To: Organizations addressing Trade-Finance Linkages

   
1) IMF love for exchange rate management: a passing fade? 
 
2) Trade and finance in G20 Summit Declaration 
 
3) Report for G20 highlights risk of accumulating trade restrictions 
 
4) Export Credit Agencies after the Global Financial Crisis‐ Report 
 
5) Basel 2 and Availability and Terms of Trade Finance‐  New Paper 
 
6) WTO holds discussion on financial crisis 
 
7) Trade considerations in the re‐regulation of commodity markets ‐ 
Drafting Committee 
 
8) WTO, OECD Secretariats launch call for Aid‐for‐Trade case stories 
 
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1) IMF love for exchange rate management: a passing fade?

A few months ago the IMF was issuing a staff paper "Rethinking
Macroeconomic Policy." (IMF 2010).
Most of the attention drawn by the paper was related to what was considered a
dramatic departure from Central Bank orthodoxy. This was the possibility of
accepting the targeting of inflation at 4, rather than 2 percent-generally on the
grounds that having a higher inflation would give policy-makers more room to
cut rates in a recession, before the rates hit zero.
The press characterized it as a big change of heart in the IMF, even though, as
any "staff paper," it born a clear disclaimer that it did not represent the views of
the institution.
The paper, however, was significant in a less visible and, yet, important respect:
its mention of exchange rate-targeting as a tool some countries could resort to
in order to avert sudden exchange rate movements.
A longstanding demand of civil society groups has been the need for broader
room for exchange rate management in developing countries. This is in account
of these countries' greater reliance on trade and their position as net "takers"
rather than "makers" of global monetary trends.

In the words of the IMF paper:

"Large fluctuations in exchange rates, due to sharp shifts in capital flows (as we
saw during this crisis) or other factors, can create large disruptions in activity. A
large appreciation may squeeze the tradable sector and make it difficult for it to
grow back if and when the exchange rate decreases."
Granted, along the lines of the rest of the paper, this was not such a bold
assertion, and it came as sort of an oblique reference. The reference was found
in a place where the paper's main argument was that central banks argued they
were targeting inflation. The paper said that this was, indeed, the case in
advanced economies, but that in "small open economies" the evidence
suggested central banks "also" intervened to smooth the volatility of the
exchange rate.
So exchange rate-targeting was presented more as something possible and a
fact of life, and, not to be forgotten, as accompanying, not substituting, a policy
of inflation-targeting, rather than as a policy prescription. Further, the usefulness
of that practice seemed, in the eyes of the IMF, and also in a one-size-fits-all
fashion, confined to "small open economies."
Nonetheless, the fact that the IMF also characterized the actions of these
central banks as "more sensible than their rhetoric" may have allowed hopeful
readers to see a change in its approach to this practice. Let us not forget that
only three years ago, the IMF had reviewed its Decision on Bilateral
Surveillance policy that had been in place for thirty years to make it all more
difficult to keep "misaligned" - that is, not floating-exchange rates. (Caliari 2007)
Though the Guidance Note for implementing this Decision was eased last year,
the policy itself as revised in 2007 stays in place. (Caliari 2009)
Hopeful readers were up for a disappointment, though.
A more recent paper called "Central Banking Lessons from the Crisis" (IMF
2010a) - this one made official and submitted to Board discussion, so it can be
said to represent an institutional position- has chosen to avoid making
exchange rate-targeting the subject of any significant finding or
recommendation. Its only reference to the practice is the purely factual
assertion that exchange rate stability is one of the policy objectives Central
Banks take into account (Ib. at 6-7 and footnote 38).
In all fairness, those really hopeful readers might still wait further for another
paper, as this one seems focused on the need to include financial stability - not
just price stability-as a major policy objective in Central Banking. But do not hold
your breath on it. The conclusive title suggests there are no more lessons for
Central Banking the IMF intends to draw from the crisis.
In fact, even the controversial statements that made the February paper famous
also seem to have been replaced by a more sober return to the "basics"
generally accepted.
"Monetary policy should continue to focus on price stability as its primary
responsibility" says the paper, before stating that price stability "has typically
meant an average inflation rate of about two percent, although definitions vary
across countries." (IMF 2010a, 20-21)
The potential way out from low inflation targets identified in the February paper -
namely, giving room to Central Banks to loosen rates in a recession-is
dismissed now: "On rare occasions, a severe crisis may cause policy interest
rates to reach the zero lower bound. However, such severe crises usually stem
from conditions that also make interest rates relatively ineffective... " In other
words, yes, there is a risk that policy-makers might run out of space to use
interest rate-easing as a tool, but this only in situations where such easing is
useless, anyway. (Ib.)
Maybe the practice of targeting exchange rates is so controversial that the
recognition that "sometimes it happens" is all that can be realistically expected
in the foreseeable future. But the IMF's most recent statement of position leaves
the institution lagging further behind the reality and growing body of support for
the practice, particularly for trade-dependent economies.
In a recent study reviewing the historical experience of Latin American
countries, Frenkel and Damill come to the conclusion that
"Probably the most important conclusion that can be drawn from our analysis is
that the level of the RER has had a significant influence in the macroeconomic
performance of Latin American countries. In particular, the experiences
reviewed suggest that an excessively appreciated RER can lead to disastrous
outcomes affecting short and medium term growth." (2010:42)
In an environment where the space for industrial policy has been dramatically
reduced, exchange rate management remains one of the few tools that
governments can employ to diversify a trade profile away from purely primary
production.
Another economist, Mr. Dani Rodrik, has gone as far as saying that "a credible,
sustained real exchange rate depreciation may constitute the most effective
industrial policy there is." (Rodrik 2004)
The idea of influencing relative prices to promote development of non-traditional
export sectors is one recently favored by another renowned mainstream
economist, Mr. Barry Eichengreen. In a seminar recently held at the World Bank
in Washington DC, he stated:
"It's beyond the capacity of governments to identify specific industries and
activities, like green growth, to which subsidies ought to be targeted but it's not
beyond their capacity to identify the kind of broad regularities between different
sectors like manufactures, and agriculture, and services, and to try to influence
the policy mix and relative prices to get the appropriate balance between broad
sectors..." (2010)
The financial crisis has shown the need to diversify the export base is a
particularly urgent one for developing countries, whose main damage in the
crisis did not come from what were relatively strong financial sectors, but as a
result of the trade shocks the crisis triggered. In a context where most tools
governments used to be able to apply to this purpose have been lost to a
number of trade and investment agreements, the macroeconomic policy tools
such as exchange rate management become even more critical. But using them
requires Central Banks breaking away from "conventional wisdom." It does not
help that the "conventional wisdom" in the Central banking community finds
mutually-reinforcing channels with the lack of open debate of new research
findings in the IMF.

