Working Group on Trade, Debt and Finance

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:

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.

• 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.

• 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.

• 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:

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

• Themes addressed in particular to the WTO

- 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.

• Themes addressed in particular to the WTO and the IMF

- 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.

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• Themes addressed to the WTO, the IMF and the World Bank

- 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. Back to text