To: Organizations addressing Trade-Finance Linkages

   
1) Regulating Financial Markets Key to Ending Global Food Crisis, Experts 
Concur 
  
2) New Book: Financial Crisis and Trade in Latin America and the Caribbean 
 
3) EC throws fresh doubts on GATS compatibility of financial regulatory 
measures 
  
4) Sub‐regional Summit addresses Aid for Trade in ECOWAS region 
  
5) Using Taxes to Change the Structure of Investment and Trade in African 
resource‐based economies 
  
6) World Bank papers focus on trade amidst the global financial crisis 
  
7) IMF staff bent on supporting liberalization through WTO Doha Round 
 
 

1) Regulating Financial Markets Key to Ending Global Food Crisis, Experts

Concur

The sustained increases in food prices that took place between 2006 and 2008,
resulting in some countries in riots and extreme acts of violence, alarmed the
international community and placed the food crisis at the top of the international
policy agenda. The Food and Agriculture Organization (FAO) index of food prices
rose by 9% in 2006, 24% in 2007 and 51% in the period July 2007 - July 2008. The
World Bank reports that the sudden increases in food prices in 2008 had driven an
estimated 100 million more people into poverty while the FAO reports an increase
of 200 million in the number of people going undernourished.
At that time, the most often heard explanations attributed the price movements to
real demand and supply factors, such as, in particular, increases in demand
triggered by the greater purchasing power in China and India.
This view was contested by some analysts. Examples of this are a paper by Jayati
Gosh and C.P. Chandrasekhar, "Global Crisis and Commodity Prices," [1] and
another by Institute for Agriculture and Trade Policy paper, "Commodity Markets
Speculation: The Risk to Food Security and Agriculture."[2] While these papers did
not question the need to pay attention to a number of factors that affected real
supply and demand, they asserted the global financial and food crises could not be
dealt with separately. They also made it clear that it would be impossible to give
appropriate response to the latter without important reforms to address the financial
markets dimensions behind price rises.
In recent months, a number of new studies concur on the impact that speculation in
financial markets has had on the price movements of agricultural commodities.
A paper by SOMO, "Financing Food: Financialization and Financial Actors in
Agricultural Commodity Markets,"[3] supports such a conclusion with an
examination of commodity exchanges -where derivatives are transparent in terms of
prices and risky positions-- and Over-the-Counter derivatives markets that take
place outside those exchanges. Then it discusses different investment vehicles
whose use has increased: Commodity Indexes, commodity Exchange-Traded
Funds and Commodity Index Swaps. The paper traces back the increase in
speculation on commodity markets to the growing influence of "non-traditional"
speculators. These include hedge funds, pension funds, other institutional investors
and large banks, often investment banks, operating as dealers whose defining
characteristic is that they have only financial motives and no interest or knowledge
on the underlying commodity or their delivery.
In a pair of papers commissioned by World Development Movement, "Speculation
in Food Commodity Markets" and "Regulating Speculation in Food Commodity
Markets," [4] Tom Lines also supports the view that speculation had a large impact
on prices of food. "Most of the recent financial investment in commodities has been
'passive' and 'long-only'. In principle, that should not make prices more volatile from
month to month, whatever other disruption it may cause on the market. But it will
tend to increase prices overall, simply by providing an extra source of demand... It
is by this route that price changes on the Chicago futures markets fed into wider,
domestic food price movements on other continents in 2007-08."
Like the one by SOMO, the first of these studies contains a typology of the
investment instruments that allowed these new forms of commodity speculation.
Lines lists among these: Managed futures funds and Commodity collateralized
obligations (CCOs). In the first, a 'Commodity trading advisor' (CTA) collects funds
from investors, which the CTA then places on the market as though an investment
from a single source. There is no index involved and the funds are actively traded.
The second is a commodity equivalent of the collateralised mortgage securities that
triggered off the credit crisis in 2007. It uses the same 'slice and dice' principle to
combine the prices of several commodities into a package in the form of an interest-
bearing bond, the principal amount of which is related to the prices of the underlying
commodities.
The paper then has a summary of the problems created by these commodity
investment vehicles. The study contains not just a typology of the actors in the
commodity markets but also makes an attempt at naming who are today the main
players in these markets.
The companion paper has a useful summary of the EU and UK regulation of
commodity markets and of initiatives to overhaul such regulations currently under
discussion in the European Union.
The impact of speculation on commodity price rises also is addressed in a paper
written for UNCTAD by Joerg Mayer. The study, "The Growing Interdependence