References
Caliari, Aldo 2007. Closing all Paths to Trade-led Development? The IMF
Revises Guiding Principles on Surveillance. Available at
http://www.coc.org/system/files/IMF_Surveillance_and_Trade%5B1%5D.pdf
Caliari, Aldo 2009. IMF backtracks on constraints to trade-led development -but
how much? Available at http://www.coc.org/system/files/IMFBilat.pdf
Eichengreen, Barry 2010. Statement at Managing Openness: Outward-Oriented
Growth Strategies after the Crisis, event held at the World Bank, May 10 2010.
Video recording of the full event is available at
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/TRADE/0,,contentMDK:
22487962~menuPK:2644066~pagePK:64020865~piPK:51164185~theSitePK:2
39071,00.html
Frenkel, Roberto and Martin Rapetti 2010. A Concise History of Exchange Rate
Regimes in Latin America. February.
IMF 2010. Rethinking Macroeconomic Policy. IMF Staff Position Note by Olivier
Blanchard and Giovanni dell'Ariccia and Paolo Mauro. February 12. SPN/10/03.
IMF 2010a. Central Banking Lessons from the Crisis. Prepared by the Monetary
and Capital Markets Department. Approved by José Viñals. May 27, 2010
Berg, Andrew and Yanliang Miao. 2010. The Real Exchange Rate and Growth
Revisited: The Washington Consensus Strikes Back? Working Paper No. 10/58.
Rodrik, Dani 2004. Growth Strategies. Harvard University

2) Trade and finance in G20 Summit Declaration

The Declaration at the last Summit of the Group of 20 (G20), held in Toronto,
June 26-27, contained references to trade and investment.

In a section called on "Fighting Protectionism and Promoting Trade and

Investment," the G20 Leaders renewed their pledge from previous summits to
"refrain from raising barriers or imposing new barriers to investment or trade in
goods and services, imposing new export restrictions or implementing World
Trade Organization -inconsistent measures to stimulate exports..."

