WTO E-LEARNING
COPYRIGHT ©
Introduction to Trade Finance
and the WTO
OBJECTIVES

Present the importance of finance for the expansion of trade, how
market failures and financial crises may pose a threat to the
availability of trade finance globally and hence affect global trade;

Explain international initiatives that have involved the WTO in
supporting the availability and affordability of trade finance, in
particular in favour of developing countries.
My Course series
12
I.
INTRODUCTION
This is a multimedia course on trade finance and the WTO. This course comprises this explanatory text,
frequently asked questions and self-assessment quizzes which you can use to measure your understanding of
this course. It is also supported by a video presentation covering most issues dealt with in the written
presentation, entitled "Trade Finance: the Grease in the Wheels of Trade" (recently updated: "Update on Trade
Finance").
Aim of this presentation
The aim of this multimedia presentation is to provide elements to understand the importance of finance for the
expansion of trade, how market failures and financial crises may pose a threat to the availability of trade
finance globally and hence affect global trade, and to explain international initiatives that have involved the
WTO in supporting the availability and affordability of trade finance, in particular in favour of developing
countries. Work on trade finance has expanded in the WTO, both in the context of the WTO's Coherence
Mandate, as the WTO cooperates with a wealth of international institutions in this domain, and in the
framework of the WTO Working Group on Trade, Debt and Finance. The progress made towards improved
availability of trade finance in least developed countries has an obvious link with Aid-for-Trade.
Structure of this presentation
The presentation deals with the following questions and topics:
1.
Why and how does finance matters for trade?
2.
Trade finance and financial crises
3.
The role of the WTO in trade finance
4.
The big trade collapse and role of trade finance
5.
Remaining structural weaknesses in low-income countries
6.
Statistical difficulties
7.
Regulatory costs and trade finance
8.
Looking ahead: challenges of trade finance in a context of financial deleveraging
9.
Bibliography
After the bibliography, one can find self-assessment questions and answers to frequently asked questions.
2
II.
WHY AND HOW DOES FINANCE MATTERS FOR
TRADE?
Finance is the 'oil' of commerce. The expansion of international trade and investment depends on reliable,
adequate, and cost-effective sources of financing. For decades, the financial sector has efficiently supported
the expansion of world trade by delivering trade credit.
Most trade credit is short-term (some 80% of the total, according to market surveys). Short-term trade
credit is necessary for most international trade transactions because a time-lag exists between the production
of the goods and their shipment by the exporter, on the one hand, and reception by the importer, on the other.
Generally, exporters would require payment, at the latest, upon shipment (at the earliest upon ordering), while
importers would expect to pay, at the earliest, upon reception. This time lag generally justifies the existence of
a credit or a guarantee of payment. The credit can either be extended directly between firms - a supplier or a
buyer's credit, or by banking intermediaries, which may offer the exporter or the importer to carry for them
part of payment risk (and some other risks involved in the international trade transaction) for a fee. For
example, under a letter of credit, the bank of the buyer provides a guarantee to the seller that it will be paid
regardless of whether the buyer ultimately fails to pay. The risk that the buyer will fail to pay is hence
transferred from the seller to the letter of credit's issuer.
In many cases, international trade credit is guaranteed by some form of credit insurance. This is the
case for inter-company credit, of which a large share is insured. Trade and investment credit insurers, formerly
known as export credit agencies, are integral and important actors of the trade finance industry. Atradius (a
company specialized in inter-company trade credit insurance), Hermes-Euler, Sinosure, and Coface are among
the largest players in the trade credit insurance industry.
Trade Finance is one of the safest forms of finance. While the commercial risks involved in an
international trade transaction seem in principle to be larger than in a domestic trade transaction (risk of nonpayment, risk of loss or alteration of the merchandises during shipment, exchange rate risk), trade finance is
generally considered to be a particularly safe form of finance, as it is underwritten by long-standing practices
and procedures used by banks and traders, strong collateral and documented credit operations. According to
the International Chamber of Commerce's (ICC) "trade finance loss register", the average default rate on
short-term international trade credit is no larger than 0.2%, of which 60% is recovered. This low-risk, lowdefault segment of credit also generated relatively low fees per transaction, as a recognition of its relatively
routine character. However, despite of trade finance being a routine task, at the same time it is systemic for
trade.
Despite the safety and soundness of trade finance, as described below, the availability of short-term trade
credit finance can be hit by contagion from other segments of the financial industry. As indicated
above, the dependence of trade on short-term financing is explained by the fact that little international trade is
paid in cash, and that the very existence of a time lag (on average 90-100 days) between the export of goods
and the payment, justifies the need for credit and/or a guarantee. Furthermore, non-bank intermediated, interfirm credit is often insured. Thus, in almost all cases the financial sector is involved in an international trade
transaction through credit, guarantee or credit insurance. Figure 1 below shows that there is a strong
correlation between the fluctuations in the volumes of trade finance and the volumes of trade flows (imports in
this case), globally, over the recent period.
3
Figure 1: The relation between imports and insured trade credits in million US$ (averaged over all countries)
Source: Auboin and Engemann (2012)
More information
More information on the mechanics of trade finance is available from key professional organizations, including
the International Chamber of Commerce and the International Institute for Finance. In particular, for more
information on the characteristics of trade finance, its instruments, the understanding of terms and of
commercial documentation, we suggest that you either consult the specific e-training module from the
International Institute for Finance; and/or the documentation made available by the website of the
International Chamber of Commerce's (ICC) Banking Commission, at http://www.iccwbo.org/advocacycodes-and-rules/
4
III.
TRADE FINANCE AND FINANCIAL CRISES
Until the financial crises of the 1990s and the 2008-09 financial crisis, trade finance had been taken for
granted. But the crises periods created distortions in the trade finance market which made policy interventions
necessary.
THE ASIAN AND LATIN AMERICAN CRISES: A WARNING CALL FOR TRADE FINANCE
With the expansion of global inter-bank markets, private credit markets have become dominant in
the 1990's in the financing of short-term trade. Inter-bank links have been disturbed during the Asian
and Latin American financial crisis of the late 1990s, when foreign "correspondent" banks reconsidered existing
exposures to local banks, in the context of a solvency crisis affecting local financial institutions. In the most
extreme cases, trade credit lines had been interrupted and outstanding debt left pending. Shortly after this
crisis, multilateral institutions engaged with market participants and public sector actors in a "debriefing"
exercise aimed at understanding why trade finance had been interrupted in this crisis, the dynamics at play,
possible "market failures" and public action needed in response to such events (Box 1).
Box 1:
Trade finance markets in crisis: market failure? How and when?
The IMF and WTO analysed the factors behind the fall in trade finance and trade flows during the financial
crisis of emerging economies in Asia and Latin America in the period of 1997-2001. The IMF attributed such
declines to:

"[…] the interaction between perceived risks and the leveraged positions of banks,

the lack of sufficient differentiation between short-term, self-liquidating trade credits, and other
categories of credit exposure by rating agencies,

herd behaviour among trade finance providers such as banks and trade insurers, as decision making by
international providers of trade finance during crises is often dominated by perceptions rather than
fundamentals,

and weak domestic banking systems."
