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Bulletin 2010 Mar 11
Bulletin 2010 Mar 11
1) Role of trade in financial crisis recovery prompts worries
2) Sovereign debt clauses in US BITs discussed by government‐appointed committee
3) Study doubts prudence of relying on WTO financial services "Prudential Carve‐out"
4) Bank practices, more than Basel II itself, responsible for trade finance decline
5) Regulatory reform could hurt trade finance: WTO expert
6) Does Trade Credit Substitute for Bank Credit during Crises?
7) Accreditation for World Bank/ IMF Spring meetings open
1) Role of trade in financial crisis recovery prompts worries
As a recovery gets underway, the speed at which trade is regaining its pace, after
having fallen in a 12 % last year, is startling observers. Without addressing some
important questions about the role that trade is playing in the recovery, however, it
will be hard to seriously hope for a recovery that is lasting and sustainable.
The main challenge was, perhaps, summarized by Mr. Strauss‐Kahn, Managing Director
of the IMF, in Davos. Referring to the growth forecast reports that the IMF is gathering
from countries he said such reports "will not add up."[1] Because exports from some
countries are not matched by exports in other countries, he stated many countries will
find exports and overall demand falling short of their expectations. As a result, it is
expected that overall forecasts for growth will not hold.
This outcome should not come as a surprise. The G20 Leaders meeting in Pittsburgh
last year agreed on a Framework for Strong, Sustainable and Balanced Growth where
they vowed to "work together as we manage a transition to a more balanced pattern
of global growth."[2] However, changing the patterns that led to the global imbalances
is easier said than done. It requires profound changes to the way that trade links with
production and consumption patterns in all countries. Such changes, to be fair, cannot
happen overnight.
But in addition to that the policy responses to the financial crises that were developed
in forums such as the Group of 20 ‐and, to a lesser extent, the United Nations‐‐ were
conspicuous for the narrow approach taken to address the trade dimensions of the
crisis.
As the average export‐to‐GDP ratio in developing countries more than doubles the
average in developed countries, it was logical that what started in the principal
financial centers as a financial crisis, primarily hit developing countries through trade‐
related channels.[3] Developing countries' proportionally greater exposure to trade did
not, in turn, happen by coincidence. For the last three decades a notable aspect of
World Bank/ IMF and donor programs was the growing prevalence of the notion that
boosting trade volumes would automatically lead to increased growth and revenue for
countries doing so.
It would be myopic to forget that the financial crisis was preceded by a boom in trade
of historical magnitude. The nature and features of that trade boom contained, in large
measure, the seeds of the bust that followed. As a consequence, the crisis could have
prompted a rethinking of the way in which trade was linked to financial structures
domestically and globally. Yet, the main trade aspects of the policy responses
advocated maintaining market access ‐e.g. through a revival of the WTO Doha Round
and naming‐and‐shaming protectionism‐‐ and enabling trade finance.
Against this backdrop, the policy responses missed a critical point. Indeed, a recovery
that is merely based on a resumption of the skewed trade patterns present in the pre‐
crisis boom would not offer much reason for celebration.
Unfortunately, there are few signs that a substantial rethinking of the structure of
trade and its links to finance has been inspired by the crisis. Though it is early to tell,
anecdotal evidence from developing countries indicates that a large part of the
rebound is dependent on exports and largely reproduces the export profiles present
before the crisis, including the impact that the rise in prices of primary commodities
had on export indicators. The recovery is led by China and a number of East Asian
economies such as Thailand, Malaysia, Taiwan and Singapore, and it is largely reliant
on exports. In Latin America and Africa, countries high exporters of oil, minerals and
agricultural commodities before the crisis are seeing their balance of payments
prospects improve mostly due to a rebound in prices of the commodities they export.
