TWN Info Service on Finance and Development (Nov08/02)
12 November 2008
Third World Network

Trade: WTO holds expert meeting on trade finance
Published in SUNS #6588 dated 12 November 2008

Geneva, 11 Nov (Kanaga Raja) -- The World Trade Organization will be holding a meeting of experts on 12 November to review how the international market for trade financing is faring in view of the current very difficult conditions in international financial markets.

The meeting of experts, convened by WTO Director-General Pascal Lamy and to be chaired by him, will also examine how to maintain and improve the availability and accessibility of trade finance facilities at affordable rates for developing countries, especially low-income countries.

According to trade officials, the objective of the meeting is to hear from the financial experts, assess the situation, take stock of the most recent developments and eventually step up actions where market gaps exist.

The experts' meeting will take place on the morning of 12 November; in the afternoon, an informal meeting of the General Council at the level of heads of delegation will be held for the Director-General to inform the broader membership of the discussions in the morning.

The regional development banks and international financial institutions that are expected to participate in the meeting include the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank, the Asian Development Bank, the International Finance Corporation, the Islamic Development Bank, the African Development Bank, the African Trade Insurance Agency, the International Monetary Fund, and the World Bank.

Also participating will be the Secretariat of the Berne Union (a coalition of the world's main export credit agencies and insurers).

The private banks that will be taking part include ING, HSBC, JP Morgan Chase, Citigroup, Commercerzbank (Frankfurt), Royal Bank of Scotland, and Banco Nacional do Desenvolvimento Economico e Social (BINDES, Brazil).

The sole observer at the meeting will be the Secretariat of the International Chamber of Commerce's Banking Commission.

According to trade officials, more than 90% of trade transactions involve some form of credit (in particular, short-term), insurance or guarantee. 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 supply of trade finance used to be more resilient in periods of financial instabilities until the Asian financial crisis. But trade finance has now become extremely sensitive to liquidity squeezes, as shown in the Argentinian crisis of 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 are hence subject to the same restrictions in the case of risks.

According to trade officials, demand for trade-financing is exceeding supply in some cases because of the liquidity shortage and increased demands for other forms of bank credits. The challenge for the international community at the present moment is to look at how to facilitate the supply of trade credits because currently, demand for trade finance and credit guarantees outweigh supply in some areas.

On short-term trade credit, some of the ideas floated by experts include regional development banks doing more through co-financing with private sector banks to help larger middle-income countries which are currently facing capacity constraints.

According to trade officials, stand-by letters of credit, overdraft, and open account operations are routinely used in international trade as a vehicle for finance. However, international banks adopted more stringent lending standards for developing countries and emerging economies after the Asian and East European financial crisis of 1997-1999.

On proposals or ideas on the table for the expert meeting, trade officials said the meeting was firstly to learn what the market has to say. The problem is that the market itself or international organizations do not produce international statistics on flows of trade finance. The best way to get a grip on what is happening in the market is to bring together the market-makers, which provide for a critical mass in the market, to know what is happening.

The meeting will give a sense of what is happening, said trade officials. Most of the meeting will be dedicated to actually know where the market is right now.

Trade officials added that a lot of different anecdotal evidence, facts, pieces of information and complaints are being heard, and there is need for a global picture of what is really happening.

Trade officials acknowledged that there is no solid evidence that trade finance is actually drying up at this stage and that it is only anecdotal evidence.

Work on trade and finance at the WTO is through the Working Group on Trade, Debt and Finance, which did not come into existence until the Doha Ministerial Conference in 2001.

According to trade officials, 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.

[There is a widespread impression among trade observers that though a part of the Doha Work Programme (but not the single undertaking), little attention, except at lower technical levels, has been paid to the working group at the WTO, and that it has been reactivated in the wake of the financial crisis, and the efforts to associate the WTO in the various moves on the global financial architecture. Washington reports (for example, in Inside US Trade) suggest that the WTO head, Mr Pascal Lamy, had unsuccessfully sought an invitation to participate as an observer at this weekend's G-20 summit.]

However, trade officials said that the Working Group has met 18 times: 3 times each in 2002, 2003, 2004 and 2006, and twice each in 2006, 2007 and 2008.

According to trade officials, since 2002, there have been almost 50 working papers on different themes addressed by the Working Group, including "Trade liberalization as a source of growth", "Trade and financial markets", "Better coherence in the design and implementation of trade-related reforms and monitoring", and the general issue of "Trade financing".

The Working Group is expected to meet after the 12 November expert meeting to share information.