Marc Auboin

Counsellor, Economic Research

Secretary, WGTDF
World Trade Organization
Trade and Finance: WTO’s Role
 Post-war architecture
• IMF-WB-GATT:

– Multilateral economic organization born out of economic cooperation failures

during the inter-war period, in 20th century

– Great depression worsened by beggar-my-neighbour policies: competitive

devaluations, and increase in trade barriers

– Idea of treating exchange rates and trade policies as matter of common interest

– Underpinned by disciplines: preventing competitive devaluations and promote

orderly adjustment of exchange rates and balance of payments (prevention of
exchange rate manipulation, ensuring convertibility, freedom of current account
transactions etc), disciplining trade restrictions and promoting a rules-based
trading system
 Post-war architecture (2)
The monetary and trade architectures had to be coherent from the onset:

The Genesis of the GATT, D. Irwin, p.44: “Keynes, White, and US Treasury teams
discussed postwar monetary and financial arrangements. Both sides recognized
that agreement on commercial policy was predicated on an agreement regarding
postwar exchange rate and financial policy. Indeed, international trade could not
flow smoothly without a well-functioning system of international payments and
exchange rates in place.
 Five Functions (Article III.5 of the WTO):

- Administer WTO Agreements

- Negotiating new rules and agreements
- Settle trade disputes between Members
- Review and monitor Members’ trade policies
- Coherence of economic policies with organizations such as
IMF and World Bank
 Where are institutions intersecting?
• Examples: Bridge Articles on finance and trade

Article XV of the GATT: GATT to collaborate with IMF for coordinated policies
related to exchange issues of IMF competency and quantitative restrictions to trade of
GATT competency. Consultation mechanism

Article XVIII.B of the GATT: Procedure for Balance of payments mechanism –

IMF has to come with a view on the BoP situation of the country requesting a BoP
measure.
 Coherence Ministerial Declaration
• Coherence Ministerial Declaration (1994) – part of WTO Agreement:

“The interactions between structural, trade, macro and financial policies are
increasing.

“Trade policies should be supported by a set of consistent policies (stable

macroeconomic conditions, sequencing between internal and external reform,
adequate amount of international assistance, proper debt policies).”

“Achieving greater policy coherence at international level = greater harmony

between these policies. However, policy coherence must be first implemented
at home. International Organizations should cooperate.”
Doha Ministerial Conference (4th): creation of WG on Trade, Debt
and Finance

“We agree to an examination, in a Working Group under the auspices of the

General Council, of the relationship between trade, debt and finance, and of
any possible recommendations on steps that might be taken within the
mandate and competence of the WTO to enhance the capacity of the
multilateral trading system to contribute to a durable solution to the problem
of external indebtedness of developing and least-developed countries, and to
strengthen the coherence of international trade and financial policies, with a
view to safeguarding the multilateral trading system from the effects of
financial and monetary instability. The General Council shall report to the Fifth
Session of the Ministerial Conference on progress in the examination”.
 Working Group on Trade, Debt and Finance
• Examination group, not rules-making group

– Previous work: understanding the relationship between trade, debt and

finance, through a series of papers (WT/WGTDF/W 1 to 5)
– relationship between exchange rates and trade (until 2015)

– Current work: Access of developing countries to trade finance

• Basis: WT/WGTDF/98 Rev1: “PROJECT TO DEVELOP A ROAD MAP OR WORK PROGRAMME FOR
ISSUES RELATING TO ACCESS TO TRADE FINANCE FOR MICRO, SMALL AND MEDIUM-SIZED
ENTERPRISES (MSMES) IN THE CONTEXT OF COVID 19” COMMUNICATION FROM CÔTE D'IVOIRE
 What is the issue? Finance is needed for trade
• For a variety of reasons:

– Exporters want to be paid at shipment, at latest;

– Importers want to pay at the earliest upon reception;
– Someone needs to take the payment risk during this period;
– Exporters want to have the working capital to buy inputs and produce;
– Importers want to distribute their products before paying them
– Sellers might want to get cash against invoice..
Trade and Finance are linked and corrolated
 Getting affordable trade finance is part of
competitiveness
• The largest exporters receive cheap and ample trade finance flows,
generally in the currency of their choice/use. Being in a position to
trade and pay in its own currency is a competitive advantage.