This also speaks to the difficulties that can be expected in reorienting the engines of
entire economies that have been oriented to develop through trade. These problems
are not only inherent to developing economies, as the situation of export powerhouses
in the developed world show. In a country like Germany, for instance, where exports
equated nearly half of GDP before the crisis, the government's chosen strategy was
one of temporarily containing the job losses with safety nets and preserving industrial
export capacity while hoping for trade to take a fast upturn. In Japan, where exports
before the crisis were a 20 % of GDP, it is reported that exports alone accounts for
more than half of the rebound in growth while the domestic market remains in fragile
conditions.[4]
Obviously, the necessary changes will take time, but they are not beyond the hands of
governments, if action is taken soon. Among those measures that would go a long way
to maximize the chances for a more lasting and equitable recovery, countries that can
increase their reliance on the domestic market, either because of their size or through
measures to expand purchasing power, should do so. All countries would benefit from
diversifying their export production base in terms of sectors and markets. It is
imperative to develop alternative monetary arrangements to reduce reliance on the
US dollar as main reserve currency, by reducing the excess demand for US dollar.
Strong regulation of the financial sector at the country level should be geared to
facilitate that profits from trade be reinvested in the local economy, and feed an
export‐investment nexus.
All of these changes call, in turn, for a renewed cooperation in the regulatory
framework for international finance that brings to the forefront the trade needs of
developing countries.
[1] Giles, Chris 2010. IMF chief warns of reliance on exports, in Financial Times, January 30.
[2] G20 Leaders' Statement: The Pittsburgh Summit. September 24‐25, 2009.
[3] More on the explanation of the relationship of different channels such as debt and foreign
investment to trade aspects in developing country economies in Caliari, Aldo 2009. Trade Issues Crucial
for Effectively Dealing with the Global Financial Crisis in Developing Countries (available at
http://www.nsi‐ins.ca/english/pdf/caliari_tradeissues.pdf)
[4] Dickie, Mure 2009. Exports mask shaky domestic outlook, in Financial Times,
February 16.
2) Sovereign debt clauses in US BITs discussed by government‐appointed committee
Last year, at the request of the US State Department and the US Trade Representative,
a committee was established to review the US Model Bilateral Investment Treaty.
Among other things that the Committee has recommended in its report that "the
Administration weigh the appropriateness of including an annex in future BITs on
restructuring public debt."
The call is contained in recommendation number 24 (and the last one) in the Report of
the Advisory Committee on International Economic Policy Regarding the Model
Bilateral Investment Treaty. Even with the understandable nuance that was expected
from a committee whose membership included representatives from the private
sector and civil society with, at times, very divergent views, it represents the most
significant progress that has been made to date on an issue that had long been the
matter of criticism by analysts.
The problematic trend in US bilateral investment treaties and Free Trade Agreements
to extend the application of provisions typically used for investment, such as national
treatment and MFN, has been addressed in this same bulletins as far back as 2005. A
Center of Concern paper issued on that year (available at
http://www.coc.org/node/5336 ) analyzes the concerns raised by clauses applying
investment treatment to sovereign debt in the context of the then under negotiations
Central American Free Trade Agreement.
That same year, in a paper commissioned by UNCTAD and published later on as part of
UNCTAD's Compendium on Debt Sustainability and Development this author noted
that the extension of National Treatment and MFN Treatment to sovereign debt might,
among other things, 1) dismantle tools needed by debtor countries in post‐crisis
recovery of the local economy, 2) prevent the State from paying salaries and pensions
in a crisis situation, 3) reduce the leverage of the debtor in negotiation of a debt
restructuring. Moreover, sovereign debt restructuring aspects become subject to
potential intervention by a patchy array of arbitral tribunals that threatened to
undermine the already uncertain situation of sovereign countries undergoing a debt
restructuring in a system that lacks rules for sovereign bankruptcy. (paper available at
http://www.coc.org/node/6415 ),
Thanks to the relentless advocacy of members of this group who were part of that
committee, a recommendation on this matter now has found its way into this
potentially pivotal report which will, no doubt, become a useful advocacy instrument
in future discussions on US (and other countries)' trade policy.
One substantial concern that gets noted by the committee and reportedly influenced
the opinion in favor of including this recommendation refers to the global financial
crisis. "There may be an increased need for negotiated restructuring of public debt,
particularly as countries have increased their public debt in recent years, in part to
address the current financial crisis," says the report.
