Speaking notes for the Director-General
As we all know, the world is experiencing one of the most severe financial crises in modern history, with its epicentre in the United States and spill-over effects on major financial centres around the world. The correction of asset values is so strong that it has systemic implications on the soundness and safety of the entire international financial system. Governments, central banks and regulatory authorities are acting on several fronts, injecting liquidity, re-capitalizing and restructuring financial institutions, and stopping risky behaviour that could further precipitate markets into depression. Beyond this, the realization that an overgrown financial system had developed bubbles, based on poor assessment of risk and questionable use of ample flows of liquidity has been raising questions in countries and internationally about the need to provide a stronger skeleton to the international financial architecture.
Seen from our side, the side of the real economy, the financial crisis that we experience is a wake-up call indicating that the world economy cannot grow above the limits of its real production, and that feeding it by debt and liquidity may only provoke severe corrections.
This is not the first shock witnessed by our multilateral trading system. Despite its young age, the WTO has already faced previous episodes of financial crises, and has shown resilience. By keeping markets open during periods of financial and external payments crisis, the multilateral trading system has shown that it can give a chance to crisis-stricken countries to recover through trade. However, we have also learned from these periods that, to do so, access to trade finance at affordable rates must be maintained in such critical times to ensure that international trade can continue to play its shock-absorbing role.
After the Asian crisis and in cases the abrupt interruption of trade credit lines by international banks to some crisis stricken countries, the WTO, in partnership with the IMF and the World Bank, formed an informal group of experts from regional development banks, credit insurance agencies and international banks who are involved in providing trade finance facilities of one kind or another. Under the banner of coherence, the aim is to seek options to deal with the scarcity of trade finance during periods of crises and what appeared to be a trend to withdraw from smaller developing countries' markets. Since then, the WTO hosted meetings periodically to discuss means to address these shortcomings, the last one in April 2008. At the time, we sensed rising costs and liquidity shortages which were already hitting trade finance for particular developing countries and LDCs.
The meeting that I chaired this morning, with the same panel of
representatives of private banks, international financial institutions
and export credit agencies, has confirmed that the market for trade
finance has severely deteriorated over the last six months, and
particularly since September. Two key causes of that were identified.
One is a shortage of liquidity to finance trade credits. The second is a
general re-assessment of risks caused as much by the financial crisis as
by the slowing down of the world economy, and it is there that those two
cycles interact with one another. These problems are being felt most
acutely by traders and banks in the emerging market economies.
The view expressed this morning by the trade finance practitioners is that the situation is likely to deteriorate further in the months to come.
Some of these difficulties were becoming apparent even in April when I chaired the last meeting of this group. Following up on this meeting, some steps were taken to respond to the situation. Let me draw your attention in particular to the announcement earlier this week by the President of the World Bank, Robert Zoellick, that he intends to propose to the Executive Board of the World Bank/IFC a tripling of the ceiling, to $3 billion, of the trade finance guarantees available under the IFC's trade finance facilitation programme. This is a remarkable example of quick reaction by an IFI to current market developments and demand, and of Aid for Trade in action. The Berne Union, which re-groups export credit agencies, has also informed us that export credit agencies have been stepping in much more actively in recent months. Collectively, they have increased their business by more than 30 percent in the last twelve months, with an acceleration since the summer. We had confirmation that this increase in their activity is being backed by some national governments, for example Germany, Japan and Hong Kong, China.
The message from some other regional development banks with similar programmes to that of the World Bank/IFC is that they too could do much more to respond in the market if their Executive Boards would also raise their ceilings on this kind of financing activity. This is a clear message for WTO Members — contact your finance and development officials who represent you on the Boards of the Regional Development Banks to promote their greater involvement in trade finance activities, as a sort of lifeline for their economic activity in many countries.
What still needs to be done?
A priority task is to enhance capacity to mitigate the effects of the increased perception of risks and to provide the market with earmarked liquidity for trade finance. From that point of view, both the international financial institutions and the export credit agencies have the possibility to expand their contributions to cover risk and provide additional liquidity under existing instruments. So there may be no need to invent any new instruments. They are there and need to be enhanced, but this will not happen without public authorities stepping in to provide them with more support.
The market currently estimates the liquidity gap in trade finance at about $25 billion. This of course is a sizeable sum, but not enormous relative to the amounts that central banks have found it necessary to inject into financial and banking markets in the past couple of months. The private banks believe that this gap could be filled reasonably comfortably through increased co-sharing partnerships with international financial institutions and export credit agencies to the extent that the trade finance and insurance programmes of these institutions are supported by their shareholders, which of course is you, the member governments.
