Emerging global trade problems to be reflected eventually in trade finance
Monday, 1 June 2009
Dr. Zaidi Sattar
The global economic crisis has been characterized, among others, by a financial meltdown. But it has not resulted in the collapse in the system of trade finance which did experience a downturn, partly due to the credit and liquidity squeeze in the financial sector, but primarily due to the contraction of trade volumes in the past year. Problems emerging in international trade will be reflected eventually in trade finance. We have hitherto assumed that as long as there is trade there will be trade finance, until the present crisis showed that that might not be the case, when the financial sector is in jeopardy. To quote Pascal Lamy, Director General (DG) of World Trade Organisation (WTO), "Trade is an essential ingredient to exit the crisis. But to keep the wheels of trade turning, we need trade finance to flow."
There are serious problems emerging on the trade side which can be described as "incipient trade protection". Although Group of Twenty (G20) leaders last November promised not to take any trade restrictive measures for 12 months, 17 out of the 20 members did adopt tariff and non-tariff measures under the watchful eye of the WTO, which has been monitoring trade policy developments closely. Most blatant violations were found to be in the application of non-tariff measures. Global economic recovery rests not only on the resumption of demand but also on recovery of trade. If such barriers to trade openness persist, exiting the global economic recession will be delayed or undermined.
As for trade finance, in December 2008, the WTO DG gave an estimate of only US$25 billion as the trade finance gap. In January 2009, at the London summit, the leaders allocated as much as US$250 billion to support trade finance. Therefore, any emerging shortage in trade financing has been adequately met. The problem though lies in the cost of trade finance, which has gone up in the current atmosphere of global recession. Exporters sense a high perception of risk in transactions and are requesting for insurance and stronger instruments of commitment. The volume of Letters of Credit mechanism which covered barely 20% of trade transactions are now in great demand due to the higher perception of risk, calling for higher insurance and other fees to cover transactions.
In conclusion, any problems in trade finance must be addressed in order to prevent the global recession from getting any deeper as well as to spur the recovery in the coming year.
Dr. Zaidi Sattar is chairman, Policy Research Institute of Bangladesh. These comments were made by him at the International Chamber of Commerce (ICC) dialogue on Trade Finance the other day in Dhaka
The global economic crisis has been characterized, among others, by a financial meltdown. But it has not resulted in the collapse in the system of trade finance which did experience a downturn, partly due to the credit and liquidity squeeze in the financial sector, but primarily due to the contraction of trade volumes in the past year. Problems emerging in international trade will be reflected eventually in trade finance. We have hitherto assumed that as long as there is trade there will be trade finance, until the present crisis showed that that might not be the case, when the financial sector is in jeopardy. To quote Pascal Lamy, Director General (DG) of World Trade Organisation (WTO), "Trade is an essential ingredient to exit the crisis. But to keep the wheels of trade turning, we need trade finance to flow."
There are serious problems emerging on the trade side which can be described as "incipient trade protection". Although Group of Twenty (G20) leaders last November promised not to take any trade restrictive measures for 12 months, 17 out of the 20 members did adopt tariff and non-tariff measures under the watchful eye of the WTO, which has been monitoring trade policy developments closely. Most blatant violations were found to be in the application of non-tariff measures. Global economic recovery rests not only on the resumption of demand but also on recovery of trade. If such barriers to trade openness persist, exiting the global economic recession will be delayed or undermined.
As for trade finance, in December 2008, the WTO DG gave an estimate of only US$25 billion as the trade finance gap. In January 2009, at the London summit, the leaders allocated as much as US$250 billion to support trade finance. Therefore, any emerging shortage in trade financing has been adequately met. The problem though lies in the cost of trade finance, which has gone up in the current atmosphere of global recession. Exporters sense a high perception of risk in transactions and are requesting for insurance and stronger instruments of commitment. The volume of Letters of Credit mechanism which covered barely 20% of trade transactions are now in great demand due to the higher perception of risk, calling for higher insurance and other fees to cover transactions.
In conclusion, any problems in trade finance must be addressed in order to prevent the global recession from getting any deeper as well as to spur the recovery in the coming year.
Dr. Zaidi Sattar is chairman, Policy Research Institute of Bangladesh. These comments were made by him at the International Chamber of Commerce (ICC) dialogue on Trade Finance the other day in Dhaka