Between Financial and Commodity Markets,"[5] as suggested by the title, supports
the notion that financial market developments are deeply intertwined now with
commodity price dynamics. In direct contrast with the explanation that attributes
price increases to changes in fundamentals, the paper concludes that financial
investment in commodity trading has caused "commodity futures exchanges to
function in such a way that prices may deviate, at least in the short run, quite far
from levels that would reliably reflect fundamental supply and demand factors."
According to Mr. Mayer, financial investors in commodity futures markets regard
commodities as an asset class, comparable to equities, bonds, real estate, etc.
Evidence that this asset class is negatively correlated with stocks and bonds'
returns made it a target for portfolio managers seeking to diversify their holdings.
His analysis of several markets finds that, however, over time, position taking for
speculative reasons has increased.
Additional aspects of the link with the financial crisis are raised in "The Unnatural
Coupling: Food and Global Finance," a paper prepared for the Group of 24 by
Jayati Gosh.[6]
As the financial crisis brought a sudden fall in commodity prices, the food crisis is
widely regarded as over. However, according to that study "the food crisis has
actually grown more intense in many developing countries since the middle of
2008."[7] Among these additional effects to consider are currency depreciations -
which affect access to imported food--, lower fiscal government capacity to
implement interventions-due to less revenue--, and the fall of real wages in relation
to food prices-- which means that lower nominal food prices do not necessarily
mean lower shares of income being spent on food.
Moreover, after the paper was written the prices have resumed an upward path.
According to the FAO's latest food situation update, the Food Price Index went up
between August 2009 and January 2010. In May 2010 was up 7 percent in relation
to the May 2009 -this continues stable at this level, which is only 23 percent down
from the peak reached in 2008 and, thus, still has not gone back to even the
historically high 2006 levels.[8]
The view that financial speculation on commodity -including agricultural commodity-
prices had a large impact on price rises is also espoused by Jan Kregel in
"Financial Markets and Specialization in International Trade: The Case of
Commodities."[9]
An additional angle Kregel's piece brings to attention is the impact that commodity
price increases have on the structure of the economies of Latin American countries.
The result has been a combination of current and capital account surpluses that
have brought rapidly increasing foreign exchange reserves and appreciating
currencies. "Thus, financial market conditions are producing real changes in the
production and export structure of most Latin American countries - changes that are
not sustainable and produce substantial disruption when they are reversed. In
particular, the bubble in commodity prices is reflected in what should be considered
a bubble in real exchange rates throughout the region."
The Role of Financial Regulation and the US Financial Reform bill
Not surprisingly, thus, many of the proposals for addressing the food crisis have to
do with re-regulating commodity futures markets.
The main measures recommended in the papers mentioned above can be
classified into three broad categories:
One category involves measures to improve transparency of derivatives trading,
especially OTC derivatives. Some of these reforms cannot be enforced unless all
exchange and clearing entities are regulated- -and either all derivatives
transactions are pushed onto such entities or those trading OTC derivatives are
required to report such transactions to some public agency.
A second category includes measures that would establish speculative position
limits for traders (by commodity and by value of contract) and margin requirements.
The purpose of such measures is to make speculation more difficult and to increase
its costs.
The third category are measures that would reduce or ban altogether the
participation of some actors in commodity derivatives trading, such as banks that
can rely on government-insured funds to speculate in markets or exchange-traded
funds.
In addition to these measures, which are generally applicable in major financial
centers, Gosh mentions some measures that developing countries could attempt to
use to mitigate the effects of price movements. She recommends banning
commodity futures markets in countries where public institutions play an important
role in such markets and capital controls as a way to prevent inflows that enter the
market with speculative purposes.
Several of these analyses consider the deregulation of US commodity futures
markets after year 2000, with the Commodity Futures Modernization Act, a critical
juncture. This legislation, as described by Gosh, "effectively deregulated
commodity trading in the United States, by exempting over-the-counter (OTC)
commodity trading (outside of regulated exchanges) from CFTC oversight. Soon
after this, several unregulated commodity exchanges opened. These allowed any
and all investors, including hedge funds, pension funds and investment banks, to
trade commodity futures contracts without any position limits, disclosure
requirements, or regulatory oversight."

