Bulletin 09 July 20

To: Organizations addressing Trade-Finance Linkages 1) UNCTAD addresses trade implications of the crisis 2) US FTAs: blocking the exit from debt crises at a time of global downturn? 3) Financial Crisis and Trade: Consultation with African Finance Ministers

4) Industrializing amidst a financial crisis: Report and video now available

5) Citi and IFC in Global Trade Funding Alliance- FT article 6) The IFC: Opportunist Expansion? - Bretton Woods Project article

1) UNCTAD addresses trade implications of the crisis Last May, UNCTAD released "Global Economic Crisis: Implications for Trade and Development," a report for the Trade and Development Commission. Please find below a summary of the report. Full report available at http://www.unctad.org/en/docs/cicrp1_en.pdf Summary The purpose of the reportis to provide an early assessment of the economic crisis and its impact on world trade in goods, services, commodities, and investment, and development. Chapter I discusses the effect of the crisis on merchandise trade flows. According to the report, trade integration has been one of the main pillars of development strategies for many developing countries so, the extent to which developing countries' trade performance is affected by the current economic crisis depends on their dependence on international markets, their export compositions, and exchange rate fluctuations. The degree of dependence of developing countries on international trade, and thus their exposure to external markets, as measured by the exports-to-GDP ratio, has greatly increased in recent years, such that developing countries are more vulnerable to international markets than developed countries. Merchandise trade flows have been rapidly contracting since October 2008. Moreover, South-South trade, which has been the most dynamic component

of world trade for over a decade, also appears to have declined, especially intraAsian trade. While the decline in international trade appears to affect all types of goods, trade in manufacturing (including non-agricultural commodities) has contracted at a much sharper rate than trade in agricultural products. The economic crisis has repercussions not only on consumer demand, but also on intermediate and investment goods such as machinery. Trade within regional trade agreements (RTAs) appears to have declined at a similar pace to trade outside RTAs. It is increasingly more difficult and costly for developing country exporters to borrow from international financial markets or to apply for export credits and/or export insurance, impacting the production capacity of developing countries and jeopardizing their trade. The report recommends that the G20 commitment to make available $250 billion in the next two years (2009-2010) to support trade finance be rapidly brought into action.

Chapter II discusses the impact of the crisis on commodity prices. The price boom that lasted between 2002 and 2008 did much to improve the balance of payments situation of commodity-dependent developing countries, but at the same time resulted in the emergence of the global food crisis. The contraction of orders for internationally traded commodities from the demand side and the deterioration of suppliers' financial positions (both inflicted by the banks' credit squeeze) strongly contributed to the dramatic falls in commodity prices and to the downturn in commodity production and demand beginning in 2008. Many commodity exporters that benefited from the commodity price boom with considerable terms-of-trade gains, are now facing the downside of their commodity dependence, manifested in a substantial shrinking of export revenues. This in spite of the fact that commodity prices are in many cases still above the pre-boom levels. Chapter III discusses the impact of the crisis on services trade and services sectors. Coming into the economic crisis, global year-on-year services exports were rising by 11 per cent in 2008 with an 8.5 per cent and 15 per cent rise achieved by developed and developing countries respectively. Notwithstanding an overall increase in services exports relative to 2007, a turning point for services exports growth occurred in the third quarter of 2008, with a precipitous decline in the fourth quarter of that year. Services workers face rising global unemployment, which will lead to a significant drop in remittances to developing countries. Maritime transport, of particular importance for some developing countries, is in a sharp decline. Activity in financial, transportation, telecommunications, and energy services has declined, while output and trade are decreasing for tourism, construction, distribution, and information and communications technology services. Chapter IV deals with the effects of the crisis on foreign direct investment (FDI). Global FDI flows declined by 15 per cent in 2008, and a further decline is expected at least in the short-to-medium term. Since cross-border mergers and acquisitions account for the bulk of FDI in most developed countries, these countries are particularly vulnerable to the credit crunch. In developing countries, the figures still do not reflect how critical their situation is, as the decline only started in the fourth

