G20 Leaders Boost Trade Finance, Renew Vow to Resist Protectionism

8 April 2009

In the face of the steepest drop in world trade in 60 years, leaders from the Group of 20 economic powers agreed last week to provide funding for US$ 250 billion worth of international trade flows. The heads of state also reiterated the vow they made in November not to establish any new barriers to trade, this time adding a promise to report any such measures to the WTO.  
 
In the 29-point communiqué released at the meeting’s close, the heads of state proved that they had also found consensus on increasing regulation of financial firms and updating the structure of the 65-year-old International Monetary Fund, topics that had sparked controversy in advance of the summit. But the leaders sidestepped the contentious question of whether governments should increase their stimulus spending – a move backed by the US but resisted by Continental Europe – and failed to set out concrete steps on how to tackle the ‘toxic assets’ that continue to plague financial systems on both sides of the Atlantic.
 
Trade finance gets a boost
 
But the leaders did agree on the need to stimulate world trade flows, which have fallen off a cliff in recent months. While much of the slump in trade can be attributed to waning global demand for goods and services, a decline in the availability of trade financing – short-term loans that many call the lifeblood of global commerce – has also helped slow the international flow of goods.
 
To help, the G20 leaders agreed to provide financing for US$ 250 billion worth of trade over the two years. Because trade finance loans are relatively short lived, that amount of commerce can be insured with a pool US$ 50 billion worth of financing, or so world leaders hope.
 
The additional financing will come from a mix of public and private sources. The World Bank’s International Finance Corporation has said it will provide US$ 5 billion; the governments of Canada, China, Japan, the Netherlands, the UK and the US are all expected to contribute to the pot, as are the African Development Bank and the Inter-American Development Bank. The US’ Export-Import Bank is expected to begin financing trade directly (traditionally, it has provided insurance for banks who offered the loans); similar European export credit agencies have yet to make their plans public.
 
Many developing countries rely on trade finance - loans tied directly to cross-border trade transactions - to help fund their participation in the global market. Trade finance is widely considered one of the most secure modes of finance. The loans have a short maturity, their execution is relatively routine, and the traded goods themselves can serve as collateral. But with many banks short on cash, such loans are now hard to come by.
 
With global demand in a slump, affordable access to trade financing can help ensure that international trade can help absorb the shock of a global economic downturn. More than 90 percent of all trade transactions involve some sort of short-term credit, and the liquidity that such loans provide has underpinned recent growth in world trade.
 
The announcement of the increased trade funding buoyed markets – especially for commodities, which have struggled since falling hard from the highs they reached last year. Copper climbed to its highest price in five months on the day of the G20 summit, and the prices of metal used in power and construction hit peaks not seen since November.
 
“Trade finance has made life difficult for many exporters, the US$ 250 billion should help conditions improve,” John Meyer, an analyst at Fairfax, an investment bank, told Reuters.
 
“Such a high figure is great news and much more than I was expecting,’’ said Ricardo Meléndez-Ortiz, chief executive of the International Centre for Trade and Sustainable Development, which publishes Bridges Weekly. ‘‘But the point is how to get it to the countries that need the money the most, an issue on which the G20 was silent.”
 
‘‘Africa’s exports are going to fall by 40 percent this year. The external demand for African products has dropped and so have commodity prices, tourism, remittances and the economic growth of the big driving countries - South Africa, Nigeria and Kenya. Africa badly needs trade financing.’’
 
New promises on free trade
 
The G20 leaders vowed to resist the kind of tit-for-tat protectionism that exacerbated and prolonged the Great Depression of the 1930s. They extended to the end of 2010 the commitment they made in November 2008 “to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.”
 
The leaders also agreed to “notify promptly the WTO of any such measures,” and called on the global trade body and other relevant international institutions “to monitor and report publicly on our adherence to these undertakings on a quarterly basis.”
 
The leaders also vowed to “rectify promptly any such [trade-restricting] measures,” perhaps in acknowledgement of a recent World Bank report that found that 17 of the G20 members had enacted trade-restricting policies since they pledged not to do so in November (see Bridges Weekly, 18 March 2009,  https://www.ictsd.org/bridges-news/bridges/news/world-bank-warns-of-‘worrisome’-rise-in-protectionism).
 
On Doha, the leaders reiterated a familiar pledge to continue to work towards “We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed.  This could boost the global economy by at least $150 billion per annum.” 
 
The heads of state also stressed that they wanted to build “on the progress already made, including with regard to modalities,” indicating that what is now on the table in the WTO talks should serve as the basis for future negotiations. The wording was notable, as the fledgling administration of US President Barack Obama has yet to indicate whether it will accept the latest draft modalities texts as a starting point for progress toward a deal to cut maximum tariff levels and slash domestic subsidies.
 
Obama’s trade policy has been the subject of intense scrutiny and speculation recently; talks at the WTO have largely stalled in the absence of clear signals from the new administration. But WTO Director General Pascal Lamy, who attended the London summit and met privately with Obama, described the new US president as “extremely engaged” in the world trade talks.
 
"My sense is that the overall stance of the US is the right one. We are not there yet and I understand the US needs some time to weigh up what is on the table," Lamy said in an interview with Reuters last week. 
 
"I do not exclude calling a ministerial before or after the summer break," he said, referring to the WTO’s annual August holiday.
 
Leaders reportedly agreed to discuss Doha again when the G8 countries gather in July. Emerging economies Brazil, China, India, Mexico and South Africa will also be represented at the summit.
 
IMF gets funding, reforms
 
In what was hailed as one of the most concrete gains from the summit, world leaders committed to tripling the funding available for the IMF, which doles out money to countries in need, boosting it to US$ 750 billion.
 
IMF Managing Director Dominique Strauss-Kahn said that the influx of funds would give the institution the ‘firepower’ it needs to begin responding to the global crisis. “Today is the proof that the IMF is back,” he said.
 
The G20 leaders also called for changes to the kinds of conditions that the IMF places on its loans, instructing the fund to make its lending instruments more flexible so as to allow low-income countries greater freedom in disbursing the money they borrow.
 
The power structure within the IMF will also get some revisions after the summit. The G20 leaders called for a ‘realignment’ of the quota shares that determine countries’ voting power and contribution levels; the shift is expected to give emerging economies like China and India a greater say in how the IMF is run. Moreover, the leaders agreed that future chiefs of the fund will be chosen on their merits, not their country of origin. The head of the IMF has traditionally been a European.
 
“Emerging markets and developing economies, including the poorest countries, should have greater voice and representation in the fund,” the leaders said.
 
The G20 will meet again in September in New York.
 
ICTSD reporting; “G20 trade finance reinforces positive mood,” REUTERS, 3 April 2009; “Factbox: G20 mobilizes funds for trade finance,” REUTERS, 2 April 2009; “G20 backs regulation crackdown, $1.1 trillion aid,” BLOOMBERG, 2 April 2009; “WTO’s Lamy says US engaged on Doha,” REUTERS, 3 April 2009; “World leaders pledge $1.1 trillion for crisis,” THE NEW YORK TIMES, 2 April 2009; “G20 summit’s trade-related commitments disappoint,” INTER PRESS SERVICE, 6 April 2009. 

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