To download a copy of the full report visit
http://www.investmenttreatynews.org/cms/news/archive/2009/10/01/advisory‐
committee‐submits‐report‐on‐the‐united‐states‐model‐bilateral‐investment‐
treaty.aspx
3) Study doubts prudence of relying on WTO financial services "Prudential Carve‐
out"
Find below summary and link to a study by the US‐based group Public Citizen, "No
Meaningful Safeguards for Prudential Measures in World Trade Organization's
Financial Service Deregulation Agreements."
This report's first section examines the existing financial services deregulation
requirements of the World Trade Organization (WTO), and the proposed expansion
of these through the "Doha Round" of trade talks. Just some of the WTO limitations
many governments have placed on their financial regulatory policies are:
. A "standstill" on financial regulation of sectors already committed to WTO
jurisdiction, so countries risk WTO challenges if they reregulate elements of the
financial industry.
. A ban on policies that limit the size of financial institutions (aimed at dealing with the
too big to fail problem), regardless of whether such rules apply equally to domestic
and foreign forms.
. Foreign firms must be allowed to offer any new financial product or services ‐ no
matter how risky ‐ limiting the ability of countries to keep out harmful products, such
as the credit default swaps and collateralized debt obligations that fueled the current
financial crisis.
. Government aid to the financial industry cannot favor domestic over foreign
companies ‐ even inadvertently.
The report argues that many members of Congress and legislators in other nations
now grappling with how to best reregulate the financial sector remain largely
unaware that these WTO rules require countries to maintain the very financial
sector policies that led to the crisis and could pose impediments to effective
reregulation.
Some experts have held the view that the measures required to re‐regulate are
protected under a "prudential carve‐out" clause in the WTO GATS agreement. But as
this paper shows, this provision offers no safe harbor for financial safety measures ‐
in that it contains a self‐cancelling loophole clause. Unfortunately, similar
restrictions on countries' financial service prudential regulation were placed by the
Bush administration in nine current and three pending trade and investment
agreements ‐ most of which additionally provide private foreign investors with
standing to challenge governments' financial stability measures before foreign
tribunals to claim cash compensation.
The paper suggests changes to the current WTO provisions, so that financial stability
proposals could be truly protected from challenge under trade and investment
pacts.
The full paper could be downloaded at
http://www.citizen.org/documents/PrudentialMeasuresReportFINAL.pdf
4) Bank practices, more than Basel II itself, responsible for trade finance decline
"Questions and Answers on Basel 2 and the agenda for regulatory reform", a set of
remarks prepared by Andrew Cornford for the G24, evaluates the role that the Basel II
on capital requirements may have played on the reduction in trade finance during the
global financial crisis.
It should be noted the question of the impact of Basle II agreement on the availability
and terms of trade finance has been the matter of complaints by developing countries.
An example of this is a communication that Brazil addressed to the WTO in October
2008 (WT/WGTDF/W/39). Brazil submits that "the Basel II potential effects on trade
flows, inter alia, through trade finance should be a matter of special interest to the
[WTO] Working Group on Trade, Debt and Finance." More recently, at a meeting
convening Finance Ministers and Central Banks from 17 Asian countries, call for "a
revision of the Basle II rules to ensure that trade financing is not unnecessarily
constrained by capital adequacy rules." (see http://www.coc.org/node/6444 for more
information)
Mr. Cornford's remarks suggest that "contractions in trade finance accompanying the
introduction of Basel 2 are due principally to changes in banks' practices regarding the
pricing and other terms of their loans which are part of the more rigorous risk
management that was one of Basel 2's collateral objectives." As a result, he says, the
appropriate policy response "would appear to lie on regulatory surveillance and the
provision of advisories to banks and bororwers, especially during the period when
bank lending is also under seveal other pressures due to the credit crisis and
macroeconomic conditions."
Full remarks available at http://www.coc.org/node/6506
5) Regulatory reform could hurt trade finance: WTO expert
The following article is reproduced from Reuters.
Regulatory reform could hurt trade finance: WTO expert
Wed, Mar 3 2010
By Jonathan Lynn
GENEVA (Reuters) ‐ Regulatory reform aimed at preventing banks from building up
toxic assets could make it more expensive and harder for banks to fund exports, a
trade finance expert said.
Reigniting world trade, which suffered its biggest collapse last year since World War
Two, is seen as vital to revive the global economy.
