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    The Wheels of Trade Finance

     

     
     

    While bailouts for banks and help for homeowners hit the headlines daily, scant regard is given to the grit in the engine of growth: access to trade finance. The narrow focus during this wave of the financial crisis as it hits homes in developed markets obscures the tsunami that threatens trade at a time when we simply cannot afford to see trade flows stall.

    About 90 % of the $13.6 trillion in world merchandise trade is funded by trade finance. But we are now facing a crisis of cash and confidence. Experts gathered at a World Trade Organization meeting on trade and finance raised the alarm, pointing out that demand for trade finance well outstrips supply. Regional development banks and export-import banks that finance trade are facing funding difficulties themselves, making it hard for companies to obtain trade finance. Even with a letter of credit, banks remain reticent to issue loans.

    The crisis of confidence extends beyond obtaining trade finance to a closer scrutiny of letters of credit. The International Trade Center shares the concern of the International Chamber of Commerce, that this practice not be used to avoid or delay financial obligations. We are working together in rolling out a tool for banks in developing countries to help them better assess risk of small and medium-sized enterprises - those who will be hit hardest in the fallout from the current crises.

    Who must act? Governments as shareholders in the international financial institutions need to put trade finance higher on their agendas. Comfort can be taken in the fact that the history of default on International Finance Corporation loans for trade financing is very low. Trade finance offers excellent odds in the current casino.

    Patricia Francis
    Executive Director, International Trade Centre

    Editor's note: These views were first published in the International Herald Tribune, Letters to the Editor section in November 2008.