WORLD TRADE
ORGANIZATIONWT/GC/W/444
18 September 2001
(01-4464)
General Council Original:  English
PREPARATIONS FOR THE FOURTH SESSION OF THE MINISTERIAL CONFERENCE
Proposal for the Establishment of a Working Group for the Study of the
Inter-Relationship between Trade and Finance
Communication from Cuba, Dominican Republic, Honduras, India, Indonesia, Kenya, Malaysia,
Pakistan, Sri Lanka, Tanzania, Uganda and  Zimbabwe
The following communication, dated 31 July 2001, has been received from the Permanent
Mission of Pakistan.
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Rationale
1. It is well recognized that international trade and finance both play a central role in
development.  But due to the influence of the currently dominant neo-liberal economic thinking, the
policy objectives seem to have been turned on their head.  There have been strong pressures to adopt
policies which focus on promoting international trade and finance for their own sake, without
reference to their implications for development, ra ther than formulate international trade and finance
policies which are designed to promote development. Viable mechanisms should be devised to ensurethe promotion of development, taking into account the discussions on the link between trade and
finance that have taken place so far. The current th inking presumes that liberalization of trade and
market oriented finance policies provide development by themselves.
2. There are few who would deny that improved and diversified access to markets in the North
for the products of developing countries, and remunerative and stable prices for their commodities,
would generate more income and thus more financ ing for development in the South.  Further, it is
clear that less exchange rate volatility and speculation in the financial markets, and hence fewer or
less serious financial crises, would assist trade and development.  The creation of mechanisms for
balance of payments support and for assistance to countries undergoing unexpected export shortfallswould also be helpful.  FDI in flows into those sectors of the economy which produce for export and
which contribute to domestic development would reduce the need for external financing, as would a
reduction in the burden of external debt.  There are many ways in which improved trade performance
and opportunities would add to the resources available for development and there are many ways in
which a more stable and development oriented financial system would enable developing countries toincrease the benefits from international trade.  Policy advances on both fronts would contribute to
economic growth and development.
3. In sum, the issue is whether the international community can agree to reform the international
trade and financial and monetary systems and provide the appropriate institutional framework such
that there is a more consistent and mutually supportiv e policy framework in the two fields of trade and
finance, with a view to providing developing countries with a more predictable environment for theirWT/GC/W/444
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development. The Bretton Woods Institutions started a reform process in 1994. An assessment of
what has been “reformed: so far and with what results, particularly from the point of view of trade and
finance from a development perspective, needs consideration. The G24 (that represents developing
countries at the IMF/World Bank) is monitoring this issue. The WTO Working Group on trade and
finance should include the G24 inputs on the link between trade and finance.
4. A necessary element of a new more integrated framework in the fields of both trade and
finance must be the acceptance of the need for different policies for countries at very different levels
of development, in recognition of the differences between the economic structures of the developing
and the advanced industrial countries and the persistent tendency towards external imbalances
associated with the development process.  Putting all countries on a “level playing field” by making
no meaningful distinction in the way they are treated in policy terms has not proved conducive todevelopment.
5. It is important to appreciate that the problems of financial volatility, speculative trading in
foreign currencies, currency and stock market collapse and generalized economic crisis referred to in
the background to the proposal are not only associated  with “new external and financial and monetary
disruptions” such as those resulting from the activities of dedicated “hedge funds and other highly
leveraged institutions”.  The liberalization of financial systems in recent years in many developing
countries has given rise to an increase in the infl ow and outflow of various types of finance, all of
which are subject to volatility.  Volatile capital flows are nowadays also part and parcel of investment
by TNCs.  In addition to engaging in green-field investment and bringing in foreign direct investment(FDI) of the so-called bricks and mortar kind, TNCs also borrow local funds to secure finance that can
be repatriated quickly and they engage in currency hedging operations to reduce their risks.  Their
investment and business activities thus embrace FDI, foreign portfolio investment (FPI) and other
forms of investment, all of which are highly liquid and often volatile.  (It should not be forgotten
either that FDI often takes the form of mergers and acquisitions.)
6. The roots of most recent financial crises can be traced to surges in the inflow of capital
(especially of FPI and short-term foreign currency denominated borrowing by domestic banks.)