Against this context, the recent process to overhaul financial legislation in the
United States obviously raised great expectations. However, after the bill emerged
from the conference process - conference is a part of the legislative process where
"conferees" from both the House and Senate meet to reconcile different versions of
a bill passed in those respective Chambers-the picture is a mixed one.
The bill will require a large portion of derivatives transactions to be standardized
and traded in public and electronic exchanges to increase transparency and to go
through central clearing houses to ensure risks being built are also transparent.
However, there are exceptions to these provisions for "nonfinancial companies"
using the contracts to hedge risk. Non-cleared derivatives still have to be reported.
They will seemingly be subject to higher margins, too, though the exact scope of the
respective provision is still under debate and may be narrowed in its application.
The bill also mandates the establishment of speculative aggregate position limits
across different markets for all contracts, and capital and margin requirements for
dealers. Earlier in the process it was feared the legislation would authorize, rather
than mandate, regulators to impose such limits (this was the language used in the
House version). In this regard the bill out of conference is an improvement.
Obviously, the legislation could not state what those requirements will actually be in
practice, a not minor detail that will be essential that regulators get right, if the
requirements are not to become meaningless.
If passed as legislation, the current bill will also require banks to spin off derivatives
operations into separately capitalized units and ban them from proprietary trading
with bank capital. But these rules have been so narrowed with exceptions that their
effect on banks' ways of doing business will be quite limited. The restrictions on
derivatives operations do not cover interest and exchange rate swaps, as well as
some investment grade products. Interest rate swaps alone constituted, to go by
figures the BIS provided in late 2009, 70 percent of OTC derivatives trading. The
banks will also be able to keep hedge funds and private equity fund units in house.
They are allowed to invest up to 3 percent of bank capital in them, and to engage in
proprietary trading of their own to hedge bank's risk and facilitate clients' needs.
An additional point to mention is the important role that the regulators will play in
clarifying myriad details that the legislation leaves open, and doubts remain the
Commodity Futures and Trade Commission, with its 600-person staff, is adequately
resourced to carry such burden.

To those who have argued that a thorough reform of financial markets in major
financial centers is a crucial part of the response to the food crisis, the US
legislation will remain a step in the right direction. The measures that developing
countries might be able to implement on their own to curb such impacts remain as
essential as ever.

[1] Available at http://www.networkideas.org/featart/dec2008/Global_Crisis.pdf

[2] Available at http://www.iatp.org/tradeobservatory/library.cfm?refID=104414
[3] Available at http://www.tni.org/sites/www.tni.org/files/download/Full%20document_0.pdf
[4] Links to both papers are available at http://www.wdm.org.uk/report/speculation-and-regulation-
food-commodities
[5] This UNCTAD paper is available at http://www.unctad.org/en/docs/osgdp20093_en.pdf
[6] Available at http://www.g24.org/jg0909.pdf
[7] Gosh, J. The Unnatural Coupling: Food and Global Finance, p. 11.
[8] See FAO Food Outlook, June 2010.
[9] See next item on this update. This study is available in Spanish in book published as a result of
the consultation, in turn available at http://www.coc.org/node/6542
 
2) New Book: Financial Crisis and Trade in Latin America and the Caribbean

A new book (published in Spanish only) "Financial Crisis and Trade: Towards an
Integrated Response in Latin America and the Caribbean," is now available (visit
http://www.coc.org/node/6542 ).