The WTO pointed to the widening of the gap between the actual levels of risks and the perceived levels of risks
during periods of financial crisis, as well as the confusion between the company risk and the country risk,
which, altogether, led foreign banks to cut exposure for all customers. The "herd behaviour" that resulted in a
general withdrawal by international banks had been encouraged by the lack of transparency and adequate
information regarding companies' balance sheets in the countries concerned, as well as worrying signals sent
by credit rating agencies, which, after failing to detect the onset of the crisis, downgraded the affected
countries abruptly.
Source:
IMF
(2003),
Trade
Finance
in
Financial
Crises:
Assessment
of
Key
Issues,
available
at
http://www.imf.org/external/np/pdr/cr/2003/eng/120903.htm; and, WTO (2004), Improving the Availability of
Trade
Finance
During
Financial
Crises,
Discussion
Paper
no.
2,
available
at
http://www.wto.org/english/res_e/publications_e/disc_paper2_e.htm
5
IV.
THE ROLE OF THE WTO IN TRADE FINANCE
The institutional case for the WTO to be concerned about the scarcity of trade finance during
periods of crisis has been relatively clear since the onset of the Asian financial crisis. In situations of
extreme financial crises, such as those experienced by emerging economies in the 1990's, the credit crunch
had reduced access to trade finance already in the short-term segment of the market and hence trade, which
would usually be the prime vector of balance of payments' recovery. The credit crunch had also affected some
countries during the Asian financial crisis to the point of bringing them to a halt, as explained above. In the
immediate aftermath of the currency crisis, a large amount of outstanding credit lines for trade had to be
rescheduled by creditors and debtors, to re-ignite trade flows and hence the economy. Under the umbrella of
the Marrakech Mandate on Coherence, the heads of the WTO, IMF and World Bank convened in 2003 an expert
group of trade finance practitioners (The "Expert Group on Trade Finance") to examine what went wrong in the
trade finance market and eventually to prepare contingencies. For more on the reports of the Expert Group on
Trade Finance, go to: http://www.wto.org/english/tratop_e/devel_e/wgtdf_e.htm#trade_financing
The conclusions of the experts were summarised in the above two documents, by the IMF (2003), and by the
WTO (2004). The case for the involvement of international organizations and multilateral development banks
has been discussed in these two documents. It is based on the idea that trade finance is, as indicated above,
very secure, short-term, self-liquidating form of finance, normally not subject to many market failures. Even in
some of the most acute periods of financial crises (1825, 1930), international credit lines have never been cut
off. For centuries, the expansion of trade finance has depended fluid and secured financing instruments, and a
wide range of credit insurance products, provided by private and public sector institutions (including national
export credit agencies, regional development banks and the World Bank/IFC). The primary market for trade
finance instruments was in addition backed by a rather liquid international secondary market, for example for
letters of credit and bank acceptances. Trade finance normally offers a high degree of security to the trade
transaction and its payment, and hence is regarded as a prime quality asset. For this reason, such prime,
secure corporate lending carries normally little risk and hence a small fee (typically, a few basis points over the
LIBOR for a prime borrower. However, as indicated above since the Asian crisis the trade finance market has
not been totally immune from general reassessments of risk, sharp squeezes in overall market liquidity, or
herd behaviour in the case of runs on currencies or repatriation of foreign assets.
Director-General Lamy has convened the Expert Group on Trade Finance on a regular basis since
2007. The Expert Group on Trade Finance is playing a very useful role in identifying gaps in the trade finance
markets, and to propose policy measures to fill such gaps. The Expert Group also provides a useful forum to
trade finance stakeholders to discuss issues of common interest to the trade finance industry. After each
meeting of the Expert Group on Trade Finance, the Secretariat reports to WTO Members through the WTO
Working Group on Trade, Debt and Finance. In 2011, the Expert Group on Trade Finance was asked by the G20 to report on the effectiveness of trade finance programmes aimed at supplying trade finance to the poorest
countries in the world (Annex 1). The Expert Group concluded that trade finance facilitation programmes run
by regional development banks should be enhanced where they existed, and created where they did not exist
yet (in Africa for example). The Expert Group has made considerable headways in several areas of trade
finance, inter alia in: developing market surveys providing data and trends to identify market gaps; expanding
co-operation between public and private sectors actors in periods of crisis; developing a trade credit register of
millions of trade credit transactions aimed at verifying the safety of trade finance; fostering the dialogue with
international prudential and other regulatory agencies; discussing ways and means to improve trade finance
availability in developing countries.
6
The Expert Group on Trade Finance brings together representatives of the main players in trade finance,
including the World Bank’s International Finance Corporation (IFC), regional development banks, export credit
agencies and big commercial banks, as well as the International Chamber of Commerce (ICC) commercial
banks and other international organizations.
7
V.
THE BIG TRADE COLLAPSE AND TRADE
FINANCE
Some of the causes of the trade credit crunch in the Asian and Latin American financial turmoil
were also identified in the 2008-09 financial crisis (herd behaviour, increased gap between the level of
risk and its perception, market concentration, confusion between country and counterparty risk). Since the
Asian crisis period, market "thermometers" had been developed, recommended by the 2003 IMF and WTO
papers, to have a better grasp on broad market trends. Both the International Chamber of Commerce’s (ICC)
Banking Commission and the Bankers Association for Trade and Finance (BAFT) produced timely surveys
during the crisis period (ICC (2009); IMF-BAFT (2009)). By the time of the London G-20 Summit, in April
2009, the surveys had provided a confirmation of the sharp deterioration (lower volumes, higher prices) of
trade finance markets and the appearance of shortages in some regions.
It appeared that the overall
tightening of liquidity on inter-bank markets had affected trade credit supply by contagion: not only liquidity
was insufficient to finance all requests for lending, but trade lending was also affected by the general reassessment of risk linked to the worsening of global economic activities (for a deeper examination of ICC trade
finance
market
surveys,
go
to:
http://www.iccwbo.org/About-ICC/Policy-Commissions/Banking/Task-
forces/Market-Intelligence/
Academic interest in trade finance rose in this period, as part of the overall search for plausible explanations
for the "big trade collapse", when global trade outpaced the drop in GDP by a factor that was much larger than
anticipated under standard models.
As summarized by Eichengreen & O’Rourke (2012): "the roots of this
collapse of trade remain to be fully understood, although recent research has begun to shed light on some of
the causes (see Baldwin (2009); and Chor & Manova (2012))". While most authors agree that the fall in
demand has been largely responsible for the drop in trade flows, the debate focused on the extent to which
other potential culprits, such as trade restrictions, a lack of trade finance, vertical specialization, and the
composition of trade, may have played a role. Although the exact amount of "missing" trade finance may
remain unknown globally, the literature produced in this context made progress in highlighting the wider link
existing between financial conditions, trade finance and trade. Firm-level empirical work has considerably
helped in establishing this causality. Box 2 provides a summary of the recent findings by academia.
