Crisis Talk - The World Bank Group

A Long Way To Go

There is a short but sweet article from All Roads Lead to China on Shanghai's 100 hardest jobs, which looks at the lives of China's poorer workers (who make up the bulk of the country's 1.3bn citizens). The editors conducted over 100 interviews with workers ranging from a cigarette salesman to a watermelon vendor.

I was particluarly struck by an interview with a hat salesman, who reminds the reader of the challenges facing China's underclass

Q: If there was one thing you could change about your job, what would it be?
A: Change? It is such a luxury to me. How can I dream about changing my current status? I want to do my own business, like opening my own restaurant, but who will give me the money? I want to recruit and train my employees, but who will teach me how to manage or run my place? I dare not think of change. I guess my only hope is my son. He is the one (sic) can bring real changes.

The authors note a recurring theme of "hope and opportunity for the next generation".

China's immense population is frequently criticized for saving too much and consuming too little, which makes the country dependent on exports in order to grow. These interviews serve as a reminder that, because many of China's citizens are placing their hopes with the next generation, saving is likely to remain a fact of life in China for a very long time.

(h/t China Law Blog)

South-South Trade Tensions

John Authers argues that the newsworthy economic story of late isn't dollar weakness; rather, it is the weak renminbi:

Many, if not most, hopes for global recovery are pinned on China buying goods from countries such as Brazil. Commodity prices, a key driver of equities and forex rates, also move in response to the new orders received by China's manufacturers.

This currency regime makes it far harder for such countries to sell to China. So it is no wonder that currencies are back at the top of the agenda.

China's currency is 15 percent cheaper against the dollar than it was in 1993. Meanwhile, many emerging market currencies are returning to their pre-crisis exchange rates.

China has been building stronger trade relations with the Global South for quite some time. It is now South Africa's top export destination. But many of these partnerships are built around China purchasing commodities, and selling manufactured goods. With a weakening currency, China is likely to purchase fewer non-commidty goods from its trading partners. This may lead to growing trade tensions, particluarly with countries who are not endowed with commodities.

East Asian Production Networks: Beggar Thy Neighbor?

There is an interesting article in Econbrowser by Willem Thorbecke of the Asian Development Bank, which looks at East Asian Production Networks, Global Imbalances, and Exchange Rate Coordination.

Thorbecke highlights the important relationship between exchange rates and production chains in East Asia, arguing for increased policy coordination between the two. The paper presents both good news and bad news regarding East Asia's crisis recovery. First, the good news:

Signs are emerging that East Asian production networks are reviving. Imports for processing and processed exports both collapsed earlier this year. Since then, however, imports for processing have recovered 85 percent of their losses and processed exports 75 percent. Thus trade within East Asian production networks is recovering.

Emerging Market Merry-go-Rounds

Paul Kedrosky writes about one of my favorite topics, emerging market decoupling. He cites a new report by HSBC which discusses a "global monetary merry-go-round":

Our optimistic views on the emerging world are also based on what we call the monetary merry-go-round. Low US interest rates typically encourage capital to flow into the emerging world. Attempts by emerging nations to limit the resulting exchange rate appreciation lead to offsetting capital outflows in the form of rising foreign exchange reserves which are often invested in US Treasuries. Higher demand for Treasuries keeps yields low and, hence, leaves US interest rates low, thereby allowing the merry-go-round to repeat, seemingly ad infinitum.

Crisis Roundup: Trade and Finance Edition

Chinese car sales are up 35 percent this year.

A look at tariffs over the past eight years. In 2008, they were significantly below the eight-year average.

The Baltic Dry Index is down, i.e. shipping costs have plummeted. Does this mean less trade, and lower growth? Or just increased capacity?

Global capital markets are entering a new era, with a greater role for emerging markets. The McKinsey Global Institute explains why.

Should the ratings agencies be downgraded?

Tensions are high at the G20 over how to reform the IMF. Simon Johnson's solution? Move it to Europe.

The World Bank is boosting its support to Eastern Europe and Central Asia. This past week Hungary, Ukