TWN Info Service on Finance and Development (Nov08/03)
14 November 2008
Third World Network

Trade: Trade finance has "severely deteriorated", Lamy tells General Council
Published in SUNS #6590 dated 14 November 2008

Geneva, 13 Nov (Kanaga Raja) -- The market for trade finance has "severely deteriorated" over the last six months, and particularly since September, WTO Director-General Pascal Lamy told an informal meeting of the General Council Wednesday. He also stressed that concluding the Doha Round of trade negotiations "is also even more desirable now than a year ago."

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 United States, the African Group, Mauritius on behalf of the ACP Group, Brazil, Lesotho, Canada, Chile and Mexico. According to trade officials, the EU said that it was essential to get a deal done now.

[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 United States and spill-over effects for major financial centres around the world. The correction of asset values is so strong that it has systemic implications on the soundness and safety of the entire international financial system. Governments, central banks and regulatory authorities are acting on several fronts, injecting liquidity, re-capitalizing and restructuring financial institutions, and stopping risky behaviour that could further precipitate markets into depression.

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, Germany, Hong Kong China, and Japan," said Lamy.

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 Washington on 15 November, said Lamy.

"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.

"After seven 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 Doha deal."

"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, Tanzania, on behalf of the Least Developed Countries (LDCs) Group, said that the LDCs are not insulated from the vagaries of the current global financial crisis. It had no doubt that the crisis will have an impact on several socioeconomic indicators that affect growth, business and livelihood in LDCs, the majority of which depend on exports of raw materials.

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."

Tanzania said that while the LDCs are still negotiating on the implementation of duty-free, quota-free market access (DFQF), this is going to be severely affected as trade financing credit to mitigate the supply side constraints is also going to be impacted negatively. In short, trade in services is going to be affected. Regional and local banks in LDCs will definitely be hesitant to honour letters of credit from international banks, thus aggravating the problem.

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.

Tanzania said that the LDCs need to be assisted in carrying out a study that will indicate the extent of the global financial turmoil, its implications to their economies and what are the possible proactive and reactive policy measures need to be undertaken immediately. The policy measures would include elements such as tariff reduction on food inputs. Also, the argument for poor countries to deal with trade imbalances through devaluing their currency when fuel prices go up, should be avoided as it hurts the poor even more as they can no longer afford cheap high quality goods from developed countries.

In conclusion, Tanzania said that there is also the question of what can be done in the interim. Certainly, it is not possible for LDCs to bail out their companies or banks as has been done in the developed countries. For the LDCs, "our priority is to immediately operationalize the enhanced integrated framework (EIF) which is a facility dedicated to LDCs, without any hitch." LDCs should also be given priority to benefit from the Aid for Trade initiative. It is only through such measures that it will be possible to attain the MDGs of reducing poverty in the LDCs and adapt to and participate in global trade.

Brazil said that the current financial crisis has similarities but also striking differences from previous ones. The most striking dissimilarity is probably found in its origin as compared to the repeated shocks that afflicted the developing world over the past two decades. This time around, the instabilities originated in the developed world and they derived from the absence of effective control over the activities of the private financial institutions in key central economies.

"Blind belief 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 Brazil.

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.

Brazil said that it remains firmly convinced that the conclusion of the Doha Round is the best contribution the WTO can provide at this juncture to restore confidence by capturing the very significant outcomes already contained in the draft modalities texts. "The conclusion of modalities in NAMA and in agriculture with proportionate contributions from both developed and developing countries in market access and in trade-distorting measures is beyond doubt the most credible confidence booster we could provide to the international community. The opening of markets and reduction of subsidies are counter-cyclical actions that would have an immediate and positive impact on the world economy."

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.

China said that the effects of the current banking and financial crisis on international trade have been felt directly through the tightening of the market for trade finance for developing countries and LDCs. It said that banks are cautious in lending and the borrowing costs have increased sharply, giving rise to trade financing difficulties. In particular, banks are reluctant to provide letters of credit to importers, which suffocates the normal trade flow.

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 China, small and medium size enterprises in developing countries have been hurt worst by the financial crisis and the consequent dry-up of channels for credits and trade financing. China cited the latest prediction of the IMF which said that world trade growth will slow down to 4.9% in 2008, and further down to 4.1% in 2009. With the spread and deepening of the financial crisis, China said that it is also witnessing the increasing impacts on its export performance.

