RESEARCH AND ANALYSIS: WORKING PAPERS
Boosting trade finance in developing countries: What link with the WTO?
The paper discusses the efforts deployed by various players, mainly multilateral financial institutions, regional development banks, export credit agencies, to mobilize greater flows of trade finance for developing countries, with a view to help them integrate in world trade.
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 Aid-for-Trade Initiative.
Since more than 90% of trade transactions involve some form of credit,
insurance or guarantee, one can reasonably say that trade finance is the
lifeline of trade. Producers and traders in developing or least-developed
countries need to have access to affordable flows of trade financing and
insurance to be able to import and export, and hence integrate in world
trade. From that perspective, an efficient financial system is one
indispensable infrastructure to allow trade to happen. In line with the
above initiatives, the WTO has been following actively, and at times,
directly supporting, initiatives to boost the availability of trade finance
in developing and least-developed countries wherever it was needed. Since
the WTO is not a financial institution, it has been supporting in the past
few years partners engaged in this effort such as international financial
institutions, export credit agencies, large banks and regional development
banks.
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 the WTO
Ministerial Meetings in Cancun (2003) and Hong-Kong (2005). 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
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 a
on-going basis.
In chairing one of these meetings, the Director-General of the WTO defined
the role of the WTO in this area: encouraging liberalization of this type of
financial services under the financial services agreement, being a regulator
of export credit and guarantee subsidies under the ASCM, and serving as a
forum to discuss WTO-compatible ways of providing support to developing
countries. Conclusions by the Working Group were presented at the WGTDF, and
later at the General Council. WTO Secretariat work on this topic up to 2003,
in particular its contribution to the WGTDF and to the expert group, was
summarized in WTO Discussion Paper 2.
While the liquidity in financial markets improved from 2002 until the recent
turmoil created by the crisis of the sub-prime mortgage markets, trade
finance remained an issue for concern for WTO Members, in particular the
poorest, which do not have access to international financial markets or for
emerging markets which remain prone to changes in market sentiment, and
hence credit rating. Despite the rapid development of “trade finance
facilitation” schemes developed by regional development banks and the IFC,
with immediate success in low income countries, the issue of availability of
trade finance came back among other “supply-side” constraints identified by
the Aid-for-Trade Task Force, after the WTO Ministerial Meeting in
Hong-Kong. While the mandate of the WTO under the Aid-for-Trade is
essentially one of evaluation and monitoring, it may be in cases one of
advocacy. Based on the work being carried out since 2002, and after
consultation with partners (regional development banks, multilateral
institutions, export credit institutions,...), input by the WTO Secretariat
to boost the availability of trade finance for developing countries under
the Aid-for-Trade umbrella was welcomed by Members. Lack of trade financing
and guarantee infrastructures were identified as one of the barriers to
integration of low income countries in world trade by each of the three
regional Aid-for-Trade Reviews. It was acknowledged that the current
Aid-for-Trade Initiative could provide the extra leverage to convince WTO
partners to deliver more plentiful of trade credit and guarantees to WTO
members that need it the most.
This paper provides background on the difficulties of some countries and
traders to access affordable trade credit and finance, on the growing divide
between these low income countries and economically advanced countries in
handling modern trade finance instruments, and on the joint reflection
undertaken by the WTO, most recently under the Aid-for-Trade programme, and
previously under the umbrella of the WGTDF and the Coherence Mandate, to
help strengthen developing countries' capacities in this area.
No: ERSD-2007-04
Authors:
Marc Auboin — WTO
Manuscript date: November 2007
Key Words:
Trade financing, cooperation with international financial institutions, aid-for-trade, coherence
JEL classification numbers:
E44, F13, F34, F36, O19
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Disclaimer
This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.
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