Box 2: Main academic work on the "trade finance channel"
Amiti & Weinstein (2011) established the causality between firms' exports, their ability to obtain credit and the
health of their banks. Using firm-level data from 1990 to 2010, they suggest that the trade finance channel
accounted for about 20% of the decline in Japan's exports during the financial crisis of 2008-09. They showed
that exporters are more reliant on trade credit and guarantees than domestic producers, and that firms
working with troubled banks saw their foreign sales drop more than that of their competitors. Multinational
enterprises seem less affected, notably because a large part of multinational's trade is intra-firm, which
exhibits less risk, and because they are able to optimize the production-to-trade cycle, thereby minimizing
working capital needs: the shorter the lag between production and payment, the less finance is a problem.
In the same vein, Bricongne et al. (2012) found that sectors highly dependent on external finance have been
most severely hit by the financial crisis and experienced the largest drop in their export activity in the recent
crisis. Using monthly data for individual French exporters at the product and destination level, the authors also
tested whether firms with heterogeneous characteristics had been affected differently by the crisis. They
found, however, that small and large firms had been similarly hit by the crisis. Using data on US imports, Chor
& Manova (2012) also found that credit conditions were one channel through which the crisis led to the
8
collapse in trade. Countries with tighter credit markets, measured by their interbank interest rates, exported
less to the US during the recent financial crisis. This effect was especially strong for financially vulnerable
industries. Financially vulnerable industries, categorized by Chor & Manova (2012) as those that require
extensive external financing, have limited access to trade credit, especially during the peak of the financial
crisis. Some papers, however, did not find at all or only found a limited role for trade finance in the "great
trade collapse" (for example Paravisini et al. (2011), and Levchenko et al. (2010)).
PUBLIC INTERVENTION
There is a legitimate debate as to the extent of the gap of unfunded trade transactions during the
2008-09 crisis. However, it was difficult to deny, in the face of all available information, that the liquidity
crisis in the fall of 2008 and the subsequent general re-evaluation of counterparty risk, did not affect the trade
finance markets in terms of higher prices and lower volumes. In a concentrated market, there were credible
concerns that a large private bank could ‘pull back’, thereby inflicting further damages to trade volumes in the
short-to-medium run. One difference between leveraged finance (derivatives) and unleveraged finance (trade
finance) is that the decline in unleveraged finance has a direct, immediate effect on real economy transactions
(the one-to-one relationship between the value of the merchandise and its financing).
The process which led the G-20 Summit in London (April 2009), in response to these concerns, to
ensure support for $ 250 billion of trade finance for 2 years, has been well documented (Auboin,
2009; Chauffour & Malouche, 2011). For the original G-20 Declaration of Heads of States, and its paragraph
on
trade
finance,
see
Article
22
of:
http://www.canadainternational.gc.ca/g20/summit-
sommet/g20/declaration_010209.aspx?view=d
More information
For more details on the G-20 support package, please see: http://www.voxeu.org/article/tradefinance-g20-and-follow
The G-20 agreed to provide temporary and extraordinary crisis-related trade finance support that would be
delivered on a basis that respected the need to avoid protectionism and would not result in the long run
displacement of private market activity. This trade finance "package" involved a mix of instruments allowing for
greater co-lending and risk co-sharing between banks and public-backed international and national institutions.
The "follow-up" working group, established by the G-20 to monitor the implementation of the London trade
finance initiative, indicated that after one year some $170 billion in extra-"capacity" have been used by
markets, out of the total commitment of $ 250 billion.
9
The question of whether a specific, tailor-made trade finance "package" was required, notably at a
time when central banks injected large amounts of liquidity, can be legitimately posed - as it was in
the G-20. The answer was two-fold: a large share of the additional liquidity provided by central banks at the
time was not intermediated into new loans. Hence, it did finance "new" trade transactions. Second, the liquidity
injection of the central banks did not answer the growing problem of risk aversion, as the crisis spread. The
perception of risk of non-payment increased disproportionately relative to the actual level of risk. This
manifested itself in a sharp increase in the demand by traders for short-term trade credit insurance or
guarantees, which the G-20 package answered by committing to supply greater "capacity" through export
credit agencies.
As for any public intervention, the question as to whether the G-20 package carried an element of
"moral hazard" arose. The concept of moral hazard is one linked to the existence of a market
failure. In addition to the recurrent factors identified in Box 1, the 2008-09 financial crisis did not fall short of
market failures, starting with the failures by credit rating agencies and all other market surveillance
mechanisms to detect early signs of deterioration of banks' general soundness, in particular the multiplication
of off-balance sheet operations and subsequent deterioration of the risk profile of banks. Another failure of
markets is, despite the experience of many periods of stress, the absence of a proper "learning curve" allowing
for a better differentiation between "ill" market segments and safe ones.
10
VI.
REMAINING STRUCTURAL WEAKNESSES IN
LOW-INCOME COUNTRIES
The G-20 package provided financing and guarantee facilities where it was needed, and it helped
restore confidence. However, the road to recovery in trade finance markets has been relatively bumpy and
uneven across countries. Since 2010, the recovery has been stronger in the fastest growing "routes" of trade,
in line with the recovery of trade demand and improved financial market conditions. This was the case in North
America, Asia, and between Asia and the rest of the World. In these areas, spreads (fees above the base
interest rates) had fallen, albeit not to pre-crisis levels, with a difference between traditional trade finance
instruments (letters of credit), which prices fell to low levels on the "best" Asian risks, and so-called funded
trade finance products (on-balance sheet, open-account transactions), which higher prices reflected relatively
large liquidity premia – the latter prices being still up to 40-50% higher than before the financial crisis. This
situation was explained by a banking environment in which capital had become scarcer and the selectivity of
risks greater.
At the G20 Summit in Seoul, Heads of States and Governments had been sensitive to the fact that
traders at the "periphery" of grand trade routes, particularly low-income countries, remained subject to
difficulties in accessing trade finance at affordable cost. Under paragraph 44 of the Seoul Summit
Declaration, they asked that "the G-20 Trade Finance Expert Group, together with the WTO Expert Group on
Trade Finance and the OECD Expert Credit Group to further assess the current need for trade finance in LICs,
and if a gap is identified, will develop and support measures to increase the availability of trade finance in LICs.
We call on the WTO to review the effectiveness of existing trade finance programs for LICs and to report on
actions and recommendations as for the consideration by the Sherpas through the G20 Development Working
Group in February 2011."
More information
For
more
information
on
the
G-20
statement
and
request
in
Seoul,
please
go
to:
http://www.voxeu.org/article/fixing-trade-finance-low-income-nations-g20-mandate
The report from the WTO Expert Group on Trade Finance has been well received at the meeting of
the G-20 Sherpas. It had revealed that only a third of the 60 poorest countries in the world benefited
regularly from the services offered under these trade finance programs. The lack of risk mitigation programs in
these countries partly explained the very high fees and collateral requirements paid by local importers. Such
high fees were out of line with risk statistics revealed by the International Chamber of Commerce's loss default
register on trade finance. Given the strong demand for these programs and their development orientation, the
Director-General of the WTO supported the Report' recommendations that the priority was to strengthen trade
finance facilitation programs where they existed, and create some where they did not yet exist. Time was of
essence in reaching these goals. From a geographical point of view, priorities were in Africa and Asia.
