Service on Finance and Development (Nov08/03)
The Director-General was reporting back to heads of delegations of his meeting with finance experts from regional development banks, international financial institutions, export credit agencies and private banks earlier in the day to discuss the issue of trade finance.
"The view expressed this morning by the trade finance practitioners is that the situation is likely to deteriorate further in the months to come," Lamy warned.
Many countries voiced their concerns on the current global financial crisis and its potential impact on trade at the informal General Council meeting. According to trade officials, everyone that spoke expressed worry over the financial crisis. They also said that this was not the time for protectionism. The poorest countries expressed concerns about ODA (official development assistance) levels.
There were also
calls from some for a Ministerial meeting in December to conclude the
modalities in agriculture and non-agricultural market access (NAMA).
According to trade officials, these included the European Union, the
[However, several former trade negotiators and experts, as well as several trade diplomats remain sceptical over attempts to conclude in December modalities in agriculture and non-agricultural market access, or the attempts to promote and present the conclusion of Doha as a "contribution" to the financial crisis or even to "trade finance", and in particular commodity trade finance that is adversely affecting many developing country exporters. They argue that there can be no serious engagement until the new Obama administration is in control, and has decided on its trade policy and gets Congressional negotiating authority, and attempts to force the hands of the incoming administration or tie up the hands of major developing countries would prove counter-productive and even harmful to the WTO.- SUNS]
Speaking at a media briefing following the General Council meeting, Lamy said that the message from members (at the General Council meeting) is to reinforce the insurance policy on trade by concluding the Doha Round as soon as possible. This would mean achieving modalities on agriculture and NAMA before the end of the year (see below).
Speaking at the General Council, Lamy identified two problems with respect to the deterioration of trade finance. One is a shortage of liquidity to finance trade credits. The second is a general re-assessment of risks caused as much by the financial crisis as by the slowing down of the world economy. These problems are being felt most acutely by traders and banks in the emerging market economies, he said.
The world is experiencing
one of the most severe financial crises in modern history, with its
epicentre in the
Beyond this, the realization that an over-grown financial system had developed "bubbles", based on poor assessment of risk and questionable use of ample flows of liquidity, has been raising questions in countries and internationally about the need to provide a stronger skeleton to the international financial architecture.
"The financial crisis that we experience is a wake-up call indicating that the world economy cannot grow above the limits of its real production, and that feeding it by debt and liquidity may only provoke severe corrections," said Lamy.
This is not the first shock witnessed by the multilateral trading system. Despite its young age, the WTO has already faced previous episodes of financial crises, and has shown resilience. By keeping markets open during periods of financial and external payments crisis, the multilateral trading system has shown that it can give a chance to crisis-stricken countries to recover through trade.
"However, we have also learned from these periods that, to do so, access to trade finance at affordable rates must be maintained in such critical times to ensure that international trade can continue to play its shock-absorbing role."
Lamy highlighted some steps being taken to respond to the situation. He drew attention in particular to the announcement earlier this week by the President of the World Bank, Robert Zoellick, that he intends to propose to the Executive Board of the World Bank/IFC a tripling of the ceiling, to $3 billion, of the trade finance guarantees available under the IFC's trade finance facilitation programme.
The Berne Union
has also said that export credit agencies have been stepping in much
more actively in recent months. Collectively, they have increased their
business by more than 30% in the last 12 months, with an acceleration
since the summer. "We had confirmation that this increase in activity
is being backed by some national governments, for example,
As to what still needs to be done, Lamy said that 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. From that point of view, both the international financial institutions and the export credit agencies have the possibility to expand their contributions to cover risk and provide additional liquidity under existing instruments. But this will not happen without public authorities stepping in to provide them with more support.
"The market currently estimates the liquidity gap in trade finance at about $25 billion. This is a sizeable sum, but not enormous relative to the amounts that central banks have found it necessary to inject into financial and banking markets in the past couple of months," said Lamy.
The private banks believe that this gap could be filled reasonably comfortably through increased co-sharing partnerships with international financial institutions and export credit agencies to the extent that the trade finance and insurance programmes of these institutions are supported by their shareholders -- the member governments.
