Trade finance has taken a battering in the past 12 months, and governments across the world are desperately seeking measures to inject life into the world's clogged-up trade arteries. Writer Charlie Corbett

If the most frequently used words of 2008 could be shortlisted then it is highly likely that 'crunch', 'crisis' and 'collapse' would be near the top of the list, or, as one commentator pithily summarised it: "There's been unprecedented use of the word unprecedented." Looking ahead into 2009, 'stimulus', 'green' and 'shoots' must surely be words that are inching their way towards the top of the list. Whether or not this is justified is a matter for debate. When it comes to trade finance, the lifeblood of global business, the prospect of an upswing in volumes in 2009 would seem a distant one.

Despite numerous attempts to stimulate world trade with promises of huge cash injections from the world's development agencies, the green shoots have failed to materialise.

In the final quarter of 2008, trade volumes across the globe plummeted. According to the Organisation for Economic Co-operation and Development (OECD) the drop in merchandise trade volumes in the Group of Seven (G-7) leading industrialised nations in the final three months of last year was unprecedented.

Exports from G-7 countries fell 9.5% and imports were down 5.6% in the fourth quarter of 2008, when compared with the third quarter. In comparison with the previous corresponding period in 2007, exports were down nearly 8% and imports down 6.4%.

The collapse in trade was felt hardest in Japan, where exports plunged 20% year on year. In the US, exports declined by 2.3%, compared with the year before, and figures for the EU as a whole indicate that exports plunged 6.3% year on year in the final quarter of 2008.

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Robert Zoellick, World Bank president

Credit drought 

For 2009, the picture looks equally gloomy. The World Trade Organization (WTO) estimated in March that trade volumes would contract by a substantial 9% this year.

The collapse in trade lies at the heart of the global economic crisis and its causes are manifold. The most obvious determinant is, of course, the drop off in global demand for goods and services, but running a close second is the lack of access to credit.

Counterparty risk has shot up to the top of banks' agendas as a result of the economic downturn and few are willing, or able, to provide credit even to bigger corporations. According to Robert Zoellick, president of the World Bank, the slump in trade finance accounts for between 10% and 15% of the decline in trade so far. Further, the WTO estimated in March that the gap between supply and demand for trade credit stood at between $100bn and $300bn, up from $25bn last November.

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Pascal Lamy, World Trade Organization (WTO) director-general

The road to resurrection 

The question of how to pump life into the clogged arteries of world trade and encourage banks to start lending again has been agonised over. On an international scale, development agencies across the globe have pledged huge sums towards stimulating trade. UK prime minister Gordon Brown declared a "new world order" in early April at the conclusion of the G-20 Summit in London. His announcement came after G-20 members had agreed to contribute $250bn toward financing world trade in the next two years. Leaders of the world's most industrialised nations pledged to monitor trade and investment, to ensure barriers to trade are not installed and to renew efforts to agree on a solution to the so-called Doha Round of WTO negotiations. The last round of WTO trade talks collapsed amid acrimony in July 2008 over the issue of agricultural import rules.

Efforts to stimulate trade have been most pronounced in the emerging markets where populations have been hit hardest by the global economic downturn. The Asian Development Bank (ADB) agreed in April to expand its trade finance programme to generate up to $15bn in support until 2013. The ADB's board will boost its annual trade facility from $150m to $1bn.

The World Bank launched a $50bn global trade liquidity programme in May, which aims to support those importers and exporters that have limited or no access to trade finance. With initial commitments of $5bn from the public sector, the World Bank said the programme should eventually be able to support up to $50bn of trade. The programme has already received a commitment of $1bn from the International Finance Corporation, a member of the World Bank Group; a pledge of £300m ($429m) from the UK government's development finance arm, CDC; a promise of $200m from the Canadian government; and $50m from the Dutch government.

Emerging market specialist banks Standard Chartered and Standard Bank have signed up to the programme and will receive credit lines of $500m and $400m, respectively. It is hoped that these credit lines will enable the banks to grease the wheels of trade finance in emerging markets by lending to local banks. In Africa, the African Development Bank announced earlier in the year its intention to triple its capital base to $100bn in order to support trade across the continent.

High premiums

Ultimately, however, a genuine revival in global trade cannot take place until banks feel comfortable about lending again. A recent survey of 44 banks in 23 countries by consultancy FImetrix, commissioned by the International Monetary Fund and the Bankers' Association for Finance and Trade, found that 60% of respondents blamed the collapse in the value of trade on lack of credit availability. What little credit is available to corporations comes at a high premium.

The survey found that across all documentary credit instruments between October 2008 and January 2009, pricing increased, and in some cases doubled. Standby letters of credit increased in price by 32 basis points (bps), confirmed letters of credit increased by 24bps and letters of credit with post-finance increased 26bps. The cost of export credit insurance doubled in the same period.

Making predictions for 2009, few of those bankers surveyed found cause for optimism. More than 40% felt that trade finance would stabilise this year, and an equally high percentage expected there to be further deterioration of trade finance in the coming year. It is unsurprising.

Despite recent, more optimistic export data emerging from the US and Europe, major difficulties are being experienced in Asia, particularly China. Once the driving force behind the global economy, China now faces severe economic difficulties. In early June, the Chinese government announced that unemployment was worsening and that a quick rebound in trade was becoming less likely. Vice-commerce minister Zhong Shan announced that trade faced "unprecedented difficulties". He added that exports and imports were set to decline in the first half of 2009 and that the outlook for the rest of the year was not optimistic. Overseas sales in China plummeted 22.6% in April 2009, compared with the year before, the sixth consecutive monthly decline.

Value growth in OECD trade in goods and services*

Value growth in OECD trade in goods and services*

How banks expect trade finance to evolve in 2009*

How banks expect trade finance to evolve in 2009*

Fighting protectionism

The myth of a truly de-coupled Asian continent has been shattered during the past 12 months and world leaders are in agreement that the only way to kick-start trade again is by working together. Since the breakdown of the last round of trade talks in Doha, the world has effectively turned on its head. The leaders of the world's biggest economies are universal in their condemnation of protectionism and have all pledged money towards stimulating trade.

So far, however, these remain just pledges and promises. The threat of protectionism remains a stark reality as national governments aim to pacify electorates at home, while stimulating trade among their neighbours. The 'Buy American' campaign in the US and the 'British jobs for British workers' slogans in the UK are timely reminders of the depth of feeling among domestic populations and the difficulties national governments face in balancing the interest of domestic voters and international co-operation.

WTO director-general Pascal Lamy warned in June that the global trading system would face added political strain as the economic crisis boosts protectionist pressures. "While, according to some, we may be seeing the bottom of the economic crisis, we have not yet seen its full social impact which will inevitably trigger political pressures on the trade front," he said. "I believe that the 'stress test' of the multilateral trading system is still to come."

It might yet be a little too early to hope for those green shoots to emerge. The best one can hope for as this year's most oft-repeated phrase might perhaps be 'cautiously optimistic'.

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