The WTO Expert Group on Trade Finance further confirmed the diagnosis that too many small businesses in
small countries having limited financial sector capacity to oil trade were increasingly requesting support from
multilateral development banks. As a result, the Director-General of the WTO committed to provide support to
MDBs willing to extend their trade finance programs, as recommended by the Report. It was important that the
WTO continued to address the challenges of trade finance with its multilateral partners because a lack of
adequate functioning of trade finance markets could be as important a barrier to trade as more traditional
obstacles. There was a risk of a market divide between the "haves" and "haves not", a risk that could be
11
increased by the "unintended consequences" of prudential regulation affecting trade finance. On that front too,
a fruitful dialogue had been initiated with the competent bodies of the Financial Stability Board – with
proposals expected by the G-20 Summit in Cannes.
ANNEX 1: WHAT ARE THE TRADE FINANCE FACILITATION PROGRAMS OF MDBS AND
THE IFC
In the past decade or so, MDBs and the IFC have developed trade finance facilitation programmes aimed at
supporting trade transactions at the "lower end" of trade finance markets – transactions ranging from a few
thousands of dollars to a maximum of a few millions. The average of such transactions, depending on
programmes and regions, is valued between $250,000 and $1 million, and hence often involves small and
medium sized enterprises at both ends of the trade transaction. Trade finance facilitation programmes provide
risk mitigation capacity (guarantees) to both issuing and confirming banks, to allow in particular for rapid
endorsement of letters of credit – a major instrument used to finance trade transactions between developing
countries players, and between developed and developing countries. The guarantee limits of these programs
have been increased in the fall of 2008, as the recognition that they were playing an important role in
protecting trade from vulnerable traders and banks, particularly in developing countries, during periods of
crisis.
The demand for these programs is still very strong in all regions of the world. Human capacity or financing limit
constraints do not always allow MDBs to cover all needs. Trade Finance Facilitation programs have been
developed in relatively standard way by to allow for the existence of a world-wide network allowing global
commercial banks to get support/coverage from at least one development bank in supporting its customers
(traders) in the various regions of the world. While the IFC started to cover African countries (in particular IDAeligible and post-conflict States), it eventually diversified its activities around the world – although its exposure
in Africa as a share of its program is significant. Although most of the African IDA-eligible countries have
benefited from at least one guarantee from the IFC, several Sub-Saharan countries have not been able to
secure more than a few guarantees from the IFC, simply as a result of a lack of resources at the IFC. The
initiation of a similar program at the African Development Bank is certainly complementing the very useful
support provided by the IFC, and further help African countries that need further risk mitigation.
More information
For more information on trade finance activities of multilateral institutions, please consult;

For
the
African
Development
Bank:
http://www.afdb.org/en/topics-and-sectors/initiatives-
partnerships/trade-finance-initiative/

For the Asian Development Bank: http://www.adb.org/site/private-sector-financing/trade-financeprogram

For
the
European
Bank
for
Reconstruction
and
Development
Bank:
http://www.ebrd.com/pages/workingwithus/trade.shtml

For the Inter-American Development Bank: http://www.iadb.org/en/news/news-releases/2010-1021/idb-and-trade-finance-faciliation-program,8316.html

For
the
International
Financial
Corporation
(World
Bank
Group):
http://www1.ifc.org/wps/wcm/connect/Industry_EXT_Content/

For
the
Islamic
Development
Bank
(Islamic
Trade
Finance
Corporation):
http://www.itfc-
idb.org/content/what-itfc
12
Between 2008 and 2010, thanks to the exceptional mobilization of MDBs and the IFC during the crisis, the total
volume of trade covered by existing trade finance facilitation programmes has increased by 150% (to a total of
almost $25 billion), and the number of trade transactions covered by 75%. The support of MDBs and the IFC is
therefore very important for trade in developing and low income countries.
Table 1: Regional Trade Finance Facilitation Programmes (cumulative to end 2010)
IFI
Started
Number
of
(year)
transactions
Trade
credit
lines/guarantees
Issuing
Confirming
banks
banks
($ billion)
Total
Number
of
Countries
Covered
EBRD
1999
9,800
8.8
115
644
20
IFC
2005
7,466
9.5
199
210
82
IaDB
2005
1,052
1.1
69
239
18
ADB
2004
2,433
5.2
101
101
14
13
VII. THE STATISTICAL DIFFICULTIES
Why is the international community relying on surveys and not on a comprehensive set of
international statistics for trade finance? Up until 2004, under the combined efforts of four international
agencies, i.e. the IMF, World Bank, BIS and OECD, a series of trade finance statistics was derived from balance
of payments and BIS banking statistics. Apparently the cost-to-quality ratio of these statistics led the agencies
concerned to discontinue their collective effort. At the present moment the only available and reliable source of
statistics concerning trade finance comes from the Berne Union database, which provides data of export credit
agencies' amounts of business (mainly trade credit insurance). Survey-based data on banks is of great help in
the short-run, but of limited if it was used for regular reporting given the very large amount of transactions
carried by them, the wide variety and variability of trade instruments used at different periods of time
(overdraft and open account; documented credit) and, more importantly, the difficulty to obtain from the main
banks commercially-sensitive and proprietary data.
The only way to obtain comprehensive information on an on-going basis would be through the
balance of payments. Here the confidentiality issue largely disappears as data is collected on an aggregate
basis (country level) and according to the resident and non-resident criterion of the balance of payments.
Although short-term trade credit has been made an item for balance of payment compilers under the IMF's 5th
Manual on Balance of Payment Statistics, it has always proved difficult to collect, because of the following
reasons: first, it is part of overall short-term capital movements (accounting global for a third to half of total
movement), and hence it makes it particularly difficult for global banks to retrieve from its various regional
trade finance regional centres (say, Tokyo, Singapore, Hong-Kong, Dubai, Geneva, London) and reconcile.
Equally, back-office of banks may not always be in a position to distinguish the various kinds of inter-bank
lending activities, the difference between treasury management of receivables under open account operations
and outright unsecured lending under such operations being extremely difficult to capture from a statistical
point of view.
There is also difficulties for statistical compilers in trading and financial centres to reconcile the process of
intermediation between incoming or outgoing short-term capital flows, longer term flows and other flows (such
as trade flows), the characteristics of such financial centres being that capital may change nature in the
process of turning inflows into outflows. This has been a long-standing difficulty faced by the IMF Standing
Committee on Balance of Payments statistics, which have not been made easier by the 10 or 15-fold increase
in short-term capital movements in the past decade.
