Monday, March 9, 2009

Trade and Shrinkage

From the FT this morning:

Explanation for trade plunge proves elusive
By Alan Beattie in Washington

Published: March 8 2009 23:31 | Last updated: March 8 2009 23:31

As world trade plunges, governments are looking for an explanation. Is it a fall in demand, a shortage of trade finance or protectionism? On the answer hangs the response they need to stop globalisation going into reverse.

International trade has long been more volatile than overall economic growth, partly because it is largely made up of manufactured goods that are subject to big swings in inventories and because imported consumer goods are often the first to be cut in a downturn.

But even allowing for the descent into recession, the speed of the collapse in trade has caused surprise. Trade has grown two to three times more quickly than the world economy in recent years, but countries with trade data for January show on average a 31 per cent fall over January 2008.

Protectionism is the easiest to eliminate. In spite of fears of another era of economic nationalism and a rise in emergency so-called anti-dumping duties, the use of such tariffs is low.

But there is confusion about the other possibilities.

The cost of trade credit, which finances goods while in transit, has surged in the past year. Participants say financing a shipment might have cost 60 basis points more than the London interbank offered rate a couple of years ago but now costs 400bp. Some developments, such as countries being unable to ship grain or resorting to barter, have been blamed on such shortages.

In particular, while some of the big providers of trade finance are still active, the smaller banks that used to buy trade finance assets from them in a secondary market have pulled in their horns. John Ahearn, head of trade finance at Citigroup, says: “Demand for finance has risen as a result of perceptions of higher risk at a time when a lot of capacity in the trade credit world has come offline and the secondary market has shrunk dramatically.” The World Bank, along with national export credit agencies, has announ­ced programmes of subsidy to trade finance.

But as the bank admits, the policy response has to contend with a lack of reliable figures. Data from Dealogic, the consultancy, suggest global trade finance shrank by 40 per cent in the last quarter of 2008, but those figures do not cover the bulk of such credit.

While commerce in low-value bulk commodities may have been hit by a shortage of trade finance, business that does not rely on such credit has also fallen.

About a third of global trade involves intra-company transfers. Simeon Djankov, chief economist for finance and the private sector at the World Bank, says research shows trade falling across the board. “The problems with demand swamp those of supply,” he says.

A general reassessment of risk among financial institutions and companies may have hurt smaller and poorer countries now cut out of global supply chains, but bank lending in trade finance has held up well compared with their activities elsewhere, he says. It might be easier politically to justify targeting government support on trade finance rather than boosting bank liquidity but the effect of such subsidy is unclear.

Mr Ahearn says an advantage of direct official support for liquidity in trade finance as opposed to pumping money into the financial system generally is that the result can be monitored.

“If governments come in and help recreate the secondary market and there is no demand for it, at least we will have ruled it out as one of the main reasons for the fall in trade,” he adds.

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