• Inversely, firms receiving no or expensive trade finance are at a

disadvantage, idem for those depending on foreign currency access
to pay. They may have to bear the exchange rate risk. Trade finance
costs add to the other trade costs
 Several instruments; “traditionnal” and supply chain
finance
• Letters of credit and pre-shipment loans have been existing for a long
time.

• New forms of trade finance come from physical supply chains. Open
account, supply chain finance, factoring, insured trade credit
 A global market

• 60 to 80% of global trade is supported by some form of finance or

insurance

• Market problably over $10 trillion, in part bank intermediated, in

part not

• Banks intermediate traditional instruments such as LCs, also some

open account. Offer SCF
• Very large flows: $2-3 trillion for LCs
Low income countries have less access to trade finance
Low income countries have less access to trade finance
 …Traditional products – very safe …

Figure 1: Risk characeristics of short-term trade finance products, 2008-2015

CATEGORY Default rate by Loss at default Expected Loss

exposures rate

Import letters of credit 0.08% 27% 0.02%

Export letters of credit 0.04% 40% 0.02%
Loans for import/export 0.21% 35% 0.07%
Performance guarantees 0.19% 5.5% 0.01%
Source: 2016 ICC Trade Register Report, p.22
 …
• The correspondent banking problem: KYC/AML/CFT requirements
lead to a cleaning up of global banks’ international networks

• There are skill shortages in developing countries: since developing

countries are the main users of letters of credit, there is a constant
need to train new users. However, now there is on top of it a need to
train users about AML KYC requirements

• Trade finance supply and demand meet a number of obstacles in

developing countries: low intake by banks, high collateral
requirements, little lending to SMEs, lack of compliant applications
by demanders, supply chain finance seldomly proposed
What are the main obstacles to trade finance (supplier’s perspective)

AML/KYC 90.3%

Low issuing bank credit rating 86.2%

Low country credit rating 82.4%

Regulatory requirements 76.1%

Low obligor or company credit rating 69.8%

Insufficient company colateral 61.8%

High transactions costs or low fee income 60.2%

Previous dispute or unsatisfactory performance 54.8%

Capital constraints 45.4%

Bank staff lack of familiarity with products 35.6%

lack of dollar liquidity 31.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
 …Why the WTO? A $2.5 trillion gap (ADB)
• $2.5 trillion gap, 10% of market? – in Asia, Africa, LATAM

• SMEs penalized: 40-50% of rejections by banks. Often no alternatives

 Main actions by international community

o Support the increased in MDBs trade finance facilitation programmes

o Trade finance provided by MDBs to developing countries: +50% during the pandemic (to
some $50 billion)

o Increase training of trade financiers and SMEs in developing countries

o Training done by MDBs and WTO: New trade finance and SME workshops (Africa,
extending to developing Asia)

o AML KYC – TBML training

o Monitor trade finance markets.

o ADB, WTO and other organizations do a global trade finance gap study every two years;
AfDB regional trade finance study every two years; IFC-WTO sub-regional studies
 Support to trade by multilateral development banks – Trade finance
facilitation programs
IFC EBRD IIC, member of Inter- ITFC, member of the ADB
American Development Islamic Development
Group Bank Group

Program title Global Trade Finance Trade Facilitation Program Trade Finance ITFC Trade Finance ADB Trade Finance
Program (GTFP) (TFP) Facilitation Program Program (ITFP) Program
(TFFP)

Number of countries in operation 90 27 21 57 20

Program commencement 2005 1999 2005 2008 (1977 under IsDB) 2004

Number of transactions since 45,000* 18,300 1,453 (7,304 underlying) 507 12,233 (11,026 of which
commencement are from 2009-2015)
(year end 31 December 2015)

USD 53 billion* EUR 12.8 billion USD 6.20 billion USD 31.529 billion USD 30 billion (2009-16)
Value of transactions
since commencement

Number of issuing banks

Number of confirming banks 1,300 800+ 300+ Not applicable 200+

Claims paid to date 0 2 0 Not applicable 0

Thanks!