WORLD TRADE  
ORGANIZATION  WT/WGTDF/W/49 
26 October 2010 
 
 (10-5577) 
Working Group on Trade, Debt and Finance  
 
 
 
EXPERT GROUP MEETING ON TRADE FINANCE – 22 OCTOBER 2010 
 
Informal Report by the WTO Secretariat  
  1. The objective of the 22
nd of October meeting was threefold: (i) to take stock of the current 
market situation, with a focus on factors such as liq uidity, risks and price patterns by countries and 
regions (ii) to consider the latest developments regarding regulatory issues (iii) to discuss whether 
smaller traders and small bankers, notably in low- income countries, continued to be adversely 
affected by the tightening of international lendi ng conditions and what could be done about it. 
2. With respect to the current market situation,  most participants agreed that the business 
environment has been continuously improving since the middle of last year, with falling prices and 
increasing volumes of transactions. Some participants  noted however that trade finance volumes have 
exhibited a high level of volatility around an up ward trend. Recovery has been uneven across 
countries, though. The recovery in market conditions  was mainly driven by increased trade within 
North America, Europe, Asia, and between Asia and th e rest of the World. In these areas, spreads had 
returned almost to pre-crisis levels, with a di fference between traditional trade finance instruments 
(letters of credit), which prices fell to very low le vels on the "best" Asian risks, and so-called funded 
trade finance products (on-balance sheet, open- account transactions) which higher prices reflected 
relatively large liquidity premia – the later pric es being still up to 40-50% higher than before the 
financial crisis.  
3. By contrast, traders in low-income countries re mained subject to the greatest difficulties in 
accessing to trade finance at affordable cost, partic ularly import finance. The same applied to small 
and medium sized enterprises in developed countries,  which relied on small or medium-sized banks. 
This situation is explained by a banking environment in which capital had become scarcer and the 
selectivity of risks greater. In addition, new a nd diverse regulatory requirements, including more 
stringent know-your-customer (KYC) standards on counterparty banks and traders in poorly rated 
countries, are deterring international banks from doing business in these areas altogether, because the 
increasing cost of compliance has reduced already lo w margins to neglictible levels. In fact, most 
participant banks had been closing correspondent accounts in recent months, in particular in Africa, in 
order to "rationalize" their trade portfolios around mo re profitable operations in  other continents. As a 
result, the "lower end" of the trade finance market  relied more and more upon development bank risk 
mitigation instruments.  
4. The representative of regional development ba nks echoed the views expressed by commercial 
bankers. While liquidity had returned in general to Asia, the Asian Development Bank was focusing 
its trade finance risk mitigation capacity towards banks in countries such as Pakistan, Bangladesh, 
Vietnam, Mongolia, which required support. The sam e applied to Latin America, in which smaller 
central American States also needed support, and in Central and Eastern Europe, in which banks from 
Ukraine, Kazakhstan, and other neighboring countries relied on s upport by the EBRD trade finance 
instruments. The representative of  the African Development Bank in formed the group of the outcome 
of the third survey of trade finance in Africa, re vealing that, while there were wide differences in 
country situations, international ba nks were clearly pulling out of some part of Africa, tenors had in 
general shortened, the level of perceived risk wa s high even for counterparties that had traditionally WT/WGTDF/W/49 
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been considered as low, and the demand for risk m itigation by the Bank was above existing resources, 
despite the Bank's $1 billion commitment to support tr ade finance. All in all, banks and traders in a 
substantial number of countries were increasingly left out of mainstream trade finance markets and could not benefit from the recovery of trade as much as they could.   
5. The trade finance industry, it was mentioned,  was encompassing a change in the business 
model, with large trading firms demanding rela tively more funded instruments than traditional 
unfunded instruments such as letters of credit. This changing business model fitted well with the 
changing patterns of world trade, which were incr easingly characterized by transactions taking place 
within integrated supply and production chains. Tr aditional trade finance instruments were more 
adequate for traditional trade patterns, in which a product was produced by one firm in a country and 
exported to other countries, while innovative forms of trade finance, including value chain finance, 
seemed more adequate in a world where the pr oduction process of goods and services was carried out 
by different firms in different locations. It remained , through, that institutions such as the IFC were in 
the process of developing international supply chai n financing products for small and medium sized 
enterprises in low income countries because there was little chance that these firms would benefit 
from open account financing on affordable terms. As open account transactions relied on state-of-the-
art technology, the risk of a technological divide existed in addition to overall trade finance market 
difficulties faced by low-income countries. 
6. With respect to regulatory issues, there w as a consensus among commercial banks, regional 
development banks, the ICC and the Berne Union that too stringent regulation and regulatory 
asymmetries across jurisdictions may have a negative  impact on the cost and availability of trade 
finance. Concerning regulatory asymmetries, it was mentioned that there were increasing 
opportunities for regulatory arbitrage, creating potentia lly more risk than what the regulations are 
meant to control. While each regula tion taken individually c ould make sense, be it leverage ratios, or 
additional informational requirements (KYC), the ac cumulation of it on financial institutions, applied 
differently in different jurisdictions, were creati ng not only regulatory uncertainty but also a tendency 
to implement regulation more conservatively, al ways in the direction of the highest industry 
standards; in the end, this also contributed to the drying up of the low-end of the trade finance. In addition to well-know Basel II and Basel III regulations hitting trade, it was pointed out that the future 
introduction of a leverage ratio and of the net stab le funding ratio would also affect export credit 
agencies in their private sector bus iness, with the potential impact of decreasing the availability of 
export credit guarantees. The net stable funding ratio  would be especially detrimental to emerging 
economies, where the existence of secondar y markets for trade bills was limited. 
7. In parallel, the ADB and the ICC have compiled data on loss default for trade finance, in the 
context of a pilot registry. The da ta collected for the past five y ears confirmed that trade finance 
products were very low-risk (a loss  default rate of less than 0.02%).  In discussions, it was agreed to 
make the registry permanent and fi nancially self-sustainable, to widen the definitions of trade finance, 
and to collect more data from a wider set of commercial banks around the world. The question arose 
as to the gradual increase in regulatory requirements were in line with real data on the trade finance 
industry risk. 
8. The last part of the discussion reverted to concerns about the funding of low income countries' 
trade, which risked marginalization in this peri od of recovery. Access to trade finance had become 
particularly problematic for African firms. In the sh ort-run, the AfDB was considering to continue to 
outsource proceeds to financial partners and increase  partnership with the Asian Development Bank, 
to support trade between Africa and Asia. However, in the long run, the AfDB was still considering 
the development of a in-house facility (albeit w ith no decision yet), similar to other regional 
development banks, on a demand basis. While repr esentatives of other regional development banks 
indicated their readiness to provide technical assistance to the African Development Bank, 
representatives of commercial banks indicated that no matter what decision was taken, the needs were 
pressing and hence the long run was not an adequate timeframe.       WT/WGTDF/W/49 
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9. In concluding the meeting, the WTO Director General indicated that the WTO would 
continue to address the challenges of trade financ e with its multilateral part ners because lack of 
adequate functioning of trade finance markets could be as important a barrier to trade than traditional 
obstacles to trade. The current difficulties faced by a wide number of developing countries at the margin of the main routes of trade also showed that  there was a risk of a market divide between the 
"have" and "have not". As a result, the Directo r-General will soon discuss with the WTO Membership 
how best to address such challenges mu ltilaterally and at the national level. 
 
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