quarter of 2008. In particular, the report makes the connection between expected FDI declines in exports. For countries reliant on external demand, plunging exports will lead to an apparent setback in efficiency- and market-seeking FDI inflows, due to collapsed growth prospects in both local and international markets. Countries reliant natural resources will see FDI lose momentum because during the past few years, FDI growth in some low-income countries in Africa and Latin America has been driven by resources-seeking investment. Sharp declines in prices of these resources is affecting not only the export earnings and growth potential of producing countries, but also their prospects of attracting FDI. Also among the LDCs, it is those countries with a high degree of dependency on mineral exports that are likely to be the most negatively affected, as mines get closed or suspended by foreign investors. Still, the picture of South-South investment is less bleak and investment opportunities triggered by cheap asset prices and industry restructuring, large amounts of financial resources available in some dynamically growing countries such as sovereign wealth funds, and quick expansion of new activities such as renewable energy and material/resource/energy efficiency may have a positive impact on flows. Chapter V discusses the threat of protectionism, and suggests policy responses to the crisis. While there is no clear trend indicating that overall tariffs are becoming more restrictive, data indicate a recurrence of the use of non-tariff protectionist measures. Some governments have announced plans to expand the use of subsidies, often as a part of national economic stimulus packages. This chapter also contains assessment of impacts due to currencies that have devalued vis-àvis the USD and euro. Addressing the global economic crisis and its impact on international trade and investment, as well as a review of development policy, must happen on a multilateral and individual country basis. First, the report states countries must resist and arrest protectionism. It will be important to start implementation of the "duty-free, quota-free" treatment for the exports of LDCs in 2009, for developed countries to pledge to keep their GSP schemes free of new restrictions and conditions, and for competition law to be well-enforced. Next, stepped-up efforts at all levels are required to increase funding for trade finance and improve lending terms. For developing countries, regional and interregional cooperation and SouthSouth cooperation in trade finance could help address the challenge. In addition, developing countries may need to use sovereign wealth funds, BOP support finance from IMF, structural adjustment loans from the World Bank, and national policy measures to bolster development and enhance commodity production. The recommendations also include reference to the opportunities the crisis offers for strengthening South-South trade linkages, via reshaping existing production supply chains; policy instruments such as GSTP; and better regional trade and investment agreements. Resilience in trade performance can be developed through diversification, particularly into more dynamic products. Finally, the report calls for a re-examination of export-oriented development strategies, review and rebalance the roles of the State and the market within development strategies, in certain cases refocusing on building more domestic-demand-creating and demand-

driven strategies while, in other cases, measures for more effective and qualitative participation in international trade need to be strengthened. Environmental measures should be treated as part of the solution to the crisis.

2) US FTAs: blocking the exit from debt crises at a time of global downturn? A recently published study focuses on the obstacles that a number of trade and investment treaties could present for governments trying to achieve orderly and timely workouts of their debt. The study, called "Risks Associated with Trends in the Treatment of Sovereign Debt in Bilateral Trade and Investment Treaties," and authored by Aldo Caliari, appeared on a book "Compendium on Debt Sustainability, published by UNCTAD. The global economic crisis has led to renewed worries about the debt situation in developing countries, which will reportedly have to roll over more than USD 3 trillion in this year. This happens in an environment of scarce and expensive credit and while trade, the main source of foreign exchange that these countries rely upon to service their external debt, is seeing its worst contraction in more than 60 years. Compared to the magnitude of the solution that will be needed, the timid mechanisms implemented in the last several decades such as the HIPC/MDRI initiative, or the recent Debt Sustainability Framework do clearly not offer an applicable model. It is unavoidable to discuss other remedies and, in this context, the need for debt standstills and a bankruptcy court, has been a key demand of developing countries in the recent conference on the financial and economic crisis and development, held at the UN. But, as explained in this article, in the most recent wave of bilateral Free Trade Agreements the US government has signed, it has insisted on clauses that would restrict the policy autonomy that countries need to implement such solutions. Find below a summary of the study To download the full study visit http://www.coc.org/system/files/SovereigndebtinFTAs.pdf For the full UNCTAD's "Compendium on Debt Sustainability and Development" visit http://www.unctad.org/en/docs/gdsddf20081_en.pdf Summary Risk associated with trends in the treatment of sovereign debt in bilateral trade and investment treaties Free Trade Agreements (FTAs) increasingly include provisions that subject