At the bank level, ideally, pieces of sophisticated software in back-offices of any particular bank should be able
to itemize trade finance deals and their counter-party for balance of payments' monthly declarations, without
any discrepancy. However, the cost of such installation is very high and only a few global banks may be able to
implement it, particularly given the changing nature of the market (both the ICC and IMF-BAFT survey are
pointing to a relative fall in open account transactions and a re-securitization and re-intermediation of trade
credits in present circumstances due to the increase risk perception), the existence of various regional centres,
and the growing impact of global supply chain operations and financing in today's world trade. At the statistical
level globally, it would be important in drafting and implementing the upcoming 6th manual of the Balance of
payments to make the compilation of trade finance statistics a real priority.
14
VIII. REGULATORY COST AND TRADE FINANCE
The expansion of world trade depends on the proper, stable, and predictable functioning of the financial
system. As a result, the strengthening of the world trading system and of world prudential rules are
self-supporting objectives. However, in a joint letter sent to the G-20 Leaders in Seoul, the Heads of the
World Bank Group and the WTO raised the issue of the potential unintended consequences of new global
prudential rules (so-called Basel II and III frameworks) on the availability of trade finance in low-income
countries. While trade finance received preferential regulatory treatment under the Basel I framework, in
recognition of its safe, mostly short-term character, the implementation of some provision of Basel II already
proved difficult for trade. The application of risk weights and the confusion between country and counterparty
risks have not been particularly advantageous for banks willing to finance trade transactions with partners from
developing countries. Basel III added to these requirements a 100% leverage ratio on letters of credit, which
are primarily used by developing countries. At a time when more risk-averse suppliers of trade credit revised
their general exposure, the application of more stringent regulatory requirements raised doubts about
profitability and incentives to engage in trade finance relative to other categories of assets.
As a result, these issues have been discussed by the Basel Committee on Banking Supervision's Policy
Development Group and the institutions concerned with trade finance, notably the WTO, the World Bank and
the ICC. The Basel Committee on Banking Supervision discussed which measures of the prudential regulation
affecting trade finance was most detrimental to trade and trade finance availability, with a particular focus on
low income countries. Based on proposals made by the WTO and the World Bank, it decided on October 25,
2011 to waive the obligation to capitalize short-term letters of credit for one full year, as average maturity was
established to be between 90 and 115 days. This measure has the potential to unblock hundreds of millions of
$ to finance more trade transactions. See in particular: http://www.bis.org/publ/bcbs205.pdf
The Director-General of the WTO continued to conduct discussions with the President of the Financial Stability
Board (FSB) in 2012, with a view to clarifying the conditions of the waiver on the one-year maturity floor for
self-liquidating trade finance instruments, the provisions regarding liquidity rules applying to short-term trade
finance (less than 30 days), and the application of the leverage ratio to trade instruments.
The Director-
General hoped that the WTO would soon meet with the Basel Committee's Committee on the leverage ratio. He
also confirmed with the EU Commission that the EU's planned to set the credit conversion factor for the
calculation of the leverage ratio at rates below 100% for some products. In any case, the inter-institutional
dialogue helped improve the understanding of trade finance products and the need to achieve adequate
prudential regulation. Hence the dialogue with Basel Members should be fact-based, and ought to be fed by
more data collected by the industry. There was a need, in particular, for country specific-data to be drawn from
the ICC registry. The registry constituted a true public good, that had been taken seriously by the Basel
Committee and that could provide important information in respect of promoting trade finance vis-à-vis rating
agencies.
Discussions have also taken in the WTO Expert Group on Trade Finance on other non-prudential regulatory
issues described as "know-your-customers" (KYC) requirements. The discussion did not focus so much on the
regulatory requirements themselves, rather on the various ways that they are being structured, defined and
implemented according to different countries and regions. The Director-General provided a general perspective
on this topic: the WTO was about opening trade and one way to do this was to facilitate trade- hence WTO
involvement in trade finance issues; the KYC issue came in as other regulatory or compliance issues; hence the
point was not whether these were needed or not, rather the focus should be whether these regulatory
compliance issues, depending on how they were structured and implemented, could damage the weakest in
trade markets. The WTO had a specific duty to these weak market participants - a reason why the WTO was
involved in the SPS facility (STDF), for example. However, the WTO was not the sectoral regulator for such
15
topics. The main concern for the WTO was when the structure, implementation or difference between
regulations had a trade clogging impact.
16
IX.
LOOKING AHEAD: CHALLENGES OF TRADE
FINANCE IN A CONTEXT OF FINANCIAL
DELEVERAGING
WILL THERE BE A LACK OF TRADE FINANCE IF THE FINANCIAL SECTOR CONTRACTS?
Normally, financial turmoil is not a secular change and hence should not matter for trade in the
long run if it leads to an orderly downsizing of the financial sector. One key question discussed in this
section is whether a downsizing of the financial sector at large could potentially lead to a reduction in the
supply of trade finance as well - and hence hamper the future expansion of trade.
As suggested by the BIS 2012 Annual Report, the European and U.S. banking sectors are currently undergoing
a similar period of "de-leveraging" of bank balance sheets that might result in a "welcome downsizing of the
banking sector over the long run" (BIS (2012), p.69). One may argue that it will lead to more sustainable and
sound financial conditions in the economy. Considering that the expansion of the global financial industry in the
2000's (be it measured by its share in GDP or the share of total credit to incomes) has been encouraged by
excess "leveraging" of banks and risk-taking, a period of credit moderation and more realistic returns on
capital would be yielding substantial economic benefits: more prudent lending policies, falling debt to income
ratios, and a return to more normal allocation of capital resources that had been diverted from other sectors
because of artificially high returns in the financial sector.
However, financial crises, when triggered by the outburst of asset bubbles (real estate or financial assets), may
lead to strong and lengthy corrections in the financial sector, with long-lasting effects on the economy.
Downsizing can be a lengthy and bumpy process, which may also lead to adverse macroeconomic and
microeconomic consequences. Figure 2 shows that after the credit-crunch in 2008-09 year-on-year growth in
claims on non-financial sectors mainly remained negative in the period from 2010 till the beginning of 2012 for
the Euro Area as well as the advanced economies more generally. Only emerging country bank's increased
their lending activities again since 2010.
Figure 2: Year-on-year growth of claims on non-banks, 2006 to 2012, in percent
Sources: BIS Locational Banking Statistics, own calculations.
17
On the macro level, financial crises can have negative spill-overs in several ways:
Banks may reduce the supply of new credit to economic agents in an effort to contain, or even reduce, the size
of their assets in order to meet prudential ratios. Existing, over-valued assets may have to be written off or
sold at a loss, with the effect of reducing bank profitability. 1
The combination of reduced profitability on bank assets and reduced new lending may be a source of
contraction for the economy’s overall investment rate - both for the financial sector itself and for the economy
as a whole (through reduced lending). If capital accumulation was to be impaired for a certain period of time,
potential output would be reduced.
According to Irving Fisher's debt-deflation mechanism financial crises usually induce a collapse in credit and a
drop in the price level, hence deflation (Fisher, 1933). Both high debt ratios and deflation generally cause
depressions, the problem being that the debt burden becomes even higher in real terms. As Fisher (1933), p.
