Recent Vox columns (Baldwin 2009 and Pryce 2009) on the G20 summit have highlighted the uncertainty surrounding trade financing. The London communiqué identified the withdrawal of trade credit as one of the causes of falls in world trade and promised "at least $250 billion over the next two years to support trade finance". In January, Marc Auboin emphasised the importance of increasing trade finance, but Richard Baldwin raised some doubts after the summit, arguing that, while such commitments are politically attractive to G20 leaders, there is scant evidence that declines in world trade are actually attributable to problems with trade financing.
The concern with trade finance and the absence of hard evidence about its impact on global trade have both been evident since the second half of 2008. When Pascal Lamy announced the formation of the WTO task force on trade credit in October 2008, he signalled the potential importance of this issue but also said that he was not aware of any shipments being stopped as a result of the crisis. There has been a lot of anticipation of stranded shipments and increasing trade finance costs, but little hard evidence.
Trade finance and developing economies
This anticipation partly stems from previous financial crises in emerging economies. In the East Asian financial crisis of 1997, sharp falls in the availability of trade finance did cause problems for importers in countries such as Indonesia. These crises had immediate and severe effects on trade finance, as international lenders rapidly reduced their exposure to risky markets. It is far from clear that the current crisis will have the same impact. The underlying problems and associated risks do not lie in the emerging markets or developing countries more generally.
Policymakers should be concerned about this issue. Over the past two decades, development policy has encouraged producers in developing countries to take advantage of the opportunities opened up by globalisation. Exports of labour-intensive manufactures and non-traditional agricultural exports have been promoted as effective means of reducing poverty. Given the unprecedented financial nature of this crisis and its impact through the banking system, will exporters from low-income countries be hit by declining availability of trade finance?
A sample of African firms
Researchers at the Institute of Development Studies investigated whether trade finance issues were affecting exports in sub-Saharan Africa (Humphrey 2009). We contacted 30 medium- and large-scale firms in two export-oriented sectors – garments and horticulture – and asked them whether trade finance was affecting their business. Telephone interviews were followed up by contacts with industry experts, banks, and UK importers.
The findings were clear. As of February/March 2009, very few of these firms faced any problems with respect to the availability of trade finance. What explains this finding? One factor was the resilience of the domestic banking system. Firms reported that credit in general is available from domestic banks as long as firms showed themselves to be creditworthy. Horticulture firms are considered good risks by local banks, so they did not have problems accessing finance. Garment companies are generally considered more risky, particularly as export-oriented companies have suffered since the phase-out of the Multifibre Arrangement. But even they reported that their access to finance from the domestic banking system had not changed. Two banks interviewed in Kenya confirmed this picture. The financial crisis has had visible impacts, such as notable declines in remittances, but the capacity of banks to finance companies and trade had not been affected.
The second factor explaining these findings is the nature of trading relationships, particularly evident in horticulture. Horticulture firms generally have well-established relationships with customers, and inter-company credit sustains trade. In some cases, transactions are conducted on open account terms. Exporters are, in effect, providing trade credit to their customers, but they have built up their financial resources to cover the gap between shipment and payment and do not rely on banks for trade financing. In other cases, customers provide advances to their suppliers. In the case of garment companies, there is greater reliance on financial instruments such as letters of credit, but most firms relied on the parent companies to provide trade finance, and, with a small number of exceptions, its availability was unchanged.
The heterogeneous impact of the crisis on trade finance
These findings do not show that the global financial crisis has had no impact on exporters in developing countries. Rather, the impact is very uneven. First, sub-Saharan Africa appears to have been less affected, so far, by trade finance problems than other regions. There is evidence that for exporters from Central America and Caribbean are facing more severe constraints – a fact illustrated by one UK horticulture importer whose suppliers had been badly hit by withdrawals of bank credit and evidenced by other sources. Second, there is evidence from Africa that restrictions on credit in the domestic market are hitting small traders and cooperatives that do not have the business linkages needed to access inter-company credit. To the extent that there is some credit rationing, the marginal firms are hit first. Third, the African exporters interviewed were clearly affected by other issues arising from the global financial crisis, particularly declining demand for garments and exchange-rate volatility for horticulture exporters targeting the UK market.
The conclusion to be drawn is that the impact of the global crisis on developing country exporters is highly differentiated – by region, by sector, and by type of firm. Responding to the new challenges requires carefully targeted support. Broadly targeted support to increase lending capacity in the banking system – in both importing and exporting countries – will not necessarily reach the firms that are in most need. Firms with established exporting records that have repeat transactions with a range of established customers are more likely to obtain what bank finance is available and more likely to give and receive trade credit than other firms. Difficulties in obtaining trade finance are more likely to affect small firms and new entrants that do not have established relationships with their banks and with their customers.
Humphrey, J. (2009) 'Are Exporters in Africa Facing Reduced Availability of Trade Finance?', Brighton: Institute of Development Studies
International Chamber of Commerce (2008) Trade Finance in the Current Financial Crisis: Preliminary Assessment of Key Issues, Paris: International Chamber Of Commerce
Wang, J.-Y. and Tadesse, H. (2005) 'Overview', in J.-Y. Wang and M. Ronci (eds), Access to Trade Finance in Times of Crisis, Washington DC, International Monetary Fund: 1-15