The pledge, which the London Summit in 2009 agreed until 2010 was, at this
Summit, extended to 2013. However, it is unclear what its value has been so
far. A pre-Summit report by OECD, UNCTAD and the WTO showed a
continuation of a mixed pattern whereby countries keep implementing trade
restrictions and government support measures.

While the report found a lower number of new restrictions in this particular
period, it also expressed concern about the accumulation and non-removal of
previous ones. (see more on next item in this update). The Leaders asked the
WTO, OECD and UNCTAD to continue preparing this monitoring report on a
quarterly basis.

The Declaration directed the OECD, ILO, World Bank and WTO to report at the
Seoul Summit on "benefits of trade liberalization for employment and growth."
Strangely lacking any mention of the trade-offs or negative impacts of trade
liberalization on employment and growth, it does not seem the report is
envisioned as an evidence-based piece to inform policy-making towards the
future, but rather as a report to help shore support against further trade
restrictions.

Finally, as it was the case in previous G20 Summits, there was a call for
bringing the WTO Doha Development Round to a "balanced and ambitious
conclusion as soon as possible."

The Declaration also devotes significant attention-even contains a full annex on-
the Framework for Strong, Sustainable and Balanced Growth agreed in
Pittsburgh and the implication it has for efforts at rebalancing global demand.

However, when it comes to the detail of some of the measures the Declaration
endorses as necessary to rebalance global demand, some of them look like
dogmatic calls for liberalization and deregulation across-the-board. Unless the
reader is imbued by this dogmatic conviction, it is not clear why such measures
would lead to the sustainable and balanced growth being sought rather than to
a resumption of more acute global imbalances.

Some examples, are:

"reducing restrictions on labour mobility, enhancing foreign investment
opportunities and simplifying product market regulation in emerging market
economies."
"Avoiding new protectionist measures"
"Completing the Doha Round to accelerate global growth through trade flows.
Open trade will yield significant benefits for all and can facilitate global
rebalancing appear more as a program to further liberalization and
deregulation."
"Vigilance is also needed to ensure open capital markets and avoid financial
protectionism"
Finally, it is worth mentioning the Toronto Summit established a Development
Working Group that, chaired by South Korea and South Africa, is called to
produce a development agenda and multi-year action plans for adoption at the
Seoul Summit in November. Trade and investment issues are, according to the
early terms of reference released by such a group, among the issues that this
newly-established group will have to consider.

The full G20 Summit Declaration is available at

http://www.g20.utoronto.ca/2010/g20_declaration_en.pdf

3) Report for G20 highlights risk of accumulating trade restrictions

In advance of the Toronto Group of 20 Summit, the WTO, UNCTAD and the
OECD delivered their joint report "Report on G20 Trade and Investment
Measures." The report covers the period November 2009-May 2010.
According to the report, in the six-month period under examination the global
economic recovery was evolving better than expected, but the recovery is still
subject to significant downsize risks. In many parts of the world the strength of
the rebound is moderate and in advanced economies unemployment remained
at close to 10 %. The report says the impacts of the financial crisis in
developing countries should not be underestimated, either, quoting IMF
projections that by end of 2010, 64 million more people would have fallen into
poverty than without the crisis.
The report finds an overall pattern of a declining trend in terms of instances of
new measures and their coverage of trade. But it warns that there is growing
risk of a potential accumulation of trade-restricting measures as previously
adopted restrictive measures are removed at a relatively slow pace.
Looking at developments in trade finance the report states that trade finance
continued to improve after the autumn 2009, but recovery patterns had been
mixed across regions with emerging markets leading the improvement. Except
for Asia, the report paints a picture of mixed recoveries in all regions. It cites
apparent "continuing constraints on trade finance in Africa - particularly in Sub-
Saharan Africa, and in the financing of manufacturing imports and inputs."
The report mentions a decrease in the average utilization rate for additional
trade finance capacity that was committed, from some 70 per cent in the first
half of 2009 to around 40 per cent in the second half, as reflective of
improvement in the global market situation. This explains why the co-chairs of
the G20 Trade Finance Experts Group have recently recommended that the
additional US$150 billion in short-term trade finance, identified in August 2009
as a possible contingent reserve, not be deployed. But the report advocates
against this recommendation, calling for continued efforts to focus on situations
where difficulties remain in accessing trade finance, and to enhancing capacity
building to local financial institutions under the Aid-for-Trade umbrella, and the
possible creation of a trade finance facilitation programme at the African
Development Bank, to deal with the problems of import financing.
It finds a continued "slippage", including by G20 economies, towards policies
that can directly or indirectly restrict trade, and behind the border measures that
appear to be having greater impact than import tariffs.
In a chapter on government support measures, the report finds that a number of
countries, in particular G20 economies, continued to make available stimulus
packages or provide state aid, including export credit schemes and specific
support predominantly benefiting the agriculture, financial and automotive
sectors. Most stimulus packages, it says, include specific measures for SMEs.
"While these measures were necessary to overcome the global crisis," it
argues, "there are still fears that the future exit of public funds from rescued
firms could lead to an increase in economic nationalism." The chapter contains
sub-sections addressing specific sectors: automobile, iron and steel, and
textiles and clothing.
In the joint summary, the authoring institutions warn that, given the sheer size of
these packages, measures taken to rescue firms or sectors of systemic
importance (such as banking) or to preserve jobs (as in the automobile industry)
or to stimulate demand (such as consumption tax reductions or "buy national"
provisions in government procurement legislation) may be more significant in
terms of their potential impact on trade, investment and competition than the
traditional trade and investment restrictions. They, thus, call for such schemes
to not be made permanent.
For the full joint Summary by OECD, UNCTAD and WTO of the report to the
G20 on Trade and Investment Measures visit
http://www.unctad.org/Templates/Page.asp?intItemID=5484‫=ۃ‬1
For the full report on trade-related measures visit
http://www.wto.org/english/news_e/news10_e/report_tprb_june10_e.pdf