A second task that needs to be viewed over more of the medium term, Lamy said, is to improve mechanisms of information sharing, risk assessment techniques, and data collection on trade finance. That would expand the scope for co-financing trade between private banks themselves and between the banks and public sector institutions such as the IFIs and the ECAs (export credit agencies).
The market for trade finance is one of the most secure areas of banking and insurance activities and it has a strong multiplier effect on trade. At a time of decelerating trade and economic growth, investing resources to keep trade finance flowing has a vital role to play. "Contrast that with the costs of inaction. The countries most vulnerable to shortages of trade finance are the emerging market economies on whom we are counting to sustain trade and economic growth as the developed countries slow down."
This is a useful
message for the world leaders meeting in
"The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral," said Lamy, adding that at the national level, there will be risks, job losses, bankruptcies. There will inevitably be demand for greater safety nets and security which is legitimate. But there will also be demand for protectionist measures.
The political message that WTO members should send both inside the multilateral trading system and outside is that the WTO is ready to take this challenge with a strong sense of collective responsibility and solidarity. Members should resist calls for protectionists measures. The second message is of course to oppose financial chaos by further organized, regulated and balanced trade opening through the Doha Round, said Lamy. While countries struggle with the design of global financial rules, they could send a positive signal by better regulating international trade through the completion of the Doha Round.
years of negotiations, we have come a long way in our collective endeavour.
My sense is that we are not that far away from our objective of concluding
the Round, even if a number of tough nuts remain to be cracked, notably
in the agriculture and industrial modalities, which would be a stepping
stone towards a final
"My sense is that we can achieve modalities in these two areas by the year-end. I remain of the view that it is doable. And it is also even more desirable now than a year ago. But we now need to do it," Lamy concluded.
Speaking at the
General Council meeting,
Coupled with constraints that the LDCs are already facing in accessing markets of developed countries, including the myriad of Non-Tariff Barriers (NTBs) in the developed country markets, this means that demand for commodities from developing countries, particularly LDCs is likely to fall thereby spelling disaster in trade for developing countries and especially the LDCs. "Again, this is coming at a time when we are grappling with supply side constraints which have placed a huge burden on our competitiveness in global trade."
Among other important considerations are risks pertaining to FDI, Aid for Trade and commercial lending that could threaten LDCs' gains and opportunities, said Tanzania, adding that there are already indications that financial flows are going to drop drastically. The cost of borrowing would go up, pushing out some countries, particularly LDCs from borrowing as the risk factor increases and this in turn will have a bearing on reduced investments which lead to more sustainable development as compared to aid, which can address the short term crisis.
in market self-regulation brought us to the current state of affairs.
The epicentre was in the developed world, but we will all share the
aftermaths, as the real economy suffers from illiquid and expensive
financial markets," said
What the world and the global financial community need today is better governance, said Brazil, adding that such governance can only be credible or effective if it is more open and transparent. "We need a new architecture for the international financial system, one that has the tools to promote better governance and more equitable sustainable growth for all countries."
Brazil cited President Luiz Inacio Lula da Silva recently suggesting three guiding principles for this inevitable reform process: legitimacy - by means of increased participation of developing countries; enhanced supervision - by rethinking the role of the current institutions or by creating new ones; and transparency - among other mechanisms, WTO experience with peer reviews as the Trade Policy Reviews could be built on.
As for trade measures, Brazil noted that now, the least developed countries and developing countries are the ones that will suffer most from the closing of the major markets and by the depression of commodity prices due to weak demand and, above all, increased distortive subsidies. The WTO can contribute in three ways: (1) in avoiding the resort to trade barriers and distortive support; (2) by providing inspiration and expertise in the reform process of the financial system architecture; and (3) by carrying out the mandate of the Working Group on Trade, Debt and Finance.
Pointing to President Lula's statement at the G20 finance ministers' meeting in Sao Paulo last weekend where he said that the conclusion of the Round is no longer an opportunity, but is now a necessity, Brazil said that this necessity needs to be fulfilled immediately and for this to happen, modalities are needed promptly, if possible, before 2008 expires.
