Of Global Trade Set To

Global Trade Financing Market

Some 80% to 90% of world trade relies on trade finance, and there is little doubt that the trade finance market will experience difficult times in the first half of 2009 – difficulties that will contribute the global economic malaise. Public-backed institutions are responding, but are they doing enough?

Part of the collapse of world trade is due to problems with trade credit financing. Since statistics on this are scare, it is impossible to be precise about the most immediately salient and challenging feature of the financial crisis from a trade perspective – the supply of trade finance.

Trade finance is at the low-risk, high collateral end of the credit spectrum but this has not insulated it from the crunch (US Dept of Commerce 2008). Some 80% to 90% of world trade relies on trade finance (trade credit and insurance/guarantees), mostly of a short-term nature. The potential damage to the real economy of shrinking trade finance is enormous (IMF 2003). International supply chain arrangements have globalised trade finance along with production. Sophisticated supply-chain financing operations – including for small- and medium-size companies – have become crucial to trade.

Concerns about the scarcity of trade finance for developing and low-income countries have been identified as an issue in the WTO since the Asian financial crisis, as such countries are prime victims in the general reassessment of risks and liquidity shortages that characterise periods of financial crisis (Auboin and Meier-Ewert 2008). At the request of member governments, the WTO is seeking to encourage the revival of the complex links and networks of actors involved in the trade finance market in order to keep finance flowing for trade, thereby mitigating at least one reason for the shrinkage of trade flows.

As early as 2003, the perceived need to work at an inter-governmental institutional level to find global solutions to trade finance challenges led the Managing Director of the IMF, the President of the World Bank, and the Director-General of the WTO – in the context of the WTO Coherence Mandate – to convene major players to find ways to improve flows of trade finance (for example, letters of credit and other documentary credit) to developing and least-developed countries. Particular emphasis was placed on encouraging regional development banks and the World Bank to expand innovative, WTO-compatible ways of financing trade operations. Since then, the main players, including inter-governmental multilateral organisations (the WTO, World Bank, IMF), regional development banks, the Berne Union of Credit and Investment Insurers, and leading private sector banks, have met regularly at a high but informal level in the format of the WTO "Expert Group on Trade Financing". The group meets as needed and reports to WTO Members through the Director-General and Secretariat. Since 2005, longer-term efforts to boost trade finance for developing countries through better infrastructure for supplying trade finance – such as the development of competitive banks and export credit agencies – have been carried out under the Aid-for-Trade mandate.

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Popular Q&A

What percentage of overal trading volume are personal finance traders?

For example, how much are prices of stocks affected by institutions (e.g. funds) and how much by small personal traders. If they recommend a stock in a financial magazine (e.g., Kiplinger), will it affect its price significantly - individual traders wanting to buy it? How big volumes are "day traders" - 10%, 20% or 0.2%?

Goldberg and Lupercio, two analysts of the online trading industry, estimated that about 40% of all trading volume comes from a group of 50,000 "semi-professional" traders who use the major online brokerage firms. The analysis was for the year 2003.

So a good guess would be 40%.

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