4) Export Credit Agencies after the Global Financial Crisis- Report

Please find below summary and link to the report "The Changing Landscape of
Export Credit Agencies in the Context of the Global Financial Crisis," written by
Kavaljit Singh.

Summary
The worst crisis since the Great Depression of the 1930s is largely attributed to
a combination of many factors and demonstrated beyond doubt that irrespective
of the degree of global integration and the soundness of domestic policies, no
country can insulate itself from external shocks. However, the degree of
contagion effects differs across countries.

The global economic recovery is still not in sight, with demand still faltering and
production falling, the squeeze in credit markets continuing and job losses
growing. With most developed economies still not out of recession, the
developing ones (particularly Asia) provide some signs of early regional
recovery, albeit at a slower pace. Private capital inflows to the developing world
witnessed a sharp decline and FDI inflows have been throughout the world as
well as the volume of global cross-border mergers and acquisitions by
international firms.

In this context, the role of trade finance is to facilitate the rapid rise in world
trade of goods and services to mitigate risk and address liquidity gaps inherent
in the delivery of goods and services across borders. There are four key players
involved in trade financing: commercial banks, private insurers, regional and
multilateral banks, and export credit agencies (ECAs). More specifically on
ECAs, besides cross-border trade of goods and services, ECAs are also
involved in promoting and protecting offshore investments and their prime
objective is to take risk away from exporters and investors. In early 2009, as
international commercial banks and private insurers became more at risk
regarding cross-border trade and investments, demand for trade finance far
exceeded supply. And the deterioration in trade finance markets increased
spreads on credit and insurance costs, making trade finance transactions highly
expensive. It affected more small and medium enterprises in the poor and
developing world.

Several policy measures were taken to reduce the negative impacts of turmoil in
the global trade. They include the increase of liquidity by central banks,
expansion of the coverage and capital of ECAs throughout the world, expansion
of programs by regional development banks, assistance through the doubling of
the International Finance Corporation`s (IFC) Global Trade Finance Program,
the assistance of the G20 to support trade finance and some other counter-
cyclical measures for official ECAs to step in to fill the huge gap left by the
private market. The impacts are, however, difficult to evaluate since the
measures were taken in early 2009. And concerns such as the lack of
information about the actual implementation of some policy announcements and
about specific support provided by national ECAs and multilateral banks are in
the rise regarding the effectiveness, transparency and public accountability of
the ECAs.
Instead of demise, the crisis has given ECAs a new life and offered the
opportunity to reassert their position as dominant players in the trade finance
markets, particularly in bad times. The emergence of new ECAs, new clients
and new products offered by ECAs, the increase in ties with the Multilateral
Development Banks and the growing trend to provide trade finance in the form
of public-private partnership are among the post-crisis developments worth of
attention. On the other hand, the deterioration in the public finances of many
countries is likely to put limits on financial support to ECAs, which are not
leveraged institutions. Likewise, the increase in defaults, given that ECAs do not
have loan loss provisions, may make their business model unviable.