It should be added
that in crises like this, the least responsible are usually the worst
affected and the least able to cope. So naturally, said
As to what role
the WTO could play,
In light of this
unprecedented crisis, and its unknown future dimensions, the global
enterprise cannot be anymore the privilege of a few in the G-8 or even
the G-20, even though these groups can no doubt contribute in a positive
way to the debate, said
As to what can and should be done by the WTO, Egypt proposed that the WTO Secretariat prepare a report to assist Members through the crisis by examining and analyzing its impact on trade, including any infringements to the rules governing world trade, and to consider its effects on areas like commodities trading, trade finance, and the availability of trade related ODA including commitments pertaining to Aid for Trade and their implementation. "This report will no doubt help countries as they steer their ship in uncertain waters."
-- underline their determination to strengthen the multilateral rules based world trading system, and to re-commit to open markets and combating protectionism. The financial crisis should not lead to increased trade barriers that will hurt mostly developing countries and LDCs.
-- exercise the necessary political will to conclude the Doha Development Round and reach modalities as soon as possible. More than ever, the developmental components of the Round should be at the centre of efforts. Delivering developmental results mean that policy space for developing and LDCs' should be strengthened and preserved. Fulfilling the DDA implies not only concluding a fair and balanced agreement, but also securing the necessary special and differential treatment to developing members in all the negotiating tracks and resulting agreements.
-- avoid any spill-over from the current financial crisis to aid commitments by the donor community destined for the poorest and most vulnerable countries. This also applies to additional commitments relating to Aid for Trade. Moreover, maintaining the level of ODA is closely linked to the global agenda for achieving the MDGs. Given the lack of adequate social safety nets, heavy debt service, and falling commodity prices, it is expected that developing countries will be among the hardest hit by the current crisis.
-- Work towards providing the necessary guarantees for the smooth flow of credit for the purpose of financing trade, particularly to developing countries that are increasingly finding it hard to access the sources of credit at acceptable and reasonable conditions.
-- preserve and expand the trade flows of developing countries, as they constitute a vehicle for economic development, and a primary source of trade finance.
The reasons for
the financial crisis which erupted in some developed countries and has
quickly spread to the rest of the world are clear - macroeconomic policies
in some developed countries which have created huge domestic and external
imbalances, serious inadequacies in financial regulation and supervision
and an entirely cavalier approach to risk of major financial institutions,
The process of globalization has ensured that there are no safe havens from this contagion. As the financial crisis spreads to the real economies around the world, many developing countries confront the grim prospect of decades of hard work in alleviating poverty and improving livelihoods being undone. Reduced growth prospects in developing countries will have serious consequences for employment and poverty. Clearly, the impact of the financial crisis will be the most on those least equipped to face it.
At the media briefing following the General Council meeting, Lamy said that the basic message is that "trade finance is the most secure, the safest, the less toxic asset which you can trade in banking and insurance." On the one side, it's much safer than many other risks. On the other side, the absence of coping with that is a big hit for poor developing countries.
This is the message
which will be sent to the G20 leaders' meeting in
On trade and the financial crisis, Lamy said that many WTO members expressed views on this at the informal General Council meeting.
He pointed to two messages -- one being that "please make sure we all keep trade open, which means resisting protectionist pressures which will be there in the coming months." The second message is "let's try and reinforce this insurance policy we have together on trade by concluding the Round as soon as possible," which means calls to achieve modalities on agriculture and NAMA before the end of the year.
This message was coupled with the notion that it's extremely important that for developing countries, the development content of the Round should materialize as soon as possible in the background of the economic crisis, said Lamy. These messages will also go to the G20 meeting, Lamy added.
Asked if there would be another Ministerial meeting in December, Lamy said that two conditions would have to be met, namely, is there political energy available to enable a conclusion, as well as whether there are technical conditions in place so that ministers can make clear decisions. As things are today, he feels that he would not be able to convene a meeting right now at the Ministerial level.
Asked whether it
would be credible to hold a Ministerial meeting due to the changes in
the current lame-duck US administration, Lamy indicated that the Uruguay
Round, NAFTA and China PNTR were under a lame-duck administration. The
politics of that is that the
Asked about calls from a number of countries for a Ministerial meeting by year end to conclude the modalities, Lamy said that it was a bit too soon to say whether to change the stance on the decision on whether or not to have a Ministerial. "We need political energy and we need the right technical positions because substance drives the process and not deadlines."