A second task, that needs to be viewed over more of the medium term, is to improve mechanisms of information sharing, risk assessment techniques, and data collection on trade finance. That would expand the scope for co-financing trade between private banks themselves and between the banks and public sector institutions such as the IFIs and the ECAs. We heard some concrete proposals on how to move ahead on these issues this morning. Naturally, this is not a task for the WTO, but we do have something to contribute in my view and we shall continue to work with the various actors on these issues.
The costs of taking these steps and actions is not exaggerated. The market for trade finance is one of the most secure areas of banking and insurance activities and it has a strong multiplier effect on trade. At a time of decelerating trade and economic growth, investing resources to keep trade finance flowing has a vital role to play. Contrast this with the costs of inaction. The countries most vulnerable to shortages of trade finance are the emerging market economies on whom we are counting to sustain trade and economic growth as the developed world slows down.
This is a useful message for the world leaders meeting in Washington on 15 November.
The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral. The global slowdown, whether it is called a recession in some parts of the world, a slump elsewhere, will last for sometime, and will affect all countries. We simply cannot say that globalization is benefiting emerging economies when developed economies' global demand is expanding, and that no effect will be felt when such demand falls. At the national level, there will be more risks, more job losses, more bankruptcies.
There will inevitably be demand for greater safety nets
and security, which is legitimate. But there will also be demand for
The political message that WTO members should send both inside the multilateral trading system and outside is that the WTO is ready to take this challenge with a strong sense of collective responsibility and solidarity. Members should resist calls for protectionists measures. In a globalized world, one's protection is another's lost opportunity. And everyone's protection — the kind of beggar thy neighbour that we saw in the 30s — is a recipe for a severe contraction of international trade, depressed growth and rising unemployment, again the kind of situation we saw in the 1930s. This was evident during the Asian and Latin American financial crisis of the 90s. Governments understood that keeping markets open was part of the solution, not part of the problem, and GATT/WTO disciplines at the time helped in resisting calls for closing trade.
The second message is of course to oppose financial chaos by further organized, regulated and balanced trade opening through the Doha Round. While countries struggle with the design of global financial rules, they could send a positive signal by better regulating international trade through the completion of the Doha Round.
After seven years of negotiations, we have come a long way in our collective endeavour. My sense is that we are not that far way from our objective of concluding the Round, even if a number of tough nuts remain to be cracked, notably in the agriculture and industrial modalities, which would be a stepping stone towards a final Doha deal. My sense is that we can achieve modalities in these two areas by the year end. I remain of the view that this is doable. And it is probably even more desirable now than a year ago. But we now need to do it. The process to get there is well known — the very good old recipe of bottom-up, transparency and inclusiveness. But above all, a common desire to mitigate the impact on your people of the severe deterioration of their economic, and hence their social conditions.
Just to address a few of the points which have been made, although we
will be addressing a number of them later.
First, I do not intend to attend the Washington 15 November meeting, which does not mean that this meeting should not send a strong signal on trade, the Round and trade finance. There happen to be other ways to be present than to be physically present, and we are working hard on that with friends in the G-20.
Second, the meeting this morning was not a meeting with Members. It was a very technical meeting with specialized practitioners. And if there are — and I understand that there are — messages for international financial institutions, I mentioned in my introduction that these international financial institutions are member-driven just like the WTO is Member-driven. So Members here present have all of the available channels which members of these international financial institutions have in order to direct their operations in one or another direction. What we can do in the WTO is complement what Members do, raise awareness, put a bit of public attention on this, but at the end of the day these international financial institutions will take the decisions which their boards will take and you are the members of these boards.
Third, on the general discussion about trade opening and regulation
— without departing from my, I hope, well-known neutrality — let's
intellectually at least make a difference between opening or not opening
on the one side and regulating or not regulating on the other side. You
can open your markets and regulate, you can open and deregulate, you can
close and regulate and you can close and deregulate. Trade opening is
one thing, regulating the sectors which you have opened in such a manner
that your domestic operators and foreign operators are treated the same
way, is something different. So, at least for the sake of the
intellectual argument, I think there should be no confusion between
these two notions.
Finally, our relationship with the Bank of International Settlements in this field is a relationship not to the BIS as a Central Bank of Central Banks, which it is not financewise. The BIS, financewise, is a clearing house for Central Banks but not the Central Bank of the Central Banks as if there was a sort of lender of last resort above the Central Banks that could provide more finance. Our relationship with the BIS is a relationship with the BIS constellation, which is BIS as a regulator, notably with the Basel II standard, and this question will be followed-up as a number of other questions which are being dealt by the Task Force in the next session of the Working Group on Trade, Debt and Finance. This specific issue is on the Agenda of the meeting of the Working Group, which is the body for following-up on the work of the internal Task Force that I have created. However, I am perfectly ready to do sort of periodic reviews of the situation under the mandate I have given to this internal Task Force, starting by the way with the next General Council meeting.
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