To read the full paper visit http://www.fern.org/changinglandscape

5) Basel 2 and Availability and Terms of Trade Finance- New Paper
According to recent estimates the tightening in availability and terms of trade
finance has made a significant contribution to the contraction of trade,
especially during the early part of 2009.
In "Basel 2 and the Availability and Terms of Trade Finance" ,a paper prepared
by Andrew Cornford for the Global Commodities Forum earlier this year, the
author sets out to scrutinize the notion that a specific factor contributing to this
tightening, cited in recent global surveys of trade finance, are increases in
capital requirements due to the introduction of Basel 2.
The author groups representations concerning the negative impact of Basel 2
on trade finance under four headings. First, the emphasis of Basel 2 on
counterparty rather than product or performance risk. It is argued this leads to
the estimation of capital requirements as an increasing function of the
probability of default and loss given default (both of which increase during
downturns like the 2008-09) and to insufficient importance the being attributed
to the mitigating factors of the low risk of trade-finance instruments -a
characteristic reflected in the self-liquidating character of many short-term trade-
finance instruments. The second is the application of the one-year floor to the
effective maturity of exposures in estimating the determination of capital
requirements for credit risk. Third, the minimum data requirements for the
estimating the probability of default and loss given default. Fourth, the status of
the United States Export-Import Bank as manifested in the risk weight for claims
on or guaranteed by the institution.
Based on a careful assessment of representations in the four categories, Mr.
Cornford concludes that the substance of them reflects more the way in which
Basel 2 is being implemented and applied than the rules themselves.
He, therefore, concludes that it is critical that national regulators and
supervisors exercise fully their discretion under Basel 2, especially taking into
account this is an agreement which consists of soft-law, i.e. rules and standards
which are the subject of international consensus as to their intent but the details
of whose national implementation provide room for flexibility.
Moreover, the alternative approach -- trying to address trade financing issues
faced by some developing-country borrowers through adjustment of the rules of
Basel 2 "would be questionable since arguably such action would contribute to
frustrating the underlying aim of the exercise" (to produce a closer
correspondence between regulatory capital requirements and banks' actual
risks).
Nonetheless, Mr. Cornford does call for some limited revisiting of some of the
rules of Basel 2.
The full paper is available at
http://www.unctad.org/sections/wcmu/docs/GCF2010_Cornford.eng.PDF
6) WTO holds discussion on financial crisis
Please find below an article reporting on the recent WTO discussion on
Financial Crisis. (This article is reproduced from SUNS- North South Monitor,
Issue #6958, 5 July 2010).

WTO holds first-ever "dedicated discussion" on financial crisis

Geneva, 2 Jul (Kanaga Raja) -- Three years after the onset of the financial crisis
that originated in the US and other world financial centres, and the massive
bailouts at taxpayer's expense that ensued, the World Trade Organization held
this week its first-ever dedicated discussion to examine the effects of the
financial crisis and of rescue measures on trade in financial services.

The day-long discussion took place on Tuesday (29 June) at the Committee on
Trade in Financial Services, under the agenda item of "Recent Developments in
Financial Services Trade."

The unprecedented bailouts, involving unorthodox measures by central banks

as well as direct injection of funds by government treasuries, involved not only
financial firms - banks, insurance firms and others - but also various "consumer"
credit and financing operations of automobile manufacturing and other
corporations.

While some of the major developing countries had been pressing repeatedly for
an in-depth discussion in the Committee on Trade in Financial Services (CTFS),
the United States, European Union, Canada and other industrial countries have
been resisting it.

While the WTO and the Secretariat, as well as the majors, have attempted to
keep the trade organisation and the GATS out of the extensive discussions
taking place outside, more recently, there have been some academic writings,
as well as position papers at web-sites by activist civil society groups (like
Public Citizen's Trade Watch), focussing on the connections between the
financial crisis and the trade in financial services of the General Agreement on
Trade in Services (GATS).

The decision to organize a dedicated discussion on the financial crisis and trade
in financial services was the outcome of two proposals, the first by Argentina,
Ecuador, India and South Africa, which formally put forward a proposal on 17
September 2009 (subsequently revised in November 2009), and the second by
the United States that was put forward at the meeting of the CTFS on 4
February 2010 - when other members put forward a number of suggestions
during the discussion at that meeting.