But Marc Auboin, the World Trade Organization's trade finance expert, said draft
regulatory reforms known as Basel III, making it more expensive for banks to hide
assets off their balance sheets, would also push up the cost of funding trade. Banks,
encouraged by the WTO, had already started gathering evidence to show that the
existing treatment of trade finance under the current Basel II rules is unfair.
"The professionals argue that the safe, short‐term and self‐liquidating nature of trade
finance has not been properly recognized in the Basel II framework," Auboin told
Reuters.
"When we discovered what was to be put back on balance sheets (under Basel III) we
had a bit of a shock and wondered whether trade finance would face another
obstacle," he said.
HUNDREDS OF BILLIONS OF DOLLARS
What is at stake is hundreds of billions of dollars of trade, especially among developing
countries.
It is unclear how hard the 2008 credit crunch has hit the roughly $15 trillion of world
trade, not least because there are no firm statistics on trade finance.
One indication is that a $250 billion two‐year package from the World Bank and
regional development banks agreed by the G20 summit in April last year has been
more than fully mobilized, taking advantage of the revolving nature of such funds.
Academics believe that the bulk of the contraction in world trade last year ‐‐ put at
about 12 percent by WTO director‐general Pascal Lamy last week ‐‐ was due to the
collapse of demand in the recession.
But researchers believe that world trade fell about 10‐30 percent more than the fall in
global demand would have suggested, with part of that decline due to a lack of
financing.
Trade volumes are already reviving, especially in Asia.
What is clear is that the proposed Basel III rules would drive up the cost of traditional
forms of trade finance, such as letters of credit, whose origins go back to mediaeval
Europe and which are among the least risky forms of credit, Auboin said.
Under the existing regulations, banks must set aside capital to cover roughly 20
percent of the value of letters of credit, because they have long been seen as so safe.
But the Basel III proposals, which require banks to cover liquidity as well as capital
risks, state that banks must cover 100 percent of off‐balance‐sheet assets ‐‐ a five‐fold
increase.
Banks hold letters of credit off balance sheet while they are going through the
painstaking process of verifying them ‐‐ checking on the names and identities of the
parties, shipping details, and local commercial law.
They only move on to a bank's balance sheet once confirmed, but typically some 75
percent are rejected before that.
Auboin said it was reasonable for regulators to seek to cover off‐balance sheet assets
but letters of credit were the wrong target.
"Letters of credit have never been used for leveraging. People don't play with them in
the industry."
Trade finance can be handled on banks' balance sheets through a form of funding
known as open account, similar to an overdraft facility.
But that requires highly sophisticated software to monitor creditworthiness and is
beyond the capacity of most banks in developing countries, who will be handling the
growth area of South‐South trade and who prefer traditional letters of credit.
"In my view this is something that is the product of a lack of understanding by
regulators of what the trade community does, and what the trade community does is
not properly explained to regulators," Auboin said.
(Editing by Ruth Pitchford)
6) Does Trade Credit Substitute for Bank Credit during Crises?
Below is link to a short article "Does Trade Credit Substitute for Bank Credit during a
Financial Crisis?" appeared in World Bank Research Digest, Volume 4, Number 1, Fall
2009.
The article explores the hypothesis that trade credit may serve as an alternative source
of finance for financially ‐constrained firms during a crisis. It concludes that it does not
and, in fact, trade credit may act as a factor that propagates the liquidity shocks
throughout the supply chain.
Article available at http://siteresources.worldbank.org/DEC/Resources/84797‐
1154354760266/2807421‐1255556544915/6476708‐
1255556605776/Does_Trade_Credit_Substitute_for_Bank.pdf
7) Accreditation for World Bank/ IMF Spring meetings open
The 2010 Spring Meetings of the International Monetary Fund and the World Bank will
be held over the weekend of April 24 ‐ 25 at the World Bank and IMF Headquarters in
Washington, D.C. As in previous years, the Civil Society Policy Forum, a program of
policy dialogues for Civil Society Organizations (CSOs), will be held between April 22
and April 25, 2010.
Accreditation will close on April 12.
For information on how to apply, please visit the Civil Society Website
Aldo Caliari
Director
Rethinking Bretton Woods Project
Center of Concern