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  • THE G20: HOW MUCH AID FOR TRADE?

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    The G20: How Much Aid for Trade?

     

     
     
    International Trade Forum - Issue 1/2009

    Before the London Summit, world leaders had been wrangling over the size of domestic stimulaus programmes. But as the event unfolded, the G20 leaders shifted their focus towards stimulating the global economy.

    There was ambiguity about how much of the agreed US$1.1 trillion was genuine new funding, but the Summit at least focused on boosting global liquidity. The major part was in new funding for the International Monetary Fund (IMF), and for a dedicated allocation of Special Drawing Rights (the IMF reserve currency). This commitment tripled IMF resources, from $250 billion to $750 billion. There was also agreement on an additional $100 billion to be made available through the World Bank and the regional development banks.

    The balance was a welcome commitment to $250 billion of trade finance. The precipitous fall in world trade following the financial crisis has not just been the result of slumping demand. It has been made worse by the evaporation of export credits, which are the lifeblood of international trade, supporting some 90% of all transactions.

    As trade credits are of short gestation, generating $250 billion over several years requires only a fraction of the total in new funds. The amount is to be provided from both public and private sources. At the core will be $5 billion from the International Finance Corporation, part of the World Bank Group, supplemented by contributions from other multilateral development banks such as the African Development Bank and the Inter-American Development Bank. The 'public' component of the new credits will be supplemented by governments, including Japan, United States, Canada, United Kingdom, Netherlands and China, directly and through their export credit agencies. An even larger amount is expected from private commercial banks, making up a possible total of $50 billion, which could in turn finance between $200 billion and $250 billion of new trade over a two-year period, assuming trade credits run for about 180 days.

    Will it work? The stimulus will not prevent 2009 seeing the largest fall in world trade for 60 years, although degrees of pessimism vary. And while the G20 leaders again, as in November 2008, solemnly pronounced against protectionism, few countries have been able to resist imposing some trade restrictions, raising barriers in some form and on some products.

    However, more trade finance will have at least two positive effects. In the first place it will restore some dynamism to international trade by bridging the critical financing gap between supply and delivery. Secondly, there will be an important psychological effect, as the availability of trade credits will restore confidence to international markets.
    In September, the G20 will meet again in New York to take stock of the effectiveness of these measures. If economic upturn is indeed underway again by then in the biggest trading countries, London's Aid for Trade will be counted as a success.

    But if these stimulus measures take a long time to work through, developing countries will grow increasingly frustrated in a crisis not of their making, and which will set back the development agenda and the timetable for achieving the MDGs.