WORLD TRADE  
ORGANIZATION  WT/WGTDF/W/45 
1 April 2009 
 (09-1638) 
Working Group on Trade, Debt and Finance  
  
 
RESTORING TRADE FINANCE: WHAT CAN THE G-20 DO? 
 
Note by the Secretariat
 
  
 
 
  
 
 
I. INTRODUCTION 
1. This note was prepared in response to a requ est from the Working Group on its meeting of 
March 18, 2009 regarding problems experienced in trade finance markets and the response by public-
backed institutions, before the G-20 meeting, by  way of partnership with commercial banks and 
export credit agencies. The analysis below is ba sed on a recently published article in the Vox  
internet-based platform on economic policy.1 
2. Shrinking trade finance threatens living standa rds in both industrialised and developing 
countries. It reduces trade flows and thus adds to ot her deflationary pressures. The threat is all the 
greater in this crisis because international supp ly chains now extend to trade finance as well the 
production of parts and components. Sophisticated supply-chain financing operations, including for 
small and medium-size companies,  rely on a high-lev el of trust among suppliers; trust that they will 
deliver their share of the value-added and have  the necessary finance to produce and export in a 
timely manner. 
II. WHAT IS THE PRE-G20 SITUATION  
3. The global liquidity situation has been a major constraint in 2008 on the largest suppliers of 
trade finance. Trade credit has also  been reduced by a general re-as sessment of counter-party risk, and 
an increase in the expected pa yment defaults on trade operations . In the second half of 2008, the 
situation spread to developing country markets. Th e market gap initially appeared in Wall Street and 
London, as US and UK global banks, particularly t hose with weak balance sheets, could not off-
load/refinance on their excess exposur e in trade credits the secondary market. As a result, some banks 
were unable to meet the demand from their customers for new trade operations, leaving a "market 
gap" estimated to be around $25 billion in Novemb er 2008, out of a global market for trade finance 
estimated at some $10 trillion a year. More disturbi ng is the fact that large banks have reported on 
several occasions that the lack of financing capacity has made them unable to finance trade 
operations. Some very large banks used to roll-ov er up to $20 billion in the secondary market per 
month are doing $200 million right now due to lack of counterparties. Demand for trade credit is far 
from being satisfied, and prices for opening letters of  credit far outweigh the normal re-assessment of 
risk according to market specialists.  
                                                      
1 Available at Voxeu.org, (2009) "Restoring the Av ailability of Trade Finance", WTO Secretariat. The 
article was published on March 5, 2009, that is ahead of the G-20 Summit. It hence does not prejudge, nor 
anticipates, nor includes the outcomes of this Summit.  This document has been prepa red under the Secretariat's own 
responsibility and without prejudice to the positions of Members 
and to their rights and obligations under the WTO WT/WGTDF/W/45 
Page 2  
 