344, put it: "Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which
we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes."
During the recent financial crisis, high debt and high leverage ratios have been in the centre of attention, with
deflation being less of a topic. Figure 3 shows that annual growth in consumer prices decreased, but it has only
been negative in 2009 for the US and China, for Europe it remained positive. In 2010 and 2011 growth in
consumer prices, for the US, China and Europe, rose again. Central banks are providing the necessary liquidity
to allow banks to deleverage. However, the problem of long deleveraging periods is not necessarily deflation
but a misallocation of resources. New loans are displaced by old loans which may induce a long period of credit
crunch leading to stagnation.
Figure 3: Annual Inflation - Year-on-year change in consumer prices of all items, 2005 to 2011, in percent
Sources: OECD Statistics.
1 In its 2010 Annual Report, the BIS estimated that in the two years between the onset of the financial crisis
and the publication of that report, international banks had experienced cumulated losses on write-downs of
assets of some $1.3 trillion, met by total recapitalization of $1.2 trillion. Since then, the BIS no longer reports
this figure, but it is likely to have increased.
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On the micro side, a long period of financial retrenchment may also yield substantial negative externalities, in
particular for trade finance and hence trade. Explicitly, the allocation of capital resources may in fact not
improve in a context of less credit.
Long periods of credit crunches can affect certain categories of economic agents or credit, disproportionately despite their good credit or safety record. This might be the case for trade credit. Amiti & Weinstein (2011)
argued that the decade-long downward adjustment of the Japanese financial industry has not been neutral for
the financing of Japanese exporters. Firms working with troubled banks saw their export performance decline
in absolute terms. Small and medium sized enterprises, in particular exporting ones, proved to be most
affected, because they were most dependent on trade credit. The question arises as to whether the access of
small and medium sized businesses to credit in general, and to trade credit in particular, will be negatively
affected, in a context of increased competition within the credit committees of banks to arbitrate between the
different categories of loans. One potential pitfall of a process of greater "selectivity of risk" is the possible
allocation by banks of scarce capital resources to the most profitable credit segments, thereby reducing
involvement in lower profitability products such as short-term trade finance. Another pitfall is that banks may
focus on their most profitable customers - the larger ones. Hence, a downsizing of the financial sector and
greater selectivity in risk-tasking may not act automatically in favour of an improved allocation of resources in
the financial industry.
Trade finance may be used as a prime vector for reducing the size of bank's balance sheet, hence achieving
rapid deleveraging. Because of its short-term, roll-over nature, most trade credit lines expire after some 90
days, the average duration of transactions. By not renewing (rolling-over) or by reducing these credit lines,
banking intermediaries can achieve a quick reduction of their lending (deleveraging) when needed. At the end
of 2011, a few European banks have announced a reduction of trade credit lines, in an effort to restructure
their balance sheets. This event proved to be short-lived.
Trade finance may be negatively affected if the re-scaling of the financial sector is accompanied by a
movement of "re-nationalisation" of lending activities, at the expense of cross-border lending. Already, as
indicated by the BIS, many international banks have scaled back international activities: "in addition to write
downs of cross-border assets during the crisis, the more expensive debt and equity funding also led to
reductions in the flow of cross-border credit. As a result, credit to foreign borrowers has fallen as a share of
internationally active banks' total assets […]" (see Figure 4). For European banks the share has declined by
almost 30 percentage points since early 2008. The share of trade credit in this retrenchment is unknown. Not
all banks have reduced foreign activities, notably Asian-based banks and other emerging countries banks.
However a re-composition of the banking landscape with shifts in market share may be at play.
Figure 4: Ratio of foreign to total assets, 2006 to 2012, in percent
19
Total foreign claims of BIS reporting banks headquartered in Canada, France, Germany, Italy, Japan,
Netherlands, and the United States as a percentage of total assets, where domestic claims are obtained from
IMF IFS.
Sources: IMF International Financial Statistics, BIS international banking statistics, own calculations.
In the end, the direction of the international banking industry may be difficult to predict, although
one might expect some reduction of its share in GDP, at least in advanced economies. A lot depends
on the incentives provided by a new, reformed financial system. Normally, bank lending should be re-oriented
towards more sustainable forms of finance. If balance sheet shrinkage works at the expense of "leverage
finance and off-balance sheet toxic investment", hence traditional forms of finance might benefit. In that case,
lending would be reoriented toward real economy financing, including trade finance, which is an important
factor of trade, not only in periods of crisis but over a whole cycle (Auboin & Engemann, 2012).
At the same time, if rationalization of the sector works in favour of higher yielding forms of lending, against
cross border lending, the question as to whether to stay engaged in trade finance will be posed to many
financial intermediaries. The question to enter or exit trade finance is not an easy one. Trade finance bears
"fixed costs" of doing business, particularly costs of origination of trade finance transactions (investing in back
offices, customers and sales relations, opening foreign bureau, being acquainted with international trade
finance procedures). Of course, the decision to stay engaged in trade finance depends largely on the demand
for real trade transactions - and hence continuation of production sharing and trade relations.
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BIBLIOGRAPHY
Amiti, M., & Weinstein, D. E. (2011). Exports and Financial Shocks. The Quarterly Journal of Economics,
126(4), 1841–1877. Retrieved from http://qje.oxfordjournals.org/cgi/doi/10.1093/qje/qjr033
Auboin, M. (2009). Boosting the availability of trade finance in the current crisis: Background analysis for a
substantial G20 package. CEPR Policy Insight, (35).
Auboin, M., & Engemann, M. (2012). Testing the Trade Credit and Trade Link: Evidence from Data on Export
Credit Insurance.
BIS. (2010). Triennial Central Bank Survey Report on global foreign exchange market activity in 2010 (pp. 1–
95).
Baldwin, R. (2009). The Great Trade Collapse: Causes, Consequences and Prospects. VoxEU.org ebook.
Bricongne, J.-C., Fontagné, L., Gaulier, G., Taglioni, D., & Vicard, V. (2012). Firms and the global crisis: French
exports in the turmoil. Journal of International Economics, 87(1), 134–146. Retrieved from
http://linkinghub.elsevier.com/retrieve/pii/S0022199611000791
Chauffour, J.-P., & Malouche, M. (2011). Trade Finance During the Great Trade Collapse. Washington D.C.: The
International Bank for Reconstruction and Development/ The World Bank.
Chor, D., & Manova, K. (2012). Off the cliff and back? Credit conditions and international trade during the
global financial crisis. Journal of International Economics, 87(1), 117–133. Retrieved from
http://linkinghub.elsevier.com/retrieve/pii/S0022199611000493
Eichengreen, B., & O’Rourke, K. H. (2012). A tale of two depressions redux. VoxEU.org, 6(March).
Fisher, I. (1933). The Debt-Deflation Theory of Great Depressions. Econometrica, 1(4), 337–357.