The book, co-published by Center of Concern and the Sistema Economico

Latinoamericano y del Caribe (SELA), gathers selected presentations delivered at a
consultation with Ministers and senior officials from governments of the region. The
consultation, held in September 2009, brought together near forty participants from
governments, intergovernmental organizations, academics and civil society, and
was organized by the Hemispheric Working Group on Trade-Finance Linkages, in
cooperation with UNCTAD and Sistema Economico Latinoamericano y del Caribe
(SELA)

Goals of the meeting were to assess the role that trade structures and their linkages
with finance have played in the unfolding of the crisis in Latin American/ Caribbean
countries and ensure such assessment is included in the responses and to explore
the practical applications that an integrated approach to trade and financial policies
could have on improving specialised policy-making on both the trade and the
macroeconomic and financial fields, domestically and internationally.

For an Outcome Document emerging from the meeting (not included in the book)
visit http://www.coc.org/system/files/InformeFinal-eng.pdf

(for a Spanish version visit http://www.coc.org/system/files/InformeFinal.pdf )

For more documentation and available papers delivered at the meeting visit
http://www.sela.org/sela2008/CrisisFinanciera2009.asp (or
www.coc.org/node/6476 )

3) EC throws fresh doubts on GATS compatibility of financial regulatory

measures

A recent European Commission staff working document, "Innovative Financing at a

Global Level" dismisses Financial Transaction Taxes resorting to some old
arguments (see http://www.coc.org/node/6531 for a general response to the
arguments presented in the report drafted by CIDSE).

Surprisingly, though, the paper adds to such arguments one that raises the
incompatibility of such taxes with the European Union commitments in the World
Trade Organization:
"the compatibility of such a levy with Article XI of the General Agreement on Trade
in Services (GATS), which provides that WTO Members cannot apply any
restrictions on international transfer and payments for current transactions relating
to their specific commitments, would have to be further assessed. As the EU has
taken specific commitments relating to financial transactions, including lending,
deposits, securities and derivatives trading and these commitments relate to
transactions with third countries, a currency transactions tax could constitute a
breach of the EU's GATS obligations."

The EC document marks the first time since the financial crisis that a government
entity has been so explicit about the potential for GATS to conflict with financial
regulation policies on size, or other prudential measures. This raises questions
about the WTO Secretariat's assertion that regulation measures are all compatible
and would be protected from a WTO challenge, says Public Citizen Staff Todd
Tucker, in an article.

Read the full article at

http://citizen.typepad.com/eyesontrade/2010/04/europe-admits-speculation-taxes-a-
wto-problem.html

4) Sub-regional Summit addresses Aid for Trade in ECOWAS region

In an Informal Report , ECDPM provides highlights of an Economic Community of

West African States (ECOWAS) sub-Regional Aid for Trade Review was held in
Abuja on 26 to 27 January

The report, "Maximizing the Impact of EU 'Aid for Trade' Support" is available here.

5) Using Taxes to Change the Structure of Investment and Trade in African

resource-based economies

The second issue of the Tax Justice Network Africa newsletter "Africa Tax
Spotlight" (link below) features short articles on some of the papers presented at the
Pan-African Conference on Taxation and Development, held in Nairobi, Kenya
between on the 25th and 26th of March 2010.
A short article based on Aldo Caliari's paper "Changing the Investment Structure in
Natural Resources," contributed to the conference, is included in the newsletter.
The article argues that in African natural resource based economies the structure of
investment bears special relevance to reap the benefits from trade. In this context,
taxation policies are an underexplored tool that can be deployed with the purpose of
shaping the structure of investment and also the structure of trade, via investment.

This conference the first made critical input into the issue of domestic taxation,
resource-based taxation as well as international taxation and as a result made
recommendations for the many issues of critical concern for the improvement of
taxation and its re-distribution within individual states in Africa.

Find the full newsletter at

http://www.taxjustice.net/cms/upload/pdf/Africa_Tax_Spotlight-_May_2010.pdf

6) World Bank papers focus on trade amidst the global financial crisis

Please see below title, summary and links to three World Bank papers addressing a
number of issues related to the links between trade and the global crisis 2008-09.

