The collapse of global trade, murky protectionism, and the crisis:

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VOX Research-based policy analysis and commentary from leading economists About the authors Biswajit Dhar is Professor and Head, Centre for WTO Studies located at the Indian Institute of Foreign Trade in New Delhi. He works in an advisorial capacity to the Govt of India on trade and development issues. Simon J. Evenett is Professor of International Trade and Economic Development at the University of St. Gallen, Switzerland, and Co-Director, International Trade and Regional Economics Programme, Centre for Economic Policy Research (CEPR). Guoqiang Long is Senior Fellow and Deputy Director General of Foreign Economic Policy Studies, Development Research Center (DRC), P.R. China. Andre M. Nassar is Director-General of the Brazilian Institute for International Trade Negotiations. He has been an advisor of the Brazilian Ministry of External Relations since 2003 for the Agricultural Negotiations of the Doha Development Round. Stefan Tangermann was until end-2008 Director for Trade and Agriculture in the OECD. He is emeritus professor of agricultural economics, Department of Agricultural Economics and Rural Development, University of Göttingen, Germany. Alberto Trejos is Professor of Economics at INCAE, President of the Costa Rican Investment Board (CINDE), and has served as Minister of Foreign Trade of Costa Rica. 74
15. Restoring trade finance: what the G20 can do Marc Auboin WTO Secretariat Shrinking trade finance threatens living standards in both industrialised and developing countries. It reduces trade flows and thus adds to other deflationary pressures. The threat is all the greater in this crisis because international supply chains now extend to trade finance as well the production of parts and components. Sophisticated supply-chain financing operations – including for small and mediumsize companies – rely on a high-level of trust among suppliers; trust that they will deliver their share of the value-added and have the necessary finance to produce and export in a timely manner. What is the situation now? The global liquidity situation has been a major constraint in 2008 on the largest suppliers of trade finance. Trade credit has also been reduced by a general re-assessment of counter-party risk, and an increase in the expected payment defaults on trade operations. In the second half of 2008, the situation spread to developing country markets. The market gap initially appeared in Wall Street and London, as US and UK global banks – particularly those with weak balance sheets – could not off-load/refinance on their excess exposure in trade credits the secondary market. As a result, some banks were unable to meet the demand from their customers for new trade operations, leaving a "market gap" estimated to be around $25 billion in November 2008 – out of a global market for trade finance estimated at some $10 trillion a year. More disturbing is the fact that large banks have reported on several occasions that the lack of financing capacity has made them unable to finance trade operations. Some very large banks used to roll-over up to $20 billion in the secondary market per months are doing $200 million right now due to lack of counterparties. Demand for trade credit is far from being satisfied, and prices for opening letters of credit far outweigh the normal re-assessment of risk according to market specialists. Further, the liquidity problem, although cooling a bit in Asia, has since spread to other developing countries' money markets in South Asia, Africa, and Latin America. This adds to the problems faced by local banks in certain developing countries even in normal circumstances such as lack of deep money markets, lack of capacity to handle large volumes of trade credit, lack of reliable information on the creditworthiness of customers, all of which lead, in periods of crisis, to difficulties in finding partners in developed countries to accept the counterparty risk. 75
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