When the World Trade Organisation (WTO) gathers experts on Wednesday to review trade finance, they are likely to hear the shortfall in the sector is far worse than it seemed just four months ago. If so, that would confirm a dangerous vicious spiral, in which the financial crisis makes it difficult to finance trade as slumping demand hits exports and, in turn, output.
That would put pressure on an April 2 G20 summit of rich and emerging countries to pump funds into trade finance either individually or through institutions such as the World Bank and its private sector arm, the International Finance Corp.
A previous meeting of experts in November heard that the shortfall in the sector was about $25 billion. But in an article in an e-book on trade and the crisis, senior WTO official Marc Auboin cited a survey by the Bankers Association for Finance and Trade for the International Monetary Fund showing that flows of trade finance to developing countries have fallen by 6 percent or more year-on-year.
"If such numbers were to be confirmed... that would mean that the market gap could be well over the $25 billion estimate mentioned above (up to $100 billion, possibly more)," he wrote in the book, published on policy portal VoxEU.org on March 5.
"The scarcity of trade finance is very likely to accelerate the slowdown of world trade and output," he said. Up to 90 percent of the $13-14 trillion in world trade is funded by trade finance - the lubricant in the wheels of commerce which is traditionally one of the simplest and safest forms of credit.
However the price of credit shot up last year and its availability dried up, particularly for developing countries. Trade is forecast to contract this year for the first time since 1982. A senior trade source said last week that the IMF would shortly revise its forecast of the decline to 5 percent or more and many countries are reporting double-digit falls in exports.
Despite this downturn, export-credit agencies, which insure trade finance and are usually state-backed, are reporting increased business, which rose to $1.5 trillion at the end of 2008 from $1.3 trillion a year earlier. "Theyre seeing a lot of businesses that had not used credit insurance before because the normal alternative is self-insurance," Kimberly Wiehl, Secretary-General of the Berne Union of export-credit agencies, who will attend Wednesdays meeting, told Reuters.
WTO Director-General Pascal Lamy will report on Wednesdays meeting, which brings together commercial and development banks and export-credit agencies, to the next session of the WTOs working group on trade, debt and finance on March 31. That report and any recommendations from the working group will be available to the G20 summit on April 2 in London, which Lamy will attend to brief leaders on trade issues.
"What we can do is to call on member governments to raise their game in respect of co-ordination with each other, both at the intergovernmental level and at the agency level," Hong Kongs WTO ambassador Martin Glass, who chairs the WTOs working group on trade, debt and finance, told Reuters. Many countries have been trying to make more trade finance available to exporters. Brazil, for instance, has been pumping foreign exchange reserves into the sector via central bank auctions of dollar repurchase agreements.
US Treasury Secretary Timothy Geithner said last week the United States is working with the World Bank and other countries to boost trade finance. And the Wall Street Journal reported last week that US and British officials are working on a plan to provide several hundred billion dollars in trade financing. Many trade experts believe that improved co-ordination such as Glass calls for would involve a bigger role for regional development banks, such as the African Development Bank which has set up a $1 billion trade finance facility.
Getting trade finance flowing again could mean reforming financial regulation, another central topic for the G20 summit. Bank capital requirements - the Basel II rules - put higher demands on banks lending to traders in developing countries, even if the underlying business is intrinsically sound.