. /.   WORLD TRADE  
ORGANIZATION  WT/WGTDF/W/39 
6 October 2008 
 (08-4735) 
Working Group on Trade, Debt and Finance Original:   English 
  
COMMUNICATION FROM BRAZIL 
  
 The following communication, dated 2 October 2008, is being circulated at the request of the 
Delegation  of Brazil. 
 
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1. Recent events had highlighted the need to fully implement the mandate given by 
Paragraph 36 of the Doha Minister ial Declaration, particularly " to enhance the capacity of the 
multilateral trading system to contribute to a durable solution to the problem of external indebtedness 
of developing and least-developed countries, and to strengthen the coherence of international trade 
and financial policies, with a view of safeguarding the multilateral trading system from the effects of 
financial and monetary instability".  The instability in financial markets since August 2007 has 
already produced spillover effects and brought attenti on to structural issues that were made apparent 
by the crisis. In this context, the multilateral trad ing system has acted as a "shock absorber": vagaries 
and lack of or insufficient regulation in other re gimes, in particular th e monetary and financial 
systems unequivocally affect trade. 
A. T
RADE FINANCE  
2. An immediate spillover effect of the current credit crunch crisis is in the area of trade finance. 
As stated in a Working Paper by the WTO Secretariat (November 2007)1, trade finance is "one of the 
most secure mode of finance due to its short matu rities, the existence of physical collateral (goods), 
[and] a fair amount of documentation". These very feat ures, specially the short maturity, nevertheless, 
contribute to make trade finance a primary target  for the withdrawal of credit supply by major 
international banks. Exporters from developing co untries who seek trade finance find themselves in 
the odd situation of being among the most creditwor thy economic agents, but unable to access credit 
in a scenario with heightened overall risk perceptions  that lead to more stringent requirements by the 
banks, or simply because funds are not available any longer. 
3. In this regard, the creation of "trade finan ce facilitation programs" (TFFP) in a few regional 
development banks (RDBs) is a welcome developm ent. The WGTDF can take credit for highlighting 
the issue of trade finance and the role to be played  by the RDBs. It is with satisfaction that we note 
that some RDBs have acted upon through the implementation of TFFPs. Notwithstanding these 
important developments, the contribution of the TFFPs has not been able to m eet the credit needs of 
developing countries in the current credit market  conditions. Therefore, it is incumbent upon the 
WGTDF to further discuss the multifaceted aspects of trade finance. In particular, it is suggested that 
the WTO Secretariat should proceed in its contacts with relevant stakeholders, including private 
banks, in order to assess the real impact of the cred it crunch on trade finance and look for alternatives 
to mitigate the problem.  
                                                      
1 "Boosting Trade Finance in Developing Countries: what link with the WTO?" – Auboin, Marc –  
Staff Working Paper ERSD-2007-04, WTO Economic Research and Statistics Division. WT/WGTDF/W/39 
Page 2  
 
  B. B
ASEL II 
4. The Basel II Agreement is expected to replace the Basel Capital Accord (Basel I) of 1988, 
both agreements were negotiated within the B asel Committee on Banking Supervision (BCBS) a body 
under the purview of the Bank for International Sett lements (BIS). Basel I had been conceived only 
for banks with international operations, but by the mid-90s Basel I rules became the standard 
prudential regime for more than a hundred. At same  time, it was the subject  of growing criticism, 
which led to the negotiation of a ne w instrument (Basel II) in 2006.  
5. One of the main criticisms towards Basel I rule s relates to their discriminatory approach, as 
they favour borrowers from OECD countries. Ba sel I established a credit risk assessment scale 
starting from "zero" risk - claims on OECD governments and central banks - to the level of "100" - 
claims from the non-financial private sector of  non-OECD countries. As it is evident, the 
aforementioned criteria unduly impinged on the sove reign debt and corporations from non-OECD 
countries.  
6. Basel II changed this. Under the Standardized  Approach of Basel II, entities for OECD 
countries are no longer favored over those from non-OE CD countries. Both banks and non-financial 
corporations are now differentiated according to th eir own credit ratings. These changes were widely 
perceived as positive. Questions have been rais ed, however, about the consequences of fully 
implementing the Accord in the current period of financial instability. In particular, the Basel II 
potential effects on trade flows, inter alia, through trade finance should be a matter of special interest 
to the WGTDF. For instance, there is a concern th at Basel II rules may have pro-cyclical impacts on 
the international financial system, a rather unfortunate side-effect for an instrument devised primarily 
to increase the stability of the system.  
C. A NEW CYCLE OF INDEBTEDNESS  
7. The external debt of developing countries has been tackled by initiatives such as the HIPC, 
which helped to alleviate the debt problem of  some developing countries, specially the least 
developed countries. However, the HIPC was neit her adequate for some low-income developing 
countries nor sufficient to prevent a new wave of i ndebtedness by developing countries, particularly in 
the case of oil importers and net food importers. It is still difficult to assess at this juncture how long 
and deep the new cycle of indebtedness by the deve loping countries is going to be, and how this is 
going to impact regional and global trade. Notwithst anding, the evolution of debt exposure, is an 
indicator that should be under consideration by the WGTDF as an important factor affecting the 
participation of developing countri es in international trade flows.  
D. CONCLUSION  
8. The debt situation of developing  countries has changed consider ably in recent years. Indeed, 
current financial instability is a debt crisis origin ated in developed countries.  Nevertheless, developing 
countries debt continues to be a source of concern, par ticularly in view of its more direct link to trade 
than in the case of developed countries. One of th e main transmission mechanisms between debt and 
trade is trade finance. A better understanding of the op eration of trade finance in developing countries, 
as well as the impact of institutional arrangements,  such as Basel II, could be part of the work 
program of the WGTDF in the second semester of 2008.  
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