My apologies for not writing for nearly a year. I foresaw in my last two blogs that we were entering an intensive busy period in the WTO negotiations. The talks did indeed keep me busy this year, not least before, during and after the meetings in July that were so close to a breakthrough. What none of us foresaw was all the other issues that would come up during the year, culminating in the global financial crisis.
But I thought it was time I catch up with you and share some of my concerns. Just last week I chaired a meeting with some key players in the banking world. This may come as a surprise to some since the WTO is not a financial institution. It’s not involved in lending and borrowing. But finance affects all economic activity and the credit crunch poses a serious threat to trade, and a threat to trade is a danger to our chances of helping lift the world economy out of the crisis. Did you know that 90% of trade is financed on short term credit? If liquidity dries up or if the cost of the credit rockets, you have the recipe for trouble.
This meeting was not the first of its kind. The WTO regularly meets other organizations such as the World Bank, IMF and regional banks with trade finance as one of the subjects on the agenda. Today’s participants represented private banks, international financial institutions, and export credit agencies, roughly the same as a group I invited here in April.
The picture that emerged is grim. The recession itself is already slowing down trade because people and companies are buying less. On top of that, companies that would normally be able to trade are finding it more difficult to do so because credit is tight.
Worse, because of the uncertainties, the cost of borrowing and insurance has risen. Risk, out of sight for so long during all those years of apparent certainty, has itself become a player – through imprudent mortgage lending, the misuse of hedge funds, and now in trade, through higher premiums and a reluctance or inability to lend.
Worst hit as far as trade is concerned are traders and banks in emerging market economies but we have seen that small and medium companies all over the world have been adversely affected as well. We heard from the financiers that the situation is likely to deteriorate in the coming months. This is particularly worrying because the large emerging economies could help to keep the world economy ticking over while the developed economies recover. One only need to look into the growth forecast for 2009: the engine of growth will be in emerging economies. Apart from the setback to their own prospects, if they too are squeezed, then global recovery will be even more difficult and take even longer.
The credit and insurance that help trade flow smoothly normally form one of the most secure areas of the whole financial sector. It is small compared to the big bank business. But the benefits are magnified for the economy as a whole because trade acts as a multiplier. We must sustain it. If trade finance is not tackled, we run the risk of worsening the world economy’s downward spiral.
This is the message that I passed to many of the leaders that were meeting in Washington on 15 November and there was a clear sense that more needs to be done to help here.
Some action is already underway, and we have heard a number of announcements for example from the World Bank which is doubling the lending ceiling for trade finance activities by its sister organisation, the IFC. The problems are liquidity and risk and both must be tackled.
We’re told that the liquidity gap in trade finance – how much more money is needed to meet the demand for trade credit and insurance – is $25 billion. This is a lot of money, but not enormous when compared with the amounts that central banks have made available in the rescue packages of the last couple of months. Private banks believe the money can be found through joint efforts among the various agencies and the governments that are their shareholders.
Part of the cooperation between the financial institutions would involve sharing information more, and improving ways of dealing with risk.
Risk can also be reduced by action within the WTO. The WTO’s trading system is organized, regulated, disciplined, balanced and predictable. It has helped to ward off the beggar-my-neighbour protectionist trade wars that the world saw in the 1930s. The WTO’s members have repeatedly shown that playing by the rules and keeping markets open have been part of the solution to various financial crises over the years. This was confirmed again in Washington last weekend, in the political commitment of the governments involved to resist protectionism and abide by their WTO obligations.
They can send a positive signal to the world by taking another step to strengthen this insurance policy by completing the Doha Round negotiations. After seven years, the talks have come a long way. Some tough obstacles still remain, but the end is now within reach. Getting there would be another victory for certainty over risk.
As you know leaders in Washington instructed their Ministers to get a deal on agriculture and industry modalities (yes, I know this jargon is terrible!) by the end of the year. So do not be surprised if I do not write over the coming weeks. Do post your comments, nevertheless, which I hope to read – and respond to – over Christmas.
Hope to hear from you soon.
Copyright image : Eric Piermont, AFP