute to mitigate the deterioration of the current situation.
Among the problems identified are the following:
·The main one is the shortage of liquidity to finance trade credits. The market currently estimates the liquidity gap in trade finance at about $25 billion.
·The second is a general re-assessment of the risks caused by the financial crisis and by the slowing down of the world economy.
·These problems are being felt most acutely by traders and banks in the emerging market economies.
Among the measures that are being taken or considered are the following:
·The World Bank/IFC is actively studying a tripling of the ceiling, to $3 billion, of the trade finance guarantees available under the IFC's trade finance facilitation programme.
·Export credit agencies have increased their business activities by more than 30 percent in the last twelve months.
·National governments, for example Germany, Hong Kong (China) and Japan, have actively being backing this increase.
Among the solutions on a medium term basis are:
·Fill the gap of liquidity by increasing the opportunity for commercial banks to co-share risks with international financial institutions and export credit agencies.
·Improve mechanisms of information sharing, risk assessment and data collection on trade and finance.
·Develop mechanisms to allow for more co-financing trade between private banks, export credit agencies and international financial institutions.
The overall objective is to keep trade flowing as an important contribution to address the current economic crisis
More than 90% of trade transactions involve some form of credit (in particular short-term), insurance or guarantee. Trade-financing is the lifeline of trade. Trade finance is in theory one of the most secure modes of finance due to its short maturity. But now there is some tightening of trade finance around the world.
The rapid expansion of world trade in the past few years could not have taken place without the traditional sources of financing, both long and short-term. While short-term finance, like any form of credit, involves a commercial risk — for example the exporter being unable to secure payment for his merchandise in case of insolvency of the importer, or the importer bearing risks of alteration of goods or delayed delivery — and other risks (transportation, exchange rate, political risk), trade financing is still considered as relatively routine and secure given the short maturity and the supporting documentation involved. Trade finance is providing fluidity and security to the movement of goods and services worldwide.
The supply of trade finance used to be more resilient in periods of financial instabilities until the Asian crisis. But trade finance has now become extremely sensitive to liquidity squeezes, as shown in the Argentinean crisis (2002) and most recently in the context of the sub-prime mortgage crisis. Trade credits are no longer distinguished from other loans by creditors — and hence are subject to the same restrictions in case of risks.
When did the problem surfaced in the WTO.
It surfaced in the wake of the Asian financial crisis (in 1997) when credit lines for the financing of imports and exports from and to crisis-stricken countries had been interrupted abruptly, leading to a collapse of trade for a certain period of time at the height of the crisis. At that time, and also during the following crises (Russia 1989-99, Brazil 1999, Turkey 2001, Argentina 2002), there was real concern among many developing countries that their trade opportunities and policies were being undercut by a variety of international financial problems, most importantly unstable capital flows and the threat of recurring financial crises and unsustainable foreign indebtedness.
What's the role of the WTO:
The WTO does not provide trade finance nor is an international financial institution. But members want the WTO to play a role in alerting about the problems, facilitating discussion among members and encouraging international cooperation in this field.
Work on Trade and Finance at the WTO.
The creation of the Working Group on Debt, Trade and Finance was initially proposed at the WTO Ministerial Conference in Seattle in 1999 but it did not come into existence until the Doha Ministerial Conference in 2001. The mandate for the Working Group is to examine the relationship between trade, debt and finance and also to examine any possible recommendations on steps that might be taken with the purpose of enhancing the capacity of the multilateral trading system to contribute to a durable solution to the problem of external indebtedness of developing and least-developed countries; and strengthening the coherence of international trade and financial policies, with a view to safeguarding the multilateral trading system from the effects of financial and monetary instability.
The Aid for Trade initiative, which has been a prominent feature in the WTO agenda for the last few years, also has studied the problem of Trade Finance and its possible solutions. Aid for Trade is a complement to the current Doha Development Agenda negotiations aiming at reducing and eliminating trade barriers, and helping developing countries, in particular the least developed, to build the trade capacity and infrastructure they need. The final goal is to use trade opening as an engine of economic growth to fight unemployment and poverty.
WTO's Director-General recent statements on the problem:
·In his letter of 10 October 2008, “The purpose of the meeting (of November 12, 2008) 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, and to examine how to maintain and improve the availability and accessibility of trade finance facilities at affordable rates for developing countries, especially low-income countries”.
·In his report to the Informal TNC Heads of Delegations of 10 October 2008, “The financial crisis may also be having an impact on developing country access to financing of imports and exports. As you know we have held a number of meetings on this issue at the WTO with both multilateral institutions and private banks, the last one in April 2008, to check availability of trade financing at affordable rates. Up until then, the situation seemed to be stable with volumes and rates at normal levels. But just this week Brazil brought this issue to the forefront. Given the deterioration of the financial landscape, and despite the welcomed announcement yesterday by the World Bank IFC of an increase in its trade financing programme by $500 million, I have today convened major providers of trade finance to a meeting on 12 November to examine this issue and find ways to alleviate the situation if it was to deteriorate”.
·In April 2008, He wrote to the President of the World Bank and of the regional development banks to highlight the difficulties faced by some private institutions to maintain and increase their trade financing role and by some countries to receive such finance at affordable terms.
Trade Finance Facilitation Program, EBRD Trade Facilitation Program, Inter-American Development Bank (IaDB) Trade Finance Facilitation Program, ADB Global Trade Finance Program, IFC (WB Group) Trade Finance Program, Islamic Development Bank (IsDB) Regional Integration and Trade Department, African Development Bank (AfDB) African Trade Insurance Agency Trade Division, International Monetary Fund, Washington World Bank (Representative Office in Geneva)
Secretariat of Berne Union
Global Trade Department, ING Global Trade Transactions, HSBC Global Trade Services, JP Morgan Chase Global Trade and Chain Supply Financing, Citigroup Global Trade Services, Commercerzbank, Frankfurt Global Trade Department, Royal Bank of Scotland Senior Management, Banco Nacional do Desenvolvimento Econômico e Social, (BNDES), Brazil Eximbank