4. Further, the liquidity problem, although cooli ng a bit in Asia, has since spread to other 
developing countries’ money markets in South Asia, Africa, and Latin America. This adds to the 
problems faced by local banks in certain developing  countries even in normal circumstances such as 
lack of deep money markets, lack of capacity to ha ndle large volumes of trade credit, lack of reliable 
information on the creditworthiness of customers, all of  which lead, in periods of crisis, to difficulties 
in finding partners in de veloped countries to accept the counterparty risk. 
III. SURVEY MEASURES OF THE DECLINE IN TRADE CREDIT 
5. According to a BAFT (Banker’s Association for Trade and Finance) and International 
Monetary Fund (IMF) joint survey,
2 flows of trade finance to developing countries seem to have 
fallen by some 6% or more year-on-year (end 200 7-end 2008), probably more than the reduction in 
trade flows, hence implying that the lack of trade financing is indeed an issue for these countries. If 
such numbers were to be confirmed (at least local  bankers seem to agree on them according to the 
survey), that would mean that the market gap c ould be well over the $25 billion estimate mentioned 
above (between $100 and 300 billion). The scarcity of trade finance is very likely to accelerate the 
slowdown of world trade and output. Of course, it can be argued that such "exogenous" factors as 
liquidity squeeze, exchange rate fluctuations a nd others impacting risk are not specific to trade 
finance. Any un-hedged cross-border flow is likely to be affected by exchange rate fluctuations and 
increased risk. Likewise, all credit is dampened  by the credit crunch. The combination of scarce 
liquidity and a re-assessment of customer and country  risks resulted in a sharp increase in the price of 
credit transactions. Spreads on 90-days letters of credit have ramped up in the course of 2008 from 10 
to 16 basis points on a normal basi s, to 150 to 500 basis for letters of credit issued by emerging and 
developing economies. Even under stress, it is hard to  believe this sort of loan, which is among the 
safest and most self-liquidating form of finance due to strong receivables and marketable collaterals. 
could see its price increase by a factor of 10 to 50.  
6. While overall flows cannot be estimated with precision, the overall increase in spreads 
requested for opening letters of credit, particularly  at times when liquidity constraint hitting the 
money market seems to have relaxed a bit, and ot her factors point to a mismatch between supply and 
demand. 
IV. MISMATCH BETWEEN SUPPLY AND DEMAND 
7. Why has this happened? Two arguments are put  forward. Public sector actors emphasise 
market failure while private sector actors tend to  blame the costs associated with implementing the 
Basel II rules. The market failure argument relies on the inability of private sector operators to avoid 
herd behaviour, especially when the credit risk and country risk are confused (e.g. amid rumours of 
sovereign default). Coopera tion between global suppliers dries up dur ing crisis, with the best run ones 
refusing to off load/refinance in the secondary mark ets the positions of banks that are in less 
favourable liquidity situations, or carrying excess e xposure to trade credit. The failure of private 
lenders, which account for an estimated 80% of the trade loan market, to meet the demand for cross-
border trade finance is unusual given the self-liquidati ng nature of the market (often backed by strong 
deliverables, e.g. the cargo itself acts as collateral for the loan). 
8. On the regulatory side, commercial bankers have  long complained about the implementation 
of Basel II rules, which are regarded as having a pro-cy clical effect on the supply of credit. That is, in 
poor market conditions, trade finance would be unfa irly treated as capital requirements for it would be 
significantly increased, particularly for counterparty risk with developing countries’ customers. These 
arguments are not necessarily new (see WTO, 2004, page 6) but at present they may well apply with 
                                                      
2 The full reference and results of the survey are available in Annex 1, under Dorsey, Thomas (2009).  WT/WGTDF/W/45 
 Page 3 
 