According to an informal note circulated by the Secretariat, topics suggested for

discussion by Members included the following:

-- The effects of the financial crisis on the cross-border supply of financial

services through modes 1 and 2, and sales and purchases of financial services
through mode 3 (commercial presence);

-- The effects of the financial crisis on the operations of foreign and domestic
financial service suppliers, including investment, employment, as well as
product mix;

-- Whether these effects vary by product (e. g. Banking relative to insurance or

securities; trade finance as compared to other banking services; marine,
aviation and transport insurance versus other non-life services);

-- The effects of global liquidity conditions in the wake of the financial crisis on
trade in financial services and the availability of trade financing;

-- The effects of government measures in support of the financial sector on

trade in financial services, including competitive conditions and global financial
stability; and

-- Possible systemic implications in terms of the GATS.

According to the informal note, the purpose of the discussion is to allow

Members to exchange information and discuss their experiences, and to be
informed about research conducted by other international organizations.

The discussion was divided into two segments, the first segment being devoted
to presentations by international organizations having undertaken work in this
area, such as the Bank for International Settlements (BIS), the International
Monetary Fund (IMF), the Financial Stability Board (FSB), and the Organization
for Economic Cooperation and Development (OECD).

The second segment was to be devoted to an exchange of information and

experiences among Members on the issues outlined for discussion, as well as
other topics of interest for Members related to the financial crisis, such as its
implications for financial services trade and the Doha Round.

At a media briefing on Thursday, Mr Hamid Mamdouh, Director of the WTO

Trade in Services Division, noted that this was the first real dedicated
discussion of the financial crisis and trade in financial services in the WTO by a
standing WTO body. The discussion was "extremely un-confrontational," said
Mamdouh.

According to trade officials, some twenty developed and developing countries

spoke during the discussions. Some had brought along capital-based officials.

Trade officials said that in their various statements, delegations focused on

whether the financial crisis had - or had not - affected their financial systems
and the types of actions that they undertook in response to the crisis.

In what seemed to be the Secretariat's interpretation of the discussions,

Mamdouh said that in the deliberations in both the segments of the dedicated
discussion, it was quite significant that "nobody at all saw that commitments
under the GATS were among the root causes of the (financial) crisis."

The WTO official said: "We've gone over all the analysis that the experts
delivered as well as the interventions and presentations by delegations. I think
what was stressed was the importance of (a) strong, sound regulatory
framework." And implicitly, according to Mamdouh's interpretation, (the stress
was on) how important it was that the regulatory framework keeps being
developed, adjusted and updated to stay in pace with innovation and
competition in the financial markets.

In the interventions by Members during the discussion, he said that there were
references made to possible distortions (arising out of the massive bailouts of
financial institutions in the developed countries, particularly in the US and
Europe). The point was made by some Members that bailouts were not
necessarily neutral in terms of their effect on conditions of competition, he
added.

Mamdouh further said that the counter-argument to that is that when

governments face serious crisis, they resort to exceptions, and that this is why
there is the "prudential carve-out". There is an exception provision for prudential
regulations in order to protect the stability and integrity of the financial system.

(This Secretariat view of the "prudential carve-out" in the financial services

annex of GATS, and the scope it provides for such government bailouts and
interventions has been challenged in some recent academic writings, as well as
by some civil society groups tracking these issues.)

Asked whether the issue of the implications of the financial crisis for the Doha
Round was raised during the discussion, he said that this issue was not talked
about.

Asked about the issues that were discussed, the WTO official said that the
statements of delegations were mainly centred around their own experiences
with the financial crisis, in how it affected their financial systems and what was
done by them in response to the crisis.

A number of developing countries said that their financial systems were not
affected in a serious way by the financial crisis. In terms of their experience with
the financial system, many developing countries explained how their approach
to sound regulation has helped them avoid the negative consequences of the
crisis, Mamdouh added.

A developing country trade diplomat who attended the dedicated session told
SUNS that the speakers made a compelling case about the competitive
problems that were caused by the bailouts in the financial sector.

While it was not a confrontational session, the trade diplomat said that some of
the speakers made a reference to the competitive distortions that were created
as a result of the bailouts (of the troubled financial institutions by the developed
countries).
For the most part, the trade diplomat said, many developing countries took the
floor to explain how the financial crisis had affected them, and how they coped
with the crisis. China made a proposal on how the financial sector relates to
development.

According to the trade diplomat, the United States and the European Union
(responsible for the bulk of the bank bailouts) tried to explain how their
programmes worked. They also made a reference to why these programmes
were needed. For the most part however, they concentrated on explaining how
their programmes worked and how they were conducted.

