RESTRICTED  WORLD TRADE  
ORGANIZATION  WT/WGTDF/M/8 
28 October 2004 
 
 (04-4593) 
Working Group on Trade, Debt and Finance  
  
 
REPORT OF THE MEETING OF 4 OCTOBER 2004 
 
 1. The Working Group held its eighth meeting on 4 October 2004 under the Chairmanship of 
Ambassador Péter Ba lás (Hungary).  The Working Group adopted
 the agenda contained in 
WTO/AIR/2390. 
I. TRADE AND FINANCIAL MARKETS 
2. Under this topic, which constitutes part of  the Group's work programme until the next 
Ministerial Conference, discussion focused on two sub-themes, namely (i) recent progress in achieving international financial stability, and its rela tionship with trade;  and (ii) exchange rate 
volatility and its impact on trade flows.  
A. R
ECENT PROGRESS IN ACHIEVING INTERNATIONAL FINANCIAL STABILITY  
Presentation by the Financial Stability Forum (FSF)  
 3. Mr. Svein Andresen, Secretary-General of the Financial Stability Forum provided Members 
with information concerning the mandate and achievements of the FSF
1, which had been created as a 
result of a series of financial and banking crises in  the 1990s after which many proposals for reform of 
the international financial system had been made.  A report commissioned by the G7 (the "Tietmeyer" 
Report), presented in February 1999,  had concluded that there was a need for better arrangements, 
recommending improved information exchange and c oordination amongst authorities, the pooling and 
assessment of information on risks and vulnerabilities in the international financial system, and more 
effective procedures to develop and implement intern ational standards and codes of good practice.  
This had then become the mandate of the FSF, wh ich approached risks and vulnerabilities with a six-
to twelve-month outlook and helped to assure a de gree of coherence across countries with regard to 
governance. The Financial Stability Forum, served by  a very small secretariat, was composed of G7 
Deputy Finance Ministers, Central Bank representa tives, Central Bank governors from major financial 
centres, standard setting and regulatory bodies (e.g. the International Accounting Standards Board  
and the Basel Committee on Banking Supervision) and in ternational financial institutions. In order for 
it to operate effectively, the Forum needed to have  on board authorities from the key financial centres 
and support from the international financial instituti ons with regard to surveillance and assistance 
functions.  
4. As a senior-level group – but technical rather than political – the FSF, operating flexibly and 
informally, could facilitate coordi nation and provide impetus where the inclination of independent 
bodies might run in different directions. When there was no natural "owner", the FSF established working groups to consider systemic issues.  In the past, these had included Working Groups on 
Highly Leveraged Institutions , Offshore Financial Centers , and Dealing with Volatile Capital Flows .  
A key area of work for the Financial Stability Fo rum had been developmen t and implementation of 
standards of sound practices in financial systems, identifying gaps and ensuring that the standards 
                                                     
 
1 A fact sheet providing background information on the Financial Stability Forum was circulated in 
WT/WGTDF/W/26. WT/WGTDF/M/8 
Page 2  
 
were met.  Soon after its esta blishment, the FSF produced a  Compendium on International Standards , 
and a subsequent Task Force had identified 12 key standards for priority implementation which had 
since been endorsed by, inter alia,  the G20. The Forum met, typically, twice a year, and its Chairman  
had a reporting obligation to the G7 and the IMFC, which was necessary to en sure the legitimacy and 
effectiveness of the Forum's work.   The Forum has held a number of regional meetings as part of its 
outreach activities and is expanding further in this ar ea.    Its current focus was on global issues of 
credit risk, reinsurance, and levels of household debt. 
5.  As to its success in achieving financial stability, the Secretary-General believed that the work 
of the FSF had improved transparency, and the bala nce sheets of central banks, through countries' 
adoption of the IMF's Special Data Dissemination Service (SDDS), Financial Sector Assessment 
Programs (FSAPs) and Report on the Observance of Standards and Codes (ROSCs).  Risk 
management had been enhanced through both t echnology and improvements in risk management 
practices, including by strengthening the independen ce of boards and audit functions, and efforts to 
structure indebtedness had reduced borrowing, thus  adding resilience to financial systems.   
6. Improvements in risk management had been ma de both through the work of international 
organizations and at the national level, where more  attention was now being paid to the timing and 
sequencing of liberalization, exchange rates were being managed more flexibly, and reliance on short-
term borrowing had been reduced.  Evidence of bett er risk management practices was that recently 
there had been no significant episode of contagion in emerging markets, nor any big retrenchment in lending to these markets at times of high risk.  In  addition, trade in financial services had been 
expanding very rapidly with, in hi s view, overwhelmingly positive results. 
7. In response to questions from Canada
, the Secretary-General confirmed that the Forum 
identified gaps in solutions from which its member s could draw inferences for policy-making;  it 
served a useful role by shedding light on a particul ar problem, but did not prescribe policy.  He noted 
that the FSF did not want to become an institutio n, although at the same time the Forum was not 
subject to external review.  Replying to a question from Japan , he said that, at present, although all the 
issues cited were being monitored, the Forum's most  important priority was to monitor the level of 
household indebtedness. The representative of Japan  further remarked that this subject also addressed 
the theme of "WTO rules and financial stab ility". With respect to a query from Brazil  that a main 
criticism of the financial architecture had been th e lack of voice of developing countries, the 
Secretary-General responded that originally it ha d been intended that the larger emerging economies 
take part but that  focus had shifted to ensuring repr esentation of the major global financial centres.  In 
addressing a related question from Nigeria  and Chinese Taipei  concerning collaboration with non-
Members, he noted that the FSF was engaged in  outreach activities on a regional basis around the 
world.  The representative of Pakistan  enquired as to whether the work of the FSF could prevent 
crises that could damage trade.  In resp onse to a question from the European Communities  regarding 
the WTO's potential contribution to financial stab ility, the Secretary-General underlined that the 
development of standards and codes could be  very positive for the world system by, inter alia , their 
recognition in WTO work on financial services libera lization. He also cited that the FSF had alerted 
banking supervisors to their exposure on telecommun ications companies in the year 2000 before the 
"dot.com" bubble had burst. The representative of the United States  noted that there was some 
concern about conflicting jurisdictions between the WTO and standards-setting organizations. In 
conclusion, Mr. Andresen remarked that the FSF could suggest good practices but that this left a lot of 
scope for implementation suitable to the needs of the country concerned.  WT/WGTDF/M/8 
 Page 3 
 