As to what role the WTO could play, China said that firstly, the WTO could mobilize trade-finance providers to increase funds. More importantly, trade financing should be made available at affordable rates. Secondly, China shared the view of the Director-General that trade is not the cause of financial turmoil, but good trade policies may be part of the solution. It is important that all Members maintain market opening, stay committed to the rules-based multilateral trading system and guard against protectionism.

Therefore, said China, an early conclusion of the Doha Development Agenda negotiations would send positive signals to the market and increase business confidence. Given that trade remedies, particularly anti-dumping, are the most convenient resorts for protectionist purposes, anti-dumping disciplines should be strengthened in the rules negotiations in order to prevent the abuse of anti-dumping measures.

Third, said China, Members should be encouraged to make efforts to expand domestic demand. In this respect, the State Council of China put forward ten measures to stimulate domestic demand last week. According to China, among these measures are to speed up construction of residences for people most in need, to speed up infrastructure construction in rural areas, and to speed up construction of major infrastructure such as railways, highways and airports.

Egypt said that there is no doubt that guaranteeing the smooth flow of credit for the purpose of financing trade is vital for traders worldwide, particularly those in developing and least developed countries that are increasingly finding it hard to access the sources of credit at acceptable and reasonable conditions. Challenges and crisis that take a global dimension require a concerted global response. This calls for changes in existing world governance structures which should be based on the fundamental principles of inclusive participation, democratic decision-making, transparent rules and ethical conduct.

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 Egypt. "If the WTO's key objective is to advance the multilateral trading system and to open the door for developing countries to better integrate in the world economy, we should protect the most vulnerable among them from the excesses, turmoil and voracity of 'markets' when left without the necessary checks and balances," said Egypt.

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."

Egypt said that within the context of the WTO, Member states should act in-concert to achieve the following goals:

-- 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.

Egypt expected this meeting to send a clear, strong and united message to the G20 summit in Washington to underline the necessity of taking the aforementioned goals into consideration. It is imperative "as we move forward not to adopt a course that continues to socialize the cost, while privatizing the profits, and more importantly that the solution to the crisis should not be at the expense of developing countries."

India said that it was encouraging to note that the major export credit suppliers are preparing to address the liquidity gap in trade finance. However, the availability of export credit with lending institutions is only one part of the solution. The other part is the actual disbursements based on risk assessments in a gloomy market scenario. "We have to find ways through which liquidity is made to flow to exporters at affordable prices."

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, said India.

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.

India said that its economy continues to be robust in its fundamentals but is beginning to feel the impact of the crisis. It noted that as a result of the turbulence in international capital markets, foreign capital inflows have been affected. There have been net outflows of portfolio investments by Foreign Institutional Investors of around $7.5 billion this year. It also said that due to the general risk aversion in international financial markets, the cost of trade finance has increased and its availability has come down.

India said that this is essentially a crisis of confidence and cannot be resolved unless confidence returns to international financial markets. The G20 meeting in Washington over the weekend provides an opportunity for leaders to address this deficit. "In order to restore confidence, it is important for all of us to reaffirm our faith in collective action, in open markets and the rules based trading system. Recourse to protectionism in not an option. An early conclusion of the Doha Round based on its development mandate is essential."

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 Washington on 15 November. "I hope they will pay the necessary attention to this part of the problem," said Lamy.

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 US administration is negotiating at the negotiating table. The US authorities have the possibility to negotiate, said Lamy, adding that what is being discussed now is modalities and not the final deal, which anyhow will have to go to the US Congress for ratification. This is where the real issue lies at the end of the day.

[The Uruguay Round negotiations stalled during the administration of George H. W. Bush. In November 1992, Bill Clinton defeated Bush Sr in the Presidential election and entered the White House in January 1993; it was only thereafter, with Clinton as President, that negotiations were resumed (with the US and EC manoeuvring to get a new GATT Director-General, Peter Sutherland appointed in place of Arthur Dunkel). Even then the Clinton administration reopened several of the key parts of the "Dunkel text" of 1991, and got them changed, and agreement at official level was concluded in December 1993, with Micky Kantor as the USTR. And while NAFTA was concluded and signed by chief negotiators of Canada, Mexico and the US in October 1992 (when Bush Sr was the President), it was President Clinton who signed the NAFTA in December 1993, and got it through the US Congress on the basis of two supplemental side agreements on environment and labour. In the cases of both NAFTA, and the Uruguay Round's Marrakesh Treaty, however, the administration could act under the Congressional Fast Track authority granted to the Bush Sr. administration and that was still in force. Currently, the US administration of George W Bush has no Congressional authority. - SUNS]

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."