The OECD, BIS, FSB and the IMF made presentations on the financial crisis.
They highlighted the type of measures that they were taking and how the
countries have reacted to those measures. They also talked about the bailouts
that were provided by some countries, said the trade diplomat.

(The title of the presentation by the IMF was "Cross-cutting Themes in

Economies with Large Banking Systems"; the title of the presentation by the
FSB was on "Priorities on Global Regulatory Reform"; the title of the
presentation by the BIS was "An Assessment of Financial Sector Rescue
Programmes"; and the title of the presentation by the OECD was on "The
Government as Guarantor of Last Resort: Benefits, Costs and Premium Setting
Issues.)

The diplomat pointed out that there were no conclusions drawn by the Members
at the end of the dedicated discussion.

In its statement at the Committee, India thanked the Secretariat for organizing
the dedicated discussion.

Referring to the session earlier in the day, India said that it has heard from the
experts about the huge size of the rescue packages in some of the countries
and how provision of blanket guarantee transferred risks from the banks to the
Sovereign, thus, in effect changing the condition of competition in favour of the
weaker banks.

India said that in one of the presentations, it was pointed out how guarantees
can introduce distortion in competitive conditions. "What is further worrying is
the question raised in the presentation whether these guarantees can be fully
withdrawn."

Thus, said India, there is a risk of perpetuating the distortion already introduced.
"Distortions in condition of competition definitely have effect on trade in financial
services. This is certainly not conducive to a level playing field and impacts
adversely on provision of financial services from the suppliers in the developing
countries."

According to India, "this supports the view of the proponents that we need to
further examine the effect of these measures on trade in financial services in a
more comprehensive manner to further improve our collective understanding of
the crisis and its impact on financial services trade."

India echoed the views expressed by Argentina about the competition distortive
effects of some of these measures.

On a separate track, India said that one of the lessons reinforced from the
presentations, as referred to earlier by Pakistan, is that developing countries
have to be cautious when looking at liberalization and expansion in financial
services taking into consideration local conditions, development needs and
priorities.

"Calibrated opening with effective regulation is probably the way to go as

developing countries do not have the deep pockets to resort to large rescue
packages in case of a crisis," said India.

A representative of the Reserve Bank of India (RBI), India's central bank, made
amongst others some technical observations on the deficiencies of
contemporary financial architecture, impact of global economic crisis on the
Indian economy, salient features of Indian banks, and role of foreign banks in
India during the crisis.

According to the RBI representative, foreign banks play an important role in the
Indian financial sector. There are currently 34 foreign banks operating in India
as branches. Their balance sheet assets, as on March 31, 2010, accounted for
about 7.65% (9.03% the previous year) of the total assets of the scheduled
commercial banks. In case, off-balance sheet assets are included, the share
was 45.94% (50.5% the previous year). However, after credit conversion of off-
balance sheet items, the share was 11.23% (13.77% the previous year) as at
end March, 2010. The foreign banks saw a decline in their share of assets over
the previous year because of contraction in lending in India during the global
financial crisis.

The RBI representative said that the crisis has shown that in countries where
foreign banks had a large presence and had also acquired a large share at the
expense of domestic banks in the boom years, when the home countries were
afflicted, the foreign banks had tended to substantially curtail their operations in
or withdraw from the host country.

The Indian experience in this regard has been no exception, as the foreign
banks had withdrawn substantially from the credit markets in India to the extent
that year-on-year growth of credit was -7.1% (as on July 3, 2009) and -15.9%
(as on October 9, 2009).

In India, the RBI official added, foreign banks not only withdrew from the credit
market, they also hoarded liquidity with their Head Offices.

"The events have demonstrated that when a banking group gets into difficulty,
liquidity which was believed to be available to the whole group can be hoarded'
by the parent or, in some cases, seized by local authorities intervening to
protect their own depositors," the RBI official added.

This is often exacerbated after the collapse of the group as liquid assets are
retained within the parent either by the management of that firm or the actions
of local authorities, which may be contrary to group assurances or even cross-
border agreements and international obligations.

Therefore, there is an increasing realisation that there should be a calibrated

approach in opening up of the domestic banking system to foreign banks. This
may also call for some kind of limitation on the size of operations of foreign
banks in terms of market share at a macro level.

In contrast to the global scenario, the RBI official said that India has by and
large been spared of the global financial contagion. Even in the midst of the
crisis, India's financial sector remained safe and sound and financial markets
continued to function normally.

