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  • COMMERCE CROSSROADS

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    Commerce Crossroads

     

     
     
    International Trade Forum - Issue 1/2009

    As recession deepens, global figures are starting to reveal the severity of the impact. Trade is contracting worldwide, and the recovery will depend on what policy-makers do next.


    In today's globalized world, trade is a powerful engine for economic growth. International trade activity in goods and services remains the cornerstone support of our financial system, facilitating economic expansion as well as international cooperation and development. For developing countries, trade is also essential for poverty reduction.

    Until 2008, the developing world has taken advantage of trade opening and a more interconnected world economy. However, after many years of rapid growth, the hard-earned achievements of global trade advancement hang precariously in the balance. The evidence of a major economic crisis is deepening and spreading across the global economy.

    For the first time since 1982, international trade is contracting worldwide. Recent World Bank statistics predict the volume of trade in goods and services to drop by 6.1% in 2009, with a significantly sharper contraction in trade volumes of manufactured products. These projections corroborate the World Trade Organization forecast of a 9% fall in world merchandise trade in 2009, with exports falling by an average of 10% in developed countries, and 2-3% in developing countries.

    An International Chamber of Commerce (ICC) survey of worldwide financial institutions, released on 2 April 2009, confirms the anecdotal evidence of the past few months. The financial problems are now impacting trade as a whole. Some 47% of banks surveyed reported a decrease in export letter of credit (L/C) volume. Similarly, 43% of banks reported a decrease in the L/C value of aggregate transactions. Data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) also shows a steady fall in trade since July 2008; the peak of 4.4 million messages dropped to just over 3 million by the end of February 2009.

    Emerging markets are most affected

    Trade finance to and from emerging markets in Asia appears to have been particularly hard hit. According to the World Bank, trade figures for East Asia show an unprecedented falloff in exports during the final months of 2008. Expressed in nominal United States dollars, hence reflecting a downturn in commodity prices exported by several countries, the data are nonetheless alarming. Export declines range from 52% in China to 80% in Taiwan (PC) through January 2009. Asia has been more sensitive to developments in developed countries than previously thought, especially with China at the hub of the assembly of final products for shipment to industrialized economies.

    Liquidity and capital requirements are still a problem

    Trade finance is still open in today's economic environment, but it's limited. Shortage of liquidity and risk reappraisal have driven up interest rates on loans and advances in many countries, especially in emerging markets. For instance, 52% of ICC survey respondents experienced an increase in confirmation requests between the last quarter of 2007 and the last quarter of 2008. Again, this reflects the increased security sought by exporters and the perceived payment risk of the country of the issuing bank.

    Many banks are also facing tougher capital requirements for their trade assets. Evidence is accumulating that the new capital adequacy regime, implemented at a time of global recession, has contributed to the drought of available finance. However there is still little data on trade finance, particularly historical and performance data for trade finance products. A consensus is emerging to argue that key risk attributes should be determined by industry benchmarks.

    Trade prospects will recover

    As recession strikes, the outlook for 2009 is negative. The collapse in global demand may have long-term effects, and economies will recover slowly after 2010. The ICC survey makes a distinction between short-term trade (six months' maturity) and longer-term projects of a more capital nature. The latter is more heavily affected at the current time, with large-scale financing projects being deferred, particularly in fast-developing Brazil, Russia, India and China (BRIC countries).

    The agreement to provide US$250 billion in new trade credits, reached in London on 2 April, means that trade, which has suffered so badly during this downturn, should now receive a major boost. This is certain to go a long way in restoring international commercial exchanges to normal levels and contribute substantially to ending the current recession. Business has also greatly appreciated the measures taken in recent months by export credit agencies, regional development banks and international banks, in particular in: trade facilitation programmes; trade guarantees facilities; increase of financial liquidity pools; and improvement of export insurance processes.

    Indeed, the global economic scene is forcing us to reconsider how business is carried out. But maintaining and enhancing trade openness is key, not only to preserving the mutual benefits of trade, but also to supporting the eventual economic recovery. More than ever, it is important that governments avoid the temptation to seek isolation from the global crisis through protectionist measures to restrict imports and foreign investment.





    Thierry Sénéchal is Policy Manager of the International Chamber of Commerce (ICC) Banking Commission and Executive Secretary of the ICC Corporate Economists Advisory Group.
    The ICC Banking Commission is a leading global rule-making body for the commercial banking industry, as well as a worldwide forum of trade finance experts whose common aim is to facilitate international trade finance. The ICC Banking Commission has more than 500 members in 70 countries, many of them from emerging countries. It produces universally accepted rules and guidelines for documentary credits, documentary collections, bank-to-bank reimbursement and bank guarantees. Its voluntary market-based approaches have been praised for levelling the playing field in trade finance practices.