 
even greater force. International ratings agencies  won’t help here as it is alleged that such 
counterparty risk is "biased" against developing countries risk.3 
V. MEASURES PROPOSED BY SOME RE PRESENTATIVE OF THE PRIVATE 
SECTOR 
9. The Banker's Association for Trade and Finan ce and other commercial bankers have proposed 
the three following measures. 
Look again at the Basel II rules 
10. In view of the positions developed by both ba nkers and the Bank for International Settlements 
(BIS) on trade finance, the WTO Expert Group on Trad e Finance has considered that the best course 
for bankers would be to make a case for themselve s on low default and the self-liquidating nature of 
trade finance, through a survey to be conducted by  the International Chamber of Commerce (ICC) on 
historical data. Work is still underway although prel iminary results are coming in. In the meantime, 
some regulators (such as the British Financial St ability Authority) are currently discussion with 
representatives of the banking industry, and it seems that some smaller requests of bankers could be 
accommodated (this benefits only to banks regulated  by the FSA, though, it needs to be agreed 
globally). 
Introduce a global liquidity fund for trade finance. 
11. A debate took place regarding the nature of  proposals. Some national Treasuries were 
unconvinced that wide liquidity funds, in the way of special liquidity provided by central banks, would be efficient or fair from a competition point of view, particularly as cash was already provided 
by them on a fairly wide basis. The trade finance departments of banks, it was said, need to compete 
better internally for the extra cash provided by centr al banks. The problem was not one of overall lack 
of liquidity but one of allocation of it, certain  institutions remaining overly liquid and having 
significant room for intervention. Confidence in a de teriorating trade-related environment was indeed 
behind this phenomenon, which coul d be best measured by the near closure of the secondary market 
for trade bills. However, the design of a smaller, al beit global, better targeted liquidity fund, run by 
international financial institutions  (including multilateral institutions such as the IFC), for smaller 
segments of the market or new countries, in partic ular those which most likely to be hit by the 
contraction of supply (for example in least-devel oped countries’ markets) was currently underway. 
This idea is appealing to the WTO and interna tional financial institutions, and progress are being 
made in this direction, with a view to presen t to the G-20 Summit a meaningful "trade finance 
liquidity mechanism at the multilateral level". 
Encourage more risk-sharing with p ublic sector-backed institutions.  
12. The idea would be to mobilise public-sector ac tors, such as Export Credit Agencies and the 
Regional Development Banks, in the effort to should er some of the private sector risk as well as 
encouraging co-financing between the various provide rs of trade finance. With the support of WTO 
members, the WTO Director-Gener al was favouring a two-step approach in WTO Expert Group for 
Trade Finance in 2008, i.e.: (i) finding collec tive short-term solutions, notably by mobilising 
government-backed export credit agencies and regi onal development banks; and (ii) developing 
technical measures that allow for better interaction between private and public sector players in the 
short- and medium-term. The latter encompasses proj ects developed by the International Chamber of 
Commerce, the IMF, the IFC, and the Berne Union, all of which aim at removing the obstacles to co-
risk sharing and co-financing by various institutions. 
                                                     
 
3 Under Basle II methodology, individual counterparty risk (a bank or a business) cannot be better than 
sovereign risk. The downgrading of the later results in the downgrading of the former. WT/WGTDF/W/45 
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VI. THE EFFORTS BY PUBLIC-BACKED INSTITUTIONS TO BOOST THE SUPPLY 
OF TRADE FINANCE 
13. One clear lesson from the 1997/98 Asian financial cris is is that in periods that are prone to a 
lack of trust and transparency, all actors, including private banks (which account for some 80% of the 
trade finance market), export credit agencies a nd regional development banks, should as far as 
practicable pool their resources (IMF, 2003). Strong links among the various players are also 
important because of an absence of comprehensive and reliable data on trade finance flows. This 
means that the main channel for making a reasonabl e assessment of the market situation is via the 
collection of informed views and partial statistics from various institutions. This has been a key aspect 
of the activities of the WTO Expert Group. In this  crisis, the response of public-backed institutions 
has been unprecedented and involv es three activities. All regional development banks and the IFC 
have doubled on average capacity under trade fac ilitation programmes since November 2008. There is 
some thinking, in the context of the G20, which might further increase the size of such programmes, 
in particular by adding some features that would ease the liquidity constraint on small customers. The 
idea of setting up limited liquidity pools for co-fi nancing operations with  banks in developing 
countries are making progress; such moves would be  likely to have a high leverage and multiplier 
effect on trade. 
14. To a large extent, export credit agencies have also  stepped in, responding positively to the call 
from governments in the fall of 2008. These have b een accomplished primarily with programmes for 
short-term lending of working capital and credit guarantees aimed at Small and Medium Enterprises 
(SMEs). For certain countries, the commitment is  very large or unlimited in amount (Germany, 
Japan). In other cases, very large lines of credit have been granted to  secure supplies with key trading 
partners (the US with Korea and China), or to support regional trade, in particular supply-chain 
operations. To this effect, the APEC summit announ ced the establishment of an Asia-Pacific Trade 
Insurance Network to facilitate intra- and extra- regional flows and investment through reinsurance 
cooperation among export credit agencies in the region. Japan’s NEXI is establishing itself as the 
leader and main underwriter of this collective re-insurance system. 
15. One problem often underestimated in developi ng countries is the difficulty for banks and 
importers to find foreign exchange, for example in cases where the main currency of transactions (say, 
the Euro or the US dollar) has become scarce because of the depreci ation of the local currency, or 
because of the fall in receipts from remittances a nd exports. Central banks with large foreign 
exchange reserves have been able to supply foreig n currency to local banks and importers generally 
through repurchase agreements. Since October 2008, Brazil’s central bank has provided $10 billion to 
the local market. The Korean central bank has ple dged $10 billion of its foreign exchange reserves to 
do likewise. The central banks of Argentina, South Africa, Indonesia, inter alia,   are also engaged in 
similar operations. Unfortunately, however, many developing countries lack foreign exchange 
reserves and are unable to use similar facilities. 
VII. DESPITE THESE STEPS, TRADE FINANCE HAS NOT YET BEEN RESTORED 
16. The current effort is a race against time. While  more financing capacity is provided by public 
institutions, it seems that the private sector’s ability to respond to importe rs’ and exporters’ demand 
for finance, particularly in developing countries is deteriorating even f aster. For example, BAFT 
members have complained that the series of measures announced by Export Credit Agencies and 
regional development banks were hard to track an d that they lack information on who is providing 
what, and under which criterion. Filling this in formation gap should be a high priority.  
17.
 Implementation and design of the programmes of the national export credit agencies may also 
need to be done cooperatively. The cooperation w ould involve the beneficiar ies (exporters, importers, 
banks), and cooperation among all th e export credit agencies in a region, if not globally. Public 
institutions understand that putting new credit or guar antee limits in place involves delays. For a long  WT/WGTDF/W/45 
 Page 5 
 
