WORLD TRADE  
ORGANIZATION  WT/WGTDF/W/54 
28 April 2011 
 
 (11-2188) 
Working Group on Trade, Debt and Finance Original: English 
 
 
 
TRADE FINANCE: AN ESSENTIAL CONTRIBUTION OF "AID FOR TRADE" 
 
Draft contribution by the International Financial Corporation  
  
1. International trade, the cross-border excha nge of goods and services, is now widely 
acknowledged as an important engine  of growth in most developing and transition economies.  The 
WTO's "Aid for Trade" initiative has further demons trated the importance of international trade and 
investment flows, with many developing economies joining hands to vigorously defend their interests 
in this area.  While countries need to actively engage  in negotiations with othe rs to create a favourable 
international environment, each must also ensure th at its domestic environment is favourable to trade 
development. 
2. Whether the domestic environment is favourable can ultimately be measured by the economic 
cost of importing or exporting specific goods and services into or from the domestic market.  In most economies, major transaction cost factors would include transportation a nd financing (including 
insurance) as well as red tape.  Unpredictable and/or uncompetitive transportation, financing or 
procedurals and documentation costs can all be formidable barriers to trade for SMEs. 
3. The financing of trade and investment has long been identified as one of the most challenging 
issues faced by new enterprises and SMEs in deve loping or transition economies.  The issue of 
financing is particularly important, as financing is needed not only during the export process itself, but 
also for the production of the goods and services to be exported, which may include imports of raw 
material or intermediate goods.  Lack of financi ng at any time during the production and/or the export 
process will result in a failed transaction.  To u nderstand the significance of trade finance, it is 
important to view it in the context of an overa ll trade development strategy whose purpose is to 
develop and expand sustainable trade flows to  support the country's economic development. 
I. TRADE DEVELOPMENT STRATEGY  
 