Caroline Freund. "The Trade Response to Global Downturns: Historical

Evidence." Policy Research Working Paper 5015. World Bank, Washington, DC.

Summary

This paper analyses the impact of global downturns on trade flows. The study
originated results regarding trade drops, global imbalances, elasticity of global trade
volumes, trade rebound, the most and least affected regions, and improvements in
the ratio of the trade balance to GDP in borrower countries. The elasticity of trade to
income rose across time and the study finds that is due to the fragmentation of
production and/or lean retailing. East Asia has the largest elasticity, making it the
most affected region as a result of trade linkages during the current downturn.

The study also found that downturns tend to moderate global imbalances. The
regions that mostly present imbalances are Latin America, East Asia, Europe and
the Middle East and North Africa. The effect is temporary unless the downturn
changes investment attitudes and/or government policies so the imbalances do not
revert to pre-crisis tendencies. North America stabilizes during the downturn but
worsens in its aftermath. The effect of exchange rates and commodity prices is
reflected negatively on the real merchandise trade. When regarding products, food
and beverages, just as iron and steel, are sharply affected by the slowdown. In
contrast, trade in automobiles shows great recovery. Overall, the trade drop over
the last few months has been extremely high and more severe regarding effects
than other recent downturns.

Full paper available here.

Leonardo Iacovone and Veronika Zavacka. "Banking Crises and Exports:

Lessons from the Past." Policy Research Working Paper 5016.

Summary
Based on 23 banking crises episodes involving both developed and developing
countries during the period 1980-2000, the paper analyses the impact of banking
crises on manufacturing exports exploiting the fact that sectors differ in their needs
for external financing. Through the difference-in-difference identification strategy, it
was found that there is a negative and significant effect of banking crises on export
growth as sectors more heavily dependent on external finance are hit harder by a
financial crisis. Sectors characterized by a higher share of tangible assets are
affected significantly less by the crisis if collateral is provided. Another issue is the
access to financial resources in a context of crisis. As it was observed, contraction
is more visible in countries with a more developed financial system because it
reduces output volatility in sector with higher liquidity needs. Higher financial
development leads to a lower search cost for financial intermediaries and higher
shares of exports in industries more dependent on external finance. However, if the
dependence on banks is too heavy, these industries suffer significantly more during
a banking crisis. For economies where financial markets are not sufficiently
developed, the use of collateral is relevant as industries with higher shares of
tangible assets tend to grow relatively faster and export more
Full paper available at here.

Ingo Borchert and Aaditya Mattoo. 2009. "The Crisis-Resilience of Services

Trade". Policy Research Working Paper 4917. World Bank, Washington, DC.

Summary
Based on new trade data from the United States, this study shows that services
trade is withstanding the crisis when comparing to the outcome of goods trade.
Trade growth has been significant other services such as insurance,
telecommunications and in business, professional, and technical types of services.
Exports to the United States of developing countries are mostly specialized in
services. One of these countries is India. India`s export services has declined less
than countries such as Brazil, China, and the African continent whose exports are
based in goods. Based on Indian services exporters, it was found that services
trade has been rising due to the crisis-induced scarcity of finance since services
trade are less dependent on trade finance less than goods. This happens because
of its limited tangible collateral. Another reason is that services are not storable
making them less subject to declines in demand in downturns that affect durable
goods and a great part of services trade seems to involve long-term relationships in
the transactions.

Full paper available here.

7) IMF staff bent on supporting liberalization through WTO Doha Round

In a recent staff paper, "Trade and the Crisis: Protect or Recover", IMF researchers
Rob Gregory, Christian Henn, Brad McDonald, and Mika Saito state that while a
widespread resort to protectionism as a result of the 2008-09 crisis has been
avoided, trade in those products that were targeted has suffered.

The authors warn that protectionist trends are likely to intensify in the coming
months and call for the conclusion of the WTO Doha Round in order to lock in
substantial trade liberalization that has taken place but has not been locked in, yet.

The paper is available at http://www.imf.org/external/pubs/ft/spn/2010/spn1007.pdf

Aldo Caliari
Director
Rethinking Bretton Woods Project
Center of Concern