ICC. (2009). Rethinking Trade Finance 2009 : An ICC Global Survey.
IMF. (2003). Trade Finance in Financial Crises: Assessment of Key Issues.
IMF-BAFT. (2009). Trade Finance Survey: Survey Among Banks Assessing the Current Trade Finance
Environment.
Knetter, M. M., & Prusa, T. J. (2003). Macroeconomic factors and antidumping filings: evidence from four
countries. Journal of International Economics, 61(1), 1–17. Retrieved from
http://linkinghub.elsevier.com/retrieve/pii/S0022199602000806
Levchenko, A. A., Lewis, L. T., & Tesar, L. L. (2010). The Collapse of International Trade During the 2008-2009
Crisis: In Search of the Smoking Gun. NBER Working Paper, 16006.
Paravisini, D., Rappoport, V., Schnabl, P., & Wolfenzon, D. (2011). Dissecting the Effect of Credit Supply on
Trade : Evidence from Matched Credit-Export Data. NBER Working Paper, 16975.
WTO. (2004). Improving the Availability of Trade Finance During Financial Crises. WTO Discussion Paper, 6.
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ABBREVIATIONS
ADB: Asian Development Bank
AFDB: African Development Bank
BAFT: Bankers Association for Finance and Trade
BCBS: Basel Committee on Banking Supervision
BIS: Bank of International Settlements
BOP: Balance of Payments
EBRD: European Bank for Reconstruction and Development
ECA: Export Credit Agency
G-20: Group of Twenty
GDP: Gross Domestic Product
IADB: Inter-American Development Bank
ISDB: Islamic Development Bank
ICC: International Chamber of Commerce
IDA: International Development Association
IFC: International Financial Corporation (subsidiary of the World Bank Group)
IFS: International Financial Statistics
IMF: International Monetary Fund
MDBS: Multilateral Development Banks
OECD: Organization for Economic Co-operation and Development
WGTDF: Working Group on Trade, Debt and Finance (body of the WTO)
WTO: World Trade Organization
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FREQUENTLY ASKED QUESTIONS
1.
Why are public institutions involved in trade finance? Why is it not only private sector-based?
Trade finance is systemic to trade flows because of the (almost) one-to-one relationship between the credit
and the merchandise. Based mainly on experience gained in the past decade, there is a need to improve the
stability and security of sources of trade-financing, especially to help deal with periods of financial crisis.
Further efforts are needed by countries, intergovernmental organizations and all interested partners in the
private sector, to explore ways and means to secure appropriate and predictable sources of trade-finance, in
particular in exceptional circumstances of financial crises. Besides, there are difficult market conditions in lowincome countries, in which the financial infrastructure is not developed enough to provide adequate and
affordable amounts of finance to exporters and importers. Multilateral development banks are focusing their
efforts in these markets.
2.
What is the relationship between WTO work on trade finance and Aid-for-Trade?
Given the importance of finance for trade, the lack of availability of trade finance can act as a major barrier to
trade. Under-developed financial infrastructures are undercutting the trade opportunities of developing
countries. Hence, the support of multilateral development banks to trade finance, including capacity building, is
Aid-for-Trade by nature. Trade finance is often mentioned as a necessary "soft infrastructure" for successful
traders.
As an institution geared towards the balanced expansion of world trade, the WTO is in the business of making
trade possible. Its various functions include reducing trade barriers, negotiating and implementing global trade
rules, and settling disputes on the basis of the rule of law. The WTO is also interested in strengthening the
“supply-side” of developing countries so that they can respond to new market opportunities. To this end, it
supports various initiatives aimed at improving the “trade infrastructures” of developing countries, ranging
from the ability to meet international product, safety and sanitary standards, to run efficient customs, or to
participate effectively to the multilateral trade negotiations by training public servants. The WTO carries out
various initiatives with other partners (public and private sector institutions), in the context of its own technical
assistance program, or in the context of multi-agency projects such as the Integrated Framework or the Aidfor-Trade Initiative.
3.
Is there a specific legal underpinning for WTO work on trade finance?
Initially, the WTO has been asked by its members at several points in recent years to examine the issue of
availability of trade financing – as a key infrastructure needed by developing and least-developed countries to
integrate in world trade. Paragraph 36 of the Ministerial Declaration of Doha requested WTO Members to
examine, and if necessary come up with recommendations, on measures that the WTO could take, within its
remit, to minimize the consequences of financial instabilities on their trade opportunities. In the context of the
newly created Working Group on Trade, Debt and Finance (WGTDF), the interruptions of the flows of trade
finance in emerging markets during the Asian and Latin American financial crises were quickly identified as
concerns by Members, as well as the chronic difficulties of low income Members to secure more affordable
flows of trade financing in the long-run. These concerns were channelled to all WTO Ministerial Meetings since
Cancun (2003). At the last Ministerial Conference (MC8), Ministers reiterated their interest on WTO work in this
area. Besides, the interaction with sister organizations on this issue at the border of trade and finance falls
within the Coherence Mandate of 1994, which requires the Director-General to cooperate with counterparts on
issues of common concern.
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4.
Is multilateral support to trade finance not generating "moral hazard" (undue support to the
private sector)?
Multilateral institutions are primarily concerned about boosting the availability of trade finance in the most
"challenging" markets, namely in low-income economies. One particular problem in these markets is the large
gap between the perception of risk in providing finance and the actual level of risk, which is not higher than in
more mature markets (in other words, the rate of default on trade credit is not higher). Therefore, Trade
finance facilitation Programmes run by multilateral development banks provide for risk mitigation between
banks issuing and receiving trade finance. They mitigate risk by providing guarantees in case of non-payment,
a very rare event.
The IFC, the European Bank for Reconstruction and Development (EBRD), the Asian
Development Bank (ADB) and the Inter-American Development Bank (IADB) participate in a global network
aimed at supporting low income countries' trade and traders.
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SELF-ASSESSMENT QUESTIONS
1.
Why is trade finance considered to be the "lifeline" of trade?
Only a small part of trade is paid cash. A lag exists between the optimal time at which the exporter wishes to
receive payment for its export (at the latest, at the expedition of the good); and the time at which the importer
would want to be paid, at the earliest, at its reception. This time lag requires a credit - which will mitigate the
opposite interests of these two parties on the best timing for the payment of the merchandise.
The need for credit is complemented by a need for liquidity. For example, large buyers in modern value chains
(automobile producers) may rely on several suppliers for essential or less essential parts of the car to be
assembled. Given the number of parts to be ordered for the assembly plants, suppliers may need to cash-in as
soon as possible their receivables to be able to finance their own production. Bankers or factoring companies
provide cash against receivables or equivalent bills. Trade receivables may be sold on a secondary market, in
which they are appreciated as high quality, short-term securities.
Trade credit in whatever form, an import loan, pre-shipment loan, bill of exchange, letter of credit and the like
are oiling trade with the necessary liquidity, precisely for trade to happen.
2.
How is it possible to identify market disruption in the supply of trade finance?