 
B. EXCHANGE RATE VOLATILITY AND ITS IMPACT ON TRADE FLOWS  
Presentation by the International Monetary Fund2 
 8. At the General Council meeting on Coherence held in May 2003, the Managing Director of 
the IMF had referred to a study of exchange rate volatility and trade that was being prepared by the 
IMF's Research Department  as an update to one that had been done in 1984 for the GATT contracting 
parties. The study, "Exchange Rate Vola tility and Trade Flows – Some New Evidence"
3, had been 
circulated as WTO document WT/WGTDF/W/24. The representative of the IMF  noted that, in 
contrast to the 1984 study, the research for the upda ted report had extended the country coverage to 
150 countries and had examined the effects on trade both from different perspectives and by using a 
number of measures for volatility.  He pointed ou t that much had changed since the 1984 study had 
been prepared, including growth in the range and variety of cross-border financial transaction and 
increased frequency of financial crises.  At the sa me time, hedging instruments had proliferated and 
multinationals now played a much larger role in trade.  The updated study had found that while there 
was a negative relationship between  exchange rate volatility and trade, the effect was small and the 
relationship not robust.  The IMF's research had also observed that maintaining a pegged exchange 
rate regime did not reduce susceptibilit y to exchange rate volatility.  
9. Following the presentation, the representative of the United States  suggested that if the 
relationship was not very robust, a nd domestic policy was often the cause  of such volatility, then this 
was not a major policy concern for enhanc ing trade.  The representative of China  asked whether the 
study had taken into account the impact on small- and medium-sized enterprises, to which the IMF 
representative responded that this had not been possibl e, but that if it had been it would likely have 
produced different results.  In response to  a question from the European Communities regarding the 
trade-promoting effects of currency unions, the IMF  representative said the analysis indicated that the 
reasons were less related to the currency factor a nd more to "cultural" variables.  The Chairman  noted 
that structural changes, as eviden ced in transition economies, were often the main cause of exchange 
rate volatility.  The representative of Chinese Taipei  noted that in economies with an exchange rate 
pegged to a weak currency, the volume of trade remained the same.  The representative of Japan  
asked how the model took disorderly movements in  exchange rates, which were unrelated to 
economic fundamentals, into account. The representative of China  asked how "other" factors were 
quantified, to which the IMF  representative referred to the formul a cited on page 33 of the study 
which included an "error" term. 
C. EXCHANGE OF VIEWS REGARDING THE UPCOMING DEDICATED SESSION OF THE GENERAL 
COUNCIL ON COHERENCE ON 22 OCTOBER 2004 
10. It was agreed that the Director-General, in hi s remarks to the General Council, be invited to 
make reference to the technical work of the Wo rking Group, much of which was relevant to the 
Coherence mandate.  The occasion might also be u sed to seek guidance from that political body.   
11. The representative of Japan  suggested that the World Bank be invited to address the Group on 
its work in respect of supply-side constraints as mentioned in the Note by the Secretariat on Assistance to Address Supply-Side Constraints (WT/COMTD/LDC/W/33, paragraph 19). The representative of Brazil
 suggested that UNCTAD's "Trade and Development Report" was relevant to 
the work of the Group.  The Chairman  said he would hold informal c onsultations shortly after the 
General Council meeting on Coherence in order to ag ree on the agenda of the Group's next meeting. 
                                                      
2 The presentation by the IMF representative was distributed to Members after the meeting. 
3 IMF Occasional Paper No. 235. WT/WGTDF/M/8 
Page 4  
 
12. The next meeting of the Working Group was scheduled for 9-10 December 2004. 
__________