The availability of trade finance: a challenge for global economic governance

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Brandi, Clara / Birgit Schmitz / Caroline Hambloch
Briefing Paper 1/2014

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Dt. Ausg. u.d.T.:
Verfügbarkeit von Handelsfinanzierung: Herausforderung für Global Economic Governance
(Analysen und Stellungnahmen 3/2014)

Global economic governance stands for the institutions, regulations and mechanisms that manage the increasing interdependency of global challenges in the world economy and forms the foundation of stable global economic development. However, global economic governance remains largely mired in “silo thinking”: it is broken down too distinctly into different subject areas, despite the fact that globalisation has led to an increasing overlap in policy areas, with political decisions in one area also affecting others.
For these close interrelations, the handling of trade finance and the parallel lack of coordinated and coherent global economic governance are important examples. Trade finance stands at the interface between trade policy and financial market regulation. Despite this, the relevant institutions, in particular the World Trade Organization (WTO) and the Bank for International Settlements (BIS), do not liaise with one another to an adequate extent.
During the financial and economic crisis, there was a dramatic slump in trade finance. The inadequate availability of trade finance has been a significant barrier to trade since then, and it may inhibit economic development in developing and emerging countries in particular. The G20 consequently saw the need to act promptly. In 2009 it organized support to the amount of US$ 250 billion to reduce the gaps in trade financing opportunities that had emerged.
The global financial and economic crisis raised the need for a reform of the global banking regulation system. The Basel Committee on Banking Supervision of the BIS consequently initiated the Basel III reform package, designed to make the banking and finance systems more resilient. During the past months, there has been intense debate regarding the extent to which Basel III could inhibit trade finance, and therefore international trade flows.
Although financial regulation does not constitute a focal point of the mandate of the WTO, the organisation should nonetheless have an interest in closer cooperation with the BIS and the Basel Committee on Banking Supervision. The WTO does indeed serve as a discussion forum for relevant players in the field of trade finance; however, cooperation between the WTO and the BIS is not adequately institutionalised, and key actors such as developing countries are not sufficiently involved in the decision-making process.
The insufficiently coordinated and incoherent regulatory framework has resulted in a lack of uniformity in implementing Basel III in different regions. Such a fragmentation of banking regulations presents a problem, as it results in regulatory arbitrage and can serve to undermine the conditions for fair competition. Therefore, there is an urgent need for action, if the anticipated growth in world trade following the latest WTO conference in Bali is also to be financed.

About the authors

Brandi, Clara

Economy and Political Science

Schmitz, Birgit

Economist