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finance
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Working Group on Trade, Debt & Finance
At that time, emerging economies had been hit by
a series of financial crises — in some cases by simple contagion,
featuring very large exchange rate swings (Mexico, 1995; Malaysia/
Indonesia/Korea/Thailand 1997-99; Russia 1998-99; Brazil 1999; Turkey,
2001). The realization that abrupt corrections in asset markets and
capital outflows may lead “successful integrators” into deep
recessions, rising poverty, and social dislocation was a shock to many
developing countries. The Argentina crisis in 2002 strengthened the
view that global crises should be met by global (or at least better
coordinated) policy responses covering not only debt and finance but
trade as well. The poorest countries (in Africa, the Caribbean, and
some countries in Central America), which do not have access to
financial markets, also supported WTO work in this area especially
linking their integration into the trading system with the reduction
of their debt burden. There is a sense that international initiatives
to reduce indebtedness through debt relief (the HIPC Initiative) is
insufficient and only one component of a more global strategy that
should focus on increasing market-access and developing supply-side
capacities.
The Group was finally created at the 4th Ministerial Conference in
Doha in November 2001, and initially granted a relatively high level
of priority, with a mandate to report on progress to the 5th
Ministerial Conference in Cancún, 2003. The full Mandate of the Group
stood as follows:
2001 Doha Mandate:
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Trade, Debt & Finance |
36. We agree to an examination, in a Working Group under the auspices
of the General Council, [i] of the relationship between trade, debt
and finance, [ii] and of any possible recommendations on steps that
might be taken within the mandate and competence of the WTO [a] to
enhance the capacity of the multilateral trading system to contribute
to a durable solution to the problem of external indebtedness of
developing and least-developed countries, [b] and to strengthen the
coherence of international trade and financial policies, with a view
to safeguarding the multilateral trading system from the effects of
financial and monetary instability. The General Council shall report
to the Fifth Session of the Ministerial Conference on progress in the
examination. |
The Working Group's reports to the General Council are in WT/WGTDF/W/1
to 7.
The work plan of the Group from Doha Ministerial Conference (2001)
and Cancun Ministerial Conference (2003) was largely analytical,
aiming to establish the legitimate links between trade, indebtedness,
and financial instability, on the basis of working papers prepared by
the WTO Secretariat and other intergovernmental organisations. In
2002-04, the Working Group structured its analytical work around an
agenda of eight issues, detailed in Annex 1.
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Three of the issues related to trade liberalization, market access and
WTO rules. Members essentially recognized the “shock absorbing” nature
of the WTO system and the value of keeping markets opened world-wide
in periods of financial crisis, so as to ensure that crisis-hit
economies are able to continue to count on exports for foreign
exchange earnings and a source of income growth; they also agreed that
trade liberalization might have a role in improving resource
allocation when addressing the internal causes of such crises, and in
making economies more resilient to external shocks. Members viewed
discussions in the Working Group as important for global policy
coherence, as clearly success in the Doha negotiations was important
if trade and the WTO were to remain relevant factors in dealing with
foreign indebtedness and financial instability.
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Two other issues addressed in the Group, i.e. trade and financial
markets and trade financing involved collaboration with the IMF and
other international financial institutions (W/22, W/23). Under these
topics, the IMF produced a study showing no clear-cut relationship
between exchange rate volatility and trade flows at the global level,
but showed that sustained misalignments in regional trade areas may
have effects on the direction and the intensity of such trade. The IMF
and the WTO cooperated in convening the main players to find ways to
improve flows of trade-financing (letters of credit and other
documentary credit) to developing and least-developed countries, and
it was acknowledged that a contribution by the WTO in this field would
be the broadening and deepening of markets for trade-financing
facilities through improved GATS offers.
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Of the last three issues — coherence (W/17), domestic policy reform,
and commodities — there was real discussion only on the issue of
coherence and WTO cooperation with the IMF and World Bank. All Members
are in favour of more coherence and cooperation.
At the Cancun and the Hong-Kong Ministerial Conferences, Members
agreed Group's mandate to complete the analytical work underway, be it
well understood that the Working Group should not be used for
encroaching into IMF and World Bank territory. At the same time, they
realized that the relationship between finance and trade was regarded
by many developing countries — as well as multilateral and regional
institutions — as increasingly relevant to the WTO. In addition, while
the HIPC programme and the resumption of economic expansion in
emerging countries has softened some of the concerns at the origin of
the Working Group, it was clear that in a globalized and more open
world, no one could certify that it was (and is) entirely protected
from the resurgence of brutal changes in market sentiment,
particularly if the global growth situation deteriorates.