financial policy to specific legal disciplines and their associated dispute-settlement mechanisms. This trend places limits on the use by developing countries of several tools designed to build and preserve stable and healthy financial sectors responsive to national development priorities and supportive of trade. As a result, developing countries may face a growing vulnerability to financial and debt crises. A review of recent FTAs negotiated by the US reveals at least two different approaches to the treatment of sovereign debt issued by the parties' principles. In the first approach, sovereign debt is explicitly excluded from application of the principles. For example, the Financial Services section of NAFTA specifies that a debt security issued by a party or state enterprise is not an investment. In the second approach, sovereign debt is explicitly included within the scope of application of investment principles. For example, in the US-Chile FTA, as well as CAFTA, "debt instruments" are listed as one form of investment; thus FTA provisions such as National Treatment and Most-Favored-Nation (MFN) Treatment are applicable to sovereign debts issued by the governments of the involved countries. However, the US-Uruguay FTA, while containing some language that mirrors the NAFTA language, then in an annex states that current or future negotiated restructuring of debt instruments can, in certain conditions, be considered a breach of obligation. Thus, sovereign debt in this case seems to be considered a type of investment even absent an explicit mention in the definition of investment, perhaps setting a precedent that, absent an explicit exclusion, this will always be the case. National Treatment and MFN Treatment were included in the GATT as principles applying to trade in goods. The extension of these Treatments to sovereign debt is certainly controversial and unclear but its application to sovereign debt could be even more harmful. First, there are several reasons why a country restructuring its sovereign debt after a financial crisis might need to resort to offering preferential conditions to domestic creditors. National Treatment in this context means that foreign creditors are offered treatment in debt restructurings no less favorable than that offered to domestic creditors. The application of National Treatment to sovereign debt would restrict the ability of the debtor government to take some policy measures aimed at the recovery of the local economy in the aftermath of financial crises. Second, the application of National Treatment to sovereign debt means that the Government will be unable to prioritize domestic debt associated with meeting wages, salaries and pension obligations. The government is bound to treat these debts in the same way as foreign debts held by transnational banks and institutional investors, and as a result, may be unable to fulfill human rights obligations and social responsibilities. Third, the offer of preferential conditions to domestic creditors is crucial to enhancing a government's leverage in negotiations over debt restructuring with other creditors. If the principle of National Treatment is applied to sovereign debt, this avenue is effectively foreclosed.

Fourth, application of National and MFN Treatment only to creditors of countries that are parties to bilateral investment treaties would have the discriminatory result of granting seniority to creditors from such countries over those from other countries. As a result of applying the principles of investment treaties to sovereign debt, governments that violate investor protections can face expensive lawsuits. CAFTA, like NAFTA and numerous bilateral investment treaties, grants private foreign investors the right to bypass domestic courts and sue governments in international tribunals. Such "investor-state lawsuits" are highly controversial, as arbitration tribunals are not required to pay regard to legal precedents or to appoint independent arbiters, and may lack transparency. The main rationale for a more systematic handling of sovereign debt defaults has been the need to provide greater predictability for debtors and creditors alike, and the arbitration tribunals would be a poor instrument for addressing those concerns. The lack of a rule-based multilateral regime in dealing with sovereign debt crises leaves debtors vulnerable to power asymmetries. These asymmetries are only reinforced by the inclusion of debt instruments, particularly those for sovereign debt, as a type of investment. In view of these dangers, an approach that explicitly excludes sovereign debt from the definition of investment, is a superior model.

3) Financial Crisis and Trade: Consultation with African Finance Ministers On April 25, 2009, the Center of Concern and the Commonwealth Foundation coorganized "The Financial Crisis and Trade: Towards an Integrated Response-a Consultation with Commonwealth Finance Ministers." The meeting was chaired by the Honourable Pierre Titti, Minister Delegate, Ministry of Finance, Cameroon, and Chair of the Commonwealth Ministerial Debt Sustainability Forum. Opening the meeting, the Chair noted the significance for the Commonwealth of the meeting between civil society representatives and Commonwealth Finance Ministers as an important step towards the strengthening of ties between the official and unofficial Commonwealth. The event, held on the eve of the 2009 Spring meetings of the World Bank and the International Monetary Fund, relied also on the generous support of the Ford Foundation and the Swedish Ministry for Foreign Affairs. The consultation brought together about forty participants from civil society, academia, and government, including African Finance Ministers and senior officials. Nowhere are the impacts of the financial crisis felt more, and with more dramatic consequences, than in Africa, where the crisis threatens to undo the modest

progress achieved after long years of efforts to reduce entrenched levels of poverty and achieve the Millennium Development Goals. Commenting on the linkages between the global crisis, finance and trade, Dr Ransom Lekunze, from South Centre, noted that the global economy faced an unprecedented downturn, with major financial institutions and countries in recession. He added initially the belief had been that Africa would be protected against the crisis because of its low integration into the global financial system. Today, the analysis is very different. According to figures released by the African Development Bank, growth rates for the continent estimated at 4.8% in 2008 were set to fall to about 2,8% by the end of 2009 (AfDB, 2009), clear evidence that Africa is more integrated into the global economy through trade, foreign direct investment, and remistances. The financial crisis offered an opportunity to re-examine the potential that an integrated approach to trade and finance may have to improve the design of development policies. Indeed, trade factors are central to the effects that the ongoing financial crisis is having on a large number of developing countries. This is in evidence through a number of trade-related channels such as commodity prices, export-driven investment, infrastructure and debt sustainability, macroeconomic imbalances, exchange rate fluctuation, trade finance, and credit for export-oriented production. In November 2008, leaders of the G20 countries gathered at an economic summit in Washington DC to launch a process to implement reforms of the international financial system. The meeting pledged co-ordinated action to tackle the downturn. The UK government, which currently holds the rotating presidency of the G20, convened a follow-up meeting on 2 April 2009, in London. A similar process is taking place in the context of the UN system where a high level conference held last June has launched a global consensus on responses to the crisis and a process to follow up on it. With so much attention focused on the response of the financial crisis, it would be easy to assume trade issues will take a backseat to financial ones. "For African countries, this would be a tragedy," noted Aldo Caliari, from Center of Concern. "It is their trade structure that is heightening their vulnerability in the downturn. How to overhaul a trade structure that is the result of years of trade liberalization, that should be the key concern if we want to support these countries' efforts to overcome the crisis."

A note on the issues addressed at the meeting is available here http://www.coc.org/node/6416 An agenda of the meeting is available here http://www.coc.org/system/files/Agenda.pdf A press release on the meeting is available here http://www.commonwealthfoundation.com/news/news/detail.cfm?id=520

As a result of the consultation, the Commonwealth Foundation and the Center of Concern were invited to present the report and recommendations of the meeting to the Commonwealth Finance Ministers upcoming meeting, to take place in Cyprus, late September.

4) Industrializing amidst a financial crisis: Report and video now available

The financial crisis will subject developing countries to great challenges. In many of their economies, shaped to strongly rely on exports, a high degree of commodity dependence and lack of diversification will magnify the impact of trade trends on their revenue. Escalating to products with higher industrial content might, in the light of global recession and lower revenue, become even more difficult, while at the same time more necessary than ever before to secure developing countries' future.