 
period of time, the private sector was comfor table to see government guarantees and programmes 
being withdrawn from export credit agencies’ short- term business. Asking today for a 180 degree turn 
requires time but perhaps also discussion between  potential customers about their needs and the 
suppliers. The issue of financing both exports and im ports has also been raised with some relevance 
by bankers and traders, as the survival of supply ch ains partly depend on the financing of both sides. 
The Asian example of export credit agencies supporting both intra- and extra-regional trade by 
working as a network could be examined by other regions. 
18. Priorities that seem to emerge from government s and institutions financial institutions with 
input from the WTO Secretariat. While there app ears to be no quick fixes to the trade finance 
problem, there is still a case for a faster, better sequenced, and cooperative implementation of a series 
of measures, many of which are underway. A programme of mutually supporting priority may 
perhaps inspire a "trade fina nce package" by G20 leaders. Such priorities would entail: 
-  Accelerated implementation of IFC and regi onal development banks’ enhancement of trade 
finance facilitation programmes. 
 
- Filling of the information gap as to what the various institutions are doing by disseminating new programmes initiatives. 
 
- Instructing export credit agencies to open quick and user-friendly liquidity and re-insurance windows for both exporters and importers; Coordinati ng actions by export credit agencies, possibly 
on a regional basis; 
 - Creating liquidity windows allowing rapid co-fi nancing between banks, export credit agencies 
and the International Financial Institutions; Creating in  particular a liquidity pool at multilateral level 
to share risk with commercial banks in de veloping countries, in particular the poorest. 
 
- Looking at Basel II regulation in light of the self-liquidating character of trade finance.    WT/WGTDF/W/45 
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ANNEX I 
 
BIBLIOGRAPHY 
 
 
Auboin, Marc (2007), Boosting Trade Finance in De veloping Countries: What Link with the WTO?, 
WTO Working Paper ERSD-2007-04, available at wto.org.  Auboin, Marc (2009),  The Challenges of Trade Fina nce, Vox-CEPR paper, available at voxeu.org. 
 
Dorsey, Thomas (2009), Trade Finance Stumbles, Finance and Development, IMF. 
 
IMF(2003), Trade Finance in Periods of Crisis: an Assessment of Key Issues
, available on 
www.imf.org/external.  
WTO (2003), Improving the Availability of Trade Fina nce During Financial Crisis, Discussion Paper 
2, Geneva. 
 WTO (2004), The Trade, Debt and Finance Nexus: At the Cross-Roads of Micro- and Macroeconomics, WTO Discussion Paper 6
, Geneva. 
 
 
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