2005 Hong Kong Mandate:
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Trade, Debt & Finance |
42. We take note of the report transmitted by the General Council on
the work undertaken and progress made in the examination of the
relationship between trade, debt and finance and on the consideration
of any possible recommendations on steps that might be taken within
the mandate and competence of the WTO as provided in paragraph 36 of
the Doha Ministerial Declaration and agree that, building on the work
carried out to date, this work shall continue on the basis of the Doha
mandate. We instruct the General Council to report further to our next
Session. |
Activities of the Group resurfaced since the beginning of the
Sub-prime crisis, with demands by developing countries on Members
looking at the implications of the current financial turmoil on trade,
trade financing and external debt.
All in all, 39 working documents have been produced by the Group
(all being in the public domain), with the latest contributions by
Brazil, Argentina, ACP Group (supported by Cuba) and the EC. The
Working Group is currently chaired by Mr. Martin Glass, the Permanent
Representative of the Hong-Kong Mission to the WTO, and reports to the
General Council of the WTO.
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ANNEX 1
Themes addressed in the Working Group
- Trade liberalization as source of growth. Trade liberalization is
among several factors that can improve the allocation of resources at
national and international levels, and hence improve the resilience to
external shocks. As a factor in improving productivity and the
allocation of resources, trade liberalization can impact favourably on
the debt servicing capacity of economies, as it may result in
increased sources of foreign exchange such as net exports and foreign
direct investment. Trade liberalization need to be accompanied by
appropriate domestic policies to guarantee a supportive investment
climate so that foreign investment could occur, a form of finance less
costly than debt. Provided that trade liberalization and reforms are
sequenced and timed properly, taking into account the special needs of
developing countries, they could also reduce adjustment costs and
enhance the ability of these developing countries to reap benefits
from them.
- WTO rules and financial stability. The WTO system is playing an
important role in providing economic stability and security, in
particular in periods of economic or financial crisis. The “shock
absorbing” nature of the WTO system was tested during the emerging
markets' financial crises in the late 1990s. The existence of a strong
rules-based multilateral trading system renders recourse to
protectionism more difficult and helps keep markets open, so as to
ensure that crisis-hit economies are able to continue counting on
exports as a source of foreign exchange and income growth. Some
crisis-hit countries have noted that self-restraint from trading
partners in the use of contingent protection (AD/SCM/Safeguards) was
of great help in overcoming the crisis, and suggested that this be
examined further in the appropriate fora of the WTO.
- The importance of market access and the reduction of other trade
barriers in the Doha Development Agenda's negotiations.
Non-discriminatory substantial reduction of trade barriers by WTO
Members in the context of current WTO negotiations, under the DDA,
especially in areas where Members' barriers affect products of export
interest to developing countries, can be a valuable contribution that
the WTO can make, within its remit, to improving their opportunities
for growth, and to overcoming the problem of external indebtedness of
developing countries by increasing their ability to earn the foreign
exchange they need. Lowering of tariffs on higher value added products
would help to alleviate the debt problem of commodity exporters.
Relevant studies suggest that the gains that can be derived from
eliminating barriers on developing countries' exports outweigh and
complement the annual resource flows they receive of ODA and debt
relief.
- Trade and financial markets. In the 1990s, deep financial crises in
part affected trade flows in a number of WTO Members. While
recognizing current efforts to strengthen the financial architecture,
Members wished to improve their understanding of the trade and trade
policy implications of a perceived greater volatility of financial
markets and exchange rates world-wide.
- Trade-financing [1].
Based mainly on experience gained in Asia and elsewhere (in the
1990s), 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.
- Better coherence in the design and implementation of trade-related
reforms and monitoring. As recognized by the Marrakesh Declaration on
the Contribution of the World Trade Organization to Achieving Greater
Coherence in Global Economic Policymaking, the inter linkages between
the different aspects of economic policy require that the
international institutions with responsibilities in trade-related
areas follow consistent and mutually supportive policies. Therefore, a
better scheduling and integration of the work of these international
organizations in areas such as capacity-building and trade
infrastructure, including fiscal and customs management, as well as
policy advice and monitoring, could benefit Members.
- The inter linkages between external liberalization and internal
reforms. The importance of the interface between external
liberalization and internal policies has been acknowledged. To
maximize the benefits of such liberalization and the integration of
individual Members in world trade, Members' policies should also be
geared to stimulating the supply-response to market opportunities,
taking into account their individual capacities and needs. This could
involve specific actions to raise domestic private savings and
encourage foreign direct investment, in line with the Monterrey
Consensus, and to remove obstacles that hinder the development of
exports such as high transport and handling costs, and the poor state
of trade infrastructures.
- External financing, commodity markets and export diversification.
The difficulties of most developing countries to attract development
finance, from private or public sources, are acknowledged. The lack of
external financing is an important element in limiting their ability
to diversify their exports. Interest was expressed in improving
Member's understanding of factors that lead to high volatility in
commodity markets and of factors hampering developing countries'
efforts to move away from commodity exports, despite notable domestic
reforms underway.
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[1] Trade finance is a catch-all term applied essentially to the whole
area of short term business, especially that involving finance
provided by banks issuing letters of credit.
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