On March 12, 2009, the Center of Concern, the Center for Economic and Policy Research and Heinrich Boll Foundation convened a panel of distinguished speakers to address these issues:

· · ·

Prof. Ha-Joon Chang, Faculty of Economics, University of Cambridge Mr. Rogerio Studart, Alternate Executive Director for Brazil, World Bank Mr. Mark Weisbrot, Center for Economic and Policy Research

To watch videos of the main presentations and for a brief report on the event, please visit http://www.coc.org/node/6384

5) Citi and IFC in Global Trade Funding Alliance -FT article Below find reproduction of news clip reporting on developments regarding the recently-launched "Global Trade Liquidity Program" at the World Bank. Citi and IFC in global trade funding alliance By Saskia Scholtes and Francesco Guerrera in New York Published: June 14 2009 22:37 | Last updated: June 14 2009 22:37 Moves to unblock world trade flows still jammed by the credit crunch havebeen backed by Citigroup, which on Monday unveils a $1.25bn funding tie-upwith the International Finance Corporation, the private sector arm of theWorld Bank.

Citi and the IFC are launching the partnership as part of a $50bn globaltrade finance initiative announced by the World Bank in April. The tie-up the second the IFC has entered into with a bank since April marks a new willingness by banks to finance trade in emerging markets. The US bank hopes to steal a march on its competitors by tapping intoopportunities arising from the scarcity of credit, which has driven up theprice of trade finance. Citi¹s deal with the IFC comes as the financial crisis has caused banksaround the world to cut credit lines to conserve resources. Trade financing in Brazil, for example, costs about 400 basis points overinterbank lending rates, while in South Korea, trade financing costs300-350bps over interbank rates. John Ahearn, head of trade finance at Citi, told the Financial Times: ³Whilethis is a lucrative business for Citi, our goal is, hopefully, that priceswill go down [as more funds are made available]². Under the deal, Citi will provide $750m to banks in Asia, the Middle East,Africa and Latin America over a three-year period. IFC and other participating development organisations will invest up to$500m in these transactions. The local banks will in turn, extend tradefinancing to their importer and exporter clients. Citi estimates the $1.25bn will support up to $7.5bn in trade flows over thethree years as the loans will be short term and the funds will be reinvestedonce borrowers repay. Georgina Baker, IFC¹s director of global financial markets, said thesefunding partnerships should ease banks¹ concerns over the risk of fundingtrade in emerging markets by reducing the amount of loans they keep on theirbooks. Trade credit, one of the simplest and longest-established forms of finance,in effect ensures that exporters will get paid by insuring receipts whilegoods are in transit. The drying-up of trade finance is one of the most direct ways in which theglobal credit crunch can directly affect the real economy. The World Bank estimates that the fall in the supply of trade finance hascontributed some 10-15 per cent of the decrease in world trade since thesecond half of 2008. Mr Ahearn said: ²The issue has been: has global trade weakened because oflack of credit or lack of demand? This IFC programme helps to answer thefirst question.² ³We don¹t see this simply as a way to put good assets to work becausespreads have widened, ² Francesco Vanni d¹Archirafi, head of Citi¹s GlobalTransaction

Services Division, told the FT: ³This is a lot of money, it isvery specific and it is going to be funded very quickly. The multipliereffects are going to be very very strong.² Copyright The Financial Times Limited 2009

6) The IFC: Opportunist Expansion?- Bretton Woods Project article See below link to a Bretton Woods Project article, "The IFC: Opportunist Expansion?" also reporting on, among other programs, the Global Trade Liquidity Facility of the IFC. http://www.brettonwoodsproject.org/art-564833

Aldo Caliari Director Rethinking Bretton Woods Project Center of Concern