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  4. Figure 1.1 suggests that a comprehensive trade development strategy includes four main 
components, with trade finance issues being addressed  as part of trade facilitation and infrastructure 
development.  Key elements of the strategy are discussed below.  
A. T
RADE RELATIONS MANAGEMENT  
5. International trade relations management invol ves developing cordial trade relations with 
other countries to safeguard a country's trade interest s and to ensure market access for its products and 
services.  It also involves responding to restrictions placed on products by importing countries.  Trade negotiations may be conducted at three levels, namely bilateral, regional (e.g., ASEAN free trade 
area, AFTA) and multilateral (i.e., WTO).  
B. T
RADE PROMOTION  
6. Trade promotion consists of programmes and activities to promote and develop trade with 
other countries.  It includes measures to help  establish and improve a country's or a firm's 
participation in trade fairs, trade missions and publicity campaigns, as well as providing information 
and advice on overseas market prospects, contacts a nd access.  More generally, it covers the way in 
which a country assists its exporters to enter ma rkets overseas, to expand their presence in those 
markets and to make their products competitive.  
C. INFRASTRUCTURE DEVELOPMENT  
7. Infrastructure development is necessary to enable  the handling of larger trade volumes and to 
increase the diversification of traded goods and ser vices.  It includes the provision of basic utilities, 
such as power and water, but also the developm ent of warehousing, transportation, shipping and 
information technology infrastructures, and the est ablishment of related administrative bodies and 
systems.  Efficient and effective banking and payment systems are important elements of the trade 
infrastructure.  
D. TRADE FACILITATION  
8. Trade facilitation, often referred to as the "plu mbing" of international trade, focuses on the 
efficient implementation of trade rules and regulatio ns.  In its narrowest sense, trade facilitation may 
be defined as the systematic rationalization of pr ocedures and documentation for international trade. 
In its wider sense, however, it covers all the regulat ory measures that affect the flow of imports and 
exports.  The main objective of trade facilitation is  to minimize the transaction costs and complexity 
of international trade for businesses,  while maintaining efficient and effective levels of government 
control.  Trade facilitation contributes to overall trad e development strategy by optimizing the use of 
the trade infrastructure and complements trade promo tion efforts by improving the country's image as 
an efficient trading centre.  It also enhances the development and management of trade relations by 
making trade regulations and procedures more tr ansparent and consistent  with international 
conventions and standards.  
E. TRADE FINANCE  
9. Trade finance refers to the financing of im ports and exports, one of the major challenges 
facing businesses that endeavour to compete in globa l markets.  Facilitating access to trade finance 
requires the development of a trade finance infrast ructure, defined here as the institutions, laws, 
regulations and other systems related to the following three activities:  
(a) Provision of capital to firms that are engaging in international trade transactions;  
(b) Provision of support services to manage the risk involved in these transactions;   WT/WGTDF/W/54 
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  (c) Provision of international payment mechanisms.  
10. The absence of an adequate trade finance infrastruct ure is, in effect, equivalent to a barrier to 
trade.  Therefore, Governments whose economic growth strategy involves trade development may 
consider supporting the development of an efficient trade finance infrastructure as part of their trade 
facilitation action plans, i.e., one that is able to pr ovide traders with a variety of trade finance tools 
and instruments at competitive prices.  
II. IMPORTANCE AND BENEFITS OF TRADE FINANCE  
11. Trade accounts for about one half of the gro ss national income of developing countries and 
financing that trade has become increasingly importa nt to a country's development prospects.  Trade 
finance, provided by commercial banks, export credit agencies, multilateral development banks, 
suppliers and purchasers, has grown by about 11 pe r cent annually over the last two decades.  Because 
trade finance eases creditor's risk, as it is tied to  the traded goods, it may be seen as a way for poor 
countries to gain broader access to financial mark ets.  However, the primary benefit of improved 
access to trade finance is to facilitate and expa nd trade, by providing traders with appropriate 
instruments to support their trading activities.  The benefits of trade finance to traders can be broadly 
classified into the following areas:  
A. REDUCED CAPITAL OUTLAYS  
12. Trade finance provides companies with the necess ary capital and liquidity and helps them to 
better manage their cash flow, allo wing them to expand and grow.  
B. REDUCED RISKS  
13. Apart from capital, traders would also need s upport systems to help them manage risks 
associated with international trad e transactions.  The development of a sound and secure trade finance 
infrastructure will increase the numb er of options available to traders to reduce or eliminate risks 
associated with non-payment or payment delays, fluc tuation in exchange rates, changes in trade and 
financial regulations and po litical unrest, among others.  
C. INCREASED COMPETITIVENESS  
14. Terms of payment are increasingly used as comp etitive tools during contract negotiation.  
Buyers would generally favour a contract that provi des certainty and attractive credit terms.  Traders 
with access to a wide array of trade finance tools and instruments are better equipped.  
III. TRADE FINANCE INFRASTRUCTURE DEVELOPMENT  
15. Numerous trade finance methods and instrument s exist to support traders throughout the trade 
cycle.  The availability and affordability of these finance tools and instruments to domestic traders 
will depend on the level of developm ent of the trade finance infrastru cture, as defined earlier.  Two 
important issues related to trade finance infrastru cture development are (a) the development of a 
favourable macroeconomic and lega l environment for trade finance and (b) the development of 
institutions to support or provide trade finance.  
A. TRADE FINANCE AND THE MACROECONOMIC ENVIRONMENT  
16. Because trade finance tools and instruments are primarily offered by or through financial 
institutions, the level of development of the trade fi nance infrastructure is closely linked with that of WT/WGTDF/W/54 
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  the overall financial sector. It can therefore be expect ed that a stable macroeconomic environment will 
be an important factor in the development of tr ade finance, along with an open economic policy.  
B. I
NSTITUTIONS FOR TRADE FINANCE DEVELOPMENT  
17. To participate efficiently in international tr ade, a country needs sound monetary and banking 
policies, transparent fiscal and financial regimes, and functioning capital and insurance markets.  To 
increase physical capacity, a country also needs a legal and regulatory framework that encourages 
domestic and foreign investment.  But is that eno ugh for the development of trade finance?  Should 
trade finance be left to private sector financial institu tions or is there a role for public institutions in 
actively supporting the provision of trade finance ser vices and capacity building, particularly for LICs 
Banks and their SME clients? 
C. IFC/MDB  PROGRAMS  
18. The IFC and regional development banks opera te a number of relatively similar programs 
aimed at facilitating the access of developing countries ' traders and their banks to affordable trade 
finance.  Most of these programs aim at providi ng guarantees for the endorsement by banks of 
developed countries of letters of credit issued by the banks of developing countries' traders.  The 
provision of such guarantees, for a small fee, allows  for the transaction to be priced at a reasonable 
rate.  The guarantee typically applies to relatively sm all trade transactions (less than US 1 million) and 
hence does not crowd out fully financed and guarant eed private sector transactions.  Such programs 
are mitigating the risks involved in financing trad e in developing countries; they bridge the gap 
between the perceived and actual level of risk (the latter being small) of doing trade financing in poor 
countries.  
19. Currently, the IFC is developing products aimed at allowing small and medium sized 
enterprises from developing countries to access s upply-chain financing at affordable conditions, 
which they would otherwise not access.  
20. Finally, the IFC provides for significant technical assistance in the field of trade finance, by 
training bankers from developing countries, in pa rticular the poorest, to handle trade finance 
instruments and develop trade finance infrastructures in commercial banks.  
21. Further details about IFC's program are available at www.ifc.org. 
 
 
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