Unfortunately, "hard" statistics are scarce in the area of trade finance. Trade credit being essentially short-term
in nature, the international statistical apparatus is not able to distinguish precisely the enormous amount of
short-term capital movements flowing from country to country. Nor it is able to recognize what is a threemonth trade credit from a three-month certificate of deposits.
Instead, authorities rely on statistics private sector-based statistics and surveys. Such data is of great help in
the short-run, providing information on broad trends on prices and volumes, but of more limited value to
appreciate longer-term development. Thanks to the short-term, survey based data, authorities have been at
least in a position during the recent financial crisis to substantiate claims by individual traders and bankers that
gaps existed in trade finance markets.
3.
What can public actors do to restore confidence in trade finance markets during financial
crises?
As evidenced during the 1997-1999 Asian financial crisis and the recent global financial turmoil (2009), the
safest financial markets may be adversely affected by changes in perception and expectations. For example,
the long-term record of paying international trade remains excellent over the recent decades - even in periods
of financial stress. However, financial crises are also characterized by an upwards re-evaluation of risk
perception, hence an increase in the gap between the actual level of risk and its perception. This confidence
gap needs to be filed, whenever it is not reflective of more fundamental or permanent market failure. One
thing that public actors can do in such circumstance is to restore market confidence, by offering more risk
mitigation capacity - in order to bridge the growing gap between the risk and its heightened perception. In
trade finance, risk mitigation capacity may take the form of government guarantees on expected failures to
pay for traded goods - although that risk may not actually materialize.
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4.
Is there a specific problem regarding the availability of trade finance in low income
countries?
Yes, there is a more permanent, structural gap in the "lower-end" of the trade finance market. Traders in
developing countries, in particular in low income one, face chronic in accessing affordable trade finance. The
situation has worsened since the 2009 crisis.
Micro, small and medium-sized enterprises in developing countries have for a long time been faced with a mix
of "structural" constraints, ranging from the lack of know-how in local banks, to the lack of trust requiring
traders to set aside very large collaterals against a trade loan and to pay high fees for these loans. Despite
this, the rate of default on trade payments in low income countries is not much higher than in other parts of
the world. This situation has worsened in the post-crisis banking environment. Capital has become scarcer and
the selectivity of risks greater, so negative expectations regarding the cost of doing business in poorly (or
non-) rated countries are translated in either higher costs for traders locally or simply in less finance.
For
example, leading consulting firms active in trade finance have indicated that regular import loans charged on
non-sovereign African risks are still well over 10% per annum for at least a third of African countries, and for
another 20 countries or so in the rest of the world. Cash collateral requirements of up to 50% of the loan face
value can be asked in addition to such high interest rates.
To alleviate part of the problem, trade finance facilitation programmes have been put in place by multilateral
development banks. These programmes provide risk mitigation capacity (guarantees) to both issuing and
confirming banks (the banks of the importer and the exporter), to allow for rapid endorsement of letters of
credit – a major instrument used to finance trade transactions between developing countries players, and
between developed and developing countries. The guarantee provided by the multilateral development bank
ensures that the bank (typically the bank of the exporter) accepting to confirm a letter of credit (typically
issued by the bank of the importer) will be paid even if the issuer fails to pay. The multilateral development
bank's payment guarantee would ensure that the exporting bank be paid. Such guarantees are rarely called in
but reduce the risk aversion of conduction trade operation in low income countries - as they close part of the
"structural confidence gap" between the existing level of risk and its perception. The demand for these
programmes has increased during the 2009 financial crisis and has not fallen ever since. The Asian
Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development
Bank, the Islamic Development Bank, and the IFC are operating relatively similar programmes. The African
Development Bank is in the process of developing its own programme.
5.
What are the various groups, structures and institutional basis by which the WTO reviews
work and acts on trade finance?
In trade finance, the WTO operates under the overall "coherence mandate" (Article III.5 of the WTO
Agreement), which provides a basis for the institution to cooperate with other international organization,
notably the IMF and World Bank, on issues of common interest. The coherence mandate is defined in the 1994
Ministerial Declaration on the WTO Contribution in Achieving Greater Coherence in Economic Policy Making".
At the Ministerial Conference in Doha, the WTO has been asked by its members at several points in recent
years to examine the issue of availability of trade finance – as a key infrastructure needed by developing and
least-developed countries to integrate in world trade.
Paragraph 36 of the Ministerial Declaration of Doha
requested WTO Members "to examine, and if necessary come up with recommendations, on measures that the
WTO could take, within its remit, to minimize the consequences of financial instabilities on their trade
opportunities". In the context of a newly created WTO body, the Working Group on Trade, Debt and Finance
(WGTDF), the interruptions of the flows of trade finance in emerging markets during the 1997-99 Asian and
Latin American financial crises were quickly identified as concerns by WTO Members, as well as the chronic
26
difficulties of low income Members to secure more affordable flows of trade financing in the long-run. These
concerns were channelled to the WTO Ministerial Conferences in Cancun (2003), Hong-Kong (2005). For
example, the report provided by the General Council of the WTO to Ministers states that: "Based mainly on
experience gained in Asia and elsewhere, there is a need to improve the stability and security of sources of
trade finance, especially to help deal with periods of financial crisis. Further efforts are needed by countries,
intergovernmental organizations and all interested partners in the private sector, to explore ways and means
to secure appropriate and predictable sources of trade finance, in particular in exceptional circumstances of
financial crises." (WTO Document WT/WGTDF/2).
During this period of examination, the Heads of the IMF, World Bank and the WTO agreed at the General
Council Meeting on Coherence of 2002 to form an Expert Group on Trade Finance, including all interested
parties, multilateral and regional public institutions, export credit agencies, private banks to examine what
went wrong in this segment of financial markets, and how to create an enabling environment in local markets
to provide adequate flows of trade finance on an on-going basis.
Since the beginning of the crisis of the international financial system in 2007, Members have used the WGTDF
to channel their concerns about the deterioration of the conditions of access to trade financing from foreign
banks, not only in developing countries, but also in mature economies, which had also been hit by the scarcity
and higher cost of trade finance, to a point where supply seemed to have fallen far short of demand. The
Director-General of the WTO rejuvenated the Expert Group on Trade Finance, as a key group to provide
information and suggest solutions. As the financial crisis spread internationally, the Expert Group on Trade
Finance has been meeting regularly, and has been reporting to the WTO Members through the Working Group
on Trade, Debt and Finance.
In the course of 2009, it became evident that the WGTDF had become the focal point in the WTO for the
examination and the follow-up of initiatives taken in support of trade finance. Elements of a trade finance
support package have been discussed at the G-20 Summit in London in April 2009, to which the WTO had
provided input. Since then, trade finance has become a regular feature of trade discussions in the G-20
process.
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Videos
Trade Finance: The Grease in the Wheels of Trade - http://www.swisslearn.org/wto/module36/e/
Update on Trade Finance http://etraining.wto.org/admin/files/Course_365/Videos/Update%20on%20Trade%20Finance.wmv
Related videos - http://www.youtube.com/user/WTO
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