[In some of the comments in business sections, both in some leading Indian
media and in US media like the New York Times, as well as in posts by
specialists in some of the blogosphere sites (moderated by financial experts), it
has been noted that in countries like India, the central bank, resisting pressures
from the banking trade, have stricter regulations on bank credits. In India, for
example, at an early stage, the RBI placed several restrictions on bank lending
for buying land for housing etc.

[In the extensive discussions taking place in the United States, in relation to the
financial reform legislation under way there, some of the leading economists like
Paul Krugman and Simon Johnson have been focussing both on the strong
regulatory framework and its enforcement, as well as separation of banking and
speculative trade activities in the financial sector. There has also been focus on
the issue of the absence of international agreements on financial institutions
becoming bankrupt and how their assets are to be distributed among creditors,
making it difficult to resolve problems arising out of failures such as that of
Lehman Brothers.]

There are a variety of reasons for this, said the RBI official. In India, credit-
derivatives market is in an embryonic stage; the originate-to-distribute model in
India is not comparable to the ones prevailing in advanced markets; there are
restrictions on investments by residents in such products issued abroad; and
regulatory guidelines on securitization do not permit immediate profit
recognition. Financial stability in India has been achieved through perseverance
of prudential policies which prevent institutions from excessive risk taking, and
financial markets from becoming extremely volatile and turbulent.

Though the Indian banking system remained stable during the crisis, there was
adverse impact on the Indian economy, the official noted.

After clocking an average of 9.4% during three successive years from 2005-06
to 2007-08, the growth rate of real GDP slowed down to 6.7% in 2008-09.
Industrial production grew by 2.6% as compared to 7.4% in the previous year.
In the half year ended March 2009, imports fell by 12.2% and exports fell by
20.0%. The trade deficit widened from $88.5 billion in 2007-08 to $119.1 billion
in 2008-09. Net capital inflows at $9.1 billion (0.8% of GDP) were much lower in
2008-09 as compared with $108.0 billion (9.2% of GDP) during the previous
year mainly due to net outflows under portfolio investment, banking capital and
short-term trade credit.

The expansion of trade in services has included not only cross-border trade but
also foreign direct investment. Banks, for example, typically establish branches
or subsidiaries within a host country. As a result, the RBI official said, the GATS
covers foreign direct investment as well as cross-border trade. IMF research on
the current crisis shows that larger stocks of debt liabilities and of FDI (foreign
direct investment) in the financial sector are associated with worse growth
slowdowns.

Countries with larger stocks of debt liabilities or financial sector FDI fared worse
in the current crisis, whereas those with larger stocks of non-financial FDI fared
better.

Under GATS, it is difficult to realize fully the benefits of liberalization of trade in

financial services without free cross-border movement of capital. The GATS
therefore contains certain provisions aimed at ensuring that a country does not
apply restrictions on payments and transfers that would undermine its
commitments to market access and national treatment.

The new findings of the IMF on FDI in financial services sector therefore sits
oddly with the requirements of GATS for liberalization of financial services,
stressed the RBI official.

7) Trade considerations in the Re-regulation of Commodity Markets -

Drafting Committee

As part of the efforts to influence processes that are looking at re-regulation of

commodity markets in the European Union, UNCTAD and other forums, a
Drafting Committee of volunteers will be assembled to develop substantive
positions that the Working Group can use in such emerging opportunities. One
of these opportunities, coming soon, is a hearing to gather inputs on the review
European Union Markets on Financial Instruments Directive (September 21,
2010).
If you are interested in being part of such Committee please indicate it in a
reply to this message by August 23.
8) WTO, OECD Secretariats launch call for Aid-for-Trade case stories

The Secretariats of the WTO and the OECD are calling on governments,
institutions, organizations, the academia, the private sector and other interested
parties to share experiences on how Aid for Trade is working on the ground.

In a jointly-prepared document the OECD and WTO state that the objective of
the call is to probe deeper into Aid-for-Trade objectives, challenges and
processes to acquire better knowledge about outcomes and impacts of Aid-for-
Trade through the submission of case stories. Case stories are well suited to
offer a large group of stakeholders an opportunity to share experiences about
what is working (or not) at the national and regional level, why it is working (or
not) and what improvements are needed.

The communication states the case stories will provide an important source of
information for the Third Global Review of Aid for Trade next year.

The full text of the call for case stories is available at

http://www.coc.org/node/6576

Aldo Caliari
Director
Rethinking Bretton Woods Project
Center of Concern