Five years have passed since TFR’s last face-to-face interview with Marc Auboin. Nothing has changed. Everything has changed. Interview by Katharine Morton
Multilateral deals appear to be dead in the water in the current environment. Where does the WTO sit with the evolving ‘new normal’?
That’s an interesting issue. The WTO as a trade regulator has always acted as an honest broker. On the one hand we understand the need for regulation, after all the real economy is the first victim of financial crises and we need a well-functioning and stable financial system. On the other hand trade finance is systemic to trade.
The WTO was also created as a shock absorbing device. The multilateral/regional development banks provide for some of the gap filling that markets are not able to do to return to reality. The second thing is that if you re-regulate a system after a crisis it has to be proportionate to the level of risk that this activity carries. The WTO has been playing a leading role, in the context of the WTO Expert Group on Trade Finance, in getting the trade finance industry to produce evidence that it is as safe as it was claiming to be.
Multilateralism is relatively new, bilateralism has been the game for years. But the WTO looks at multilateral issues. Our focus has been on building a multinational trading system which is strong and deep enough to sustain financial and other tensions. The system was built not only for trade liberalisation but also to find solutions to disputes under a rules-based framework. The WTO rules are not external, they are based on agreements that are ratified by each country’s parliament. It’s a treaty-based trade relationship that isn’t the most flexible but is one of the most inclusive processes possible.
What about the unintended consequences of regulation?
The WTO has had a role in showing the regulators (particularly in the design of Basel III) how safe trade finance is. Trade is a solution to economic problems, in particular to financial crises. Affected countries are able, through a stable trading system, to export their excess supply to turn around their balance of payments and recover.
When Basel III was being designed and discussed by regulators, for structured products which had been given relatively favourable capital liquidity treatment, these treatments were getting worse. Products that are used by developing countries such as letters of credit (LCs) were getting less favourable treatments relative to other products, it was not helping the development drive. It’s more complicated for supply chain finance (SCF) which may be on-balance sheet. We had conversations with the Basel regulators under a G-20 mandate. While the WTO’s role was to clarify the facts while understanding the regulators’ point of view, this dialogue produced very positive results in terms of lifting the one-year maturity floor and eliminating the sovereign floor on LCs and by reducing the 100% leverage ratio on such instruments to a 20% floor.
These measures were not only important in themselves, but also gave a sign of confidence to the trade finance industry that the regulator recognised that there was a substantial difference between the perception of risk and the actual level of risk in trade finance. Such a difference is typically the source of the market failures in the trade finance industry, particularly when dealing with developing countries and with SMEs.
And filling the US$1.6trn trade finance gap?
Trade finance markets are huge. All in all (bank-intermediated, non-bank intermediated), we estimate it to be of over US$10trn in annual flows, to support US$18trn in trade. For the most part, markets work efficiently. But when it comes to SMEs, developing countries, there are question marks. A US$1.6trn gap for a US$10-12trn markets is a very significant gap, particularly as much of it is protracted.
We have been working with an Expert Group on Trade Finance and the multilateral development banks on filling some of the persistent gaps that have emerged. What we are doing in terms of trade finance is a very small proportion of the gap (US$30bn in support of trade in very poor countries out of a US$1.6trn gap estimated), but the (learning by doing) experience of those involved in these programmes is unique and it helps build capacity. There are many reasons why developing countries markets are under-supplied. One is the rising cost of due diligence and the disappearance of too many correspondent bank relationships. Reports by the World Bank and IMF have echoed our concerns about de-risking. The IMF made the point that for some countries (Philippines, Caribbean, some Pacific countries and countries that rely on remittances), de-risking had become macro critical as remittances and trade finance were being affected. Financial exclusion also becomes trade exclusion. We plan to discuss this in 2017 at a senior level.
Will fintechs disrupt trade?
Fintechs yield many promises and opportunities for trade finance, and trade in general. For example, the fintech world will help moving globally to electronic customs. But there are areas of concern, particularly if it excludes the emerging world. In a paper with the Asian Development Bank we are looking at the risk of a digital divide if emerging markets are not part of distributed ledgers. There is a long way to get there, by way of harmonising companies accounts, registration, transparency levels, etc.
Marc Auboin, counsellor, economic research and statistics division of the World Trade Organization
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