Avoiding a detrimental impact on the money supply and interest rates and preventing adverse
pressures on the exchange rate pose a serious challenge for macro-economic management.  The
inflows may act in a pro-cyclical manner and overheat the economy or fuel an inflation of equity and
property prices and thereby encourage unproducti ve investment, and/or a boom in consumption.
When the dislocations are seen to be such as to make doubtful the continuation of the boom, short
term investors seek to make a rapid exit in herd-like fashion, with a consequent run on reserves.
Interest rates are increased to stem the capital ou tflows and protect the exchange rate, which in turn
can have detrimental consequences for both investors and borrowers.
7. It is clear that the rapid growth and diversification of financial instruments, the liberalization
and globalization of capital markets, and the frequency of crises with potentially severe implications
for the global financial and monetary system pose continuing threats to international trade and the
multilateral trading system.
8. More generally, in the absence of stable and rising export revenues, resort to other sources of
external financing becomes necessary.  What form this finance takes -- public or private -- is a key
issue, and a number of the relevant issues will necessarily have to be addressed, regarding the
relationship between the international financial and monetary system and international trade and the
multilateral trading system.WT/GC/W/444
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9. It should be recalled that many WTO Members argue that the principal advantage of the
GATT/WTO process and rules of the game are that they provide a degree of certainty and
predictability.  This, it is argued, provides the best possible guarantee against protectionism and large
reversals in trade in adverse economic circumstances.
10. From a developing country’s perspective, certainty and predictability in relation to continued
expansion of trade are also intimately linked.  This is because the GATT/WTO multilaterally agreed
rules (the content of agreements) are an important factor determining the extent to which developing
countries actually benefit from further liberalization efforts. Other major determinants are financial
and monetary disruptions,  which can have a detrimental impact on export earnings, due to exchange
rate changes, and on the balance of payments.
11. When considering the issue of certainty and predictability in relation to a continued expansion
of trade, it is obviously necessary to focus on th e value and not just the volume of trade.  In this
context it needs to be appreciated that the often quite considerable changes in developed country
exchange rates have a significant impact on developi ng country trade.  The issue of the exchange rate
regime is therefore an important one.
12. In addition to the above, an important issue to be studied is that concerning the measures
required in order to provide a greater degree of certainty regarding commodity prices and earnings,
while at the same time encouraging diversific ation, (whether through price stabilization,
compensation, insurance or other schemes).  Developing countries need strong and stable commodityprices if their development process is to proceed smoothly.
Reforms to  ensure that Members benefit from further liberalization efforts:
13. In discussing reforms that may be necessary to ensure that Members genuinely benefit from
further liberalization, developing countries will presumably wish to focus discussion on what can be
done to ensure that future initiatives to liberalize trade in goods and services does in fact serve the
interests of developing countries.
Proposals
14. On the trade front, and on the broad range of trade-related matters within the WTO ambit.
There is a need to be focused on the following central issues in particular:
• The institutional measures that need to be taken to facilitate greater and more
effective participation by developing countries in WTO proceedings;
• As mentioned earlier, new conceptual and substantive approaches to multilateral
agreements involving developed and developing countries are needed to provide a
different notion of “level playing fields”, based on recognition of their different
objective circumstances, which put them at a disadvantage compared with advanced
economies;
• An important lesson of economic theory is that, in order for the full benefits to be
derived from an open trading system, there must be full utilization of resources,
notably full employment.  It should be the task of the international financial and
monetary system to ensure this by pursuing appropriate policies to this end.  One
essential element would be a coordinated effort by the developed countries to achieve
a higher level of world demand;WT/GC/W/444
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• In order to ensure that developing country Members benefit from further trade
liberalization, it is worth repeating that developing countries themselves must engagein “internal” reform, in the sense that greater and more structured efforts need to be
made to develop a common platform on these matters so that they are better able to
advance their individual and joint interests.
• There is a need to develop a new more coherent framework in the fields of both trade
and finance with the recognition of diversity of appropriate polices based on diversityof levels of development and national situation.
• To ensure preservation of national policy autonomy.
• Consider mechanisms under the umbrella of coherence to alleviate the situation of
countries damaged by financial instability particularly exchange rate instability.
• To develop a multilateral surveillance system both to coordinate macroeconomic
policy and to ensure that these policies were compatible with the requirements of
development policy.
• To examine the trade implications of exchange rate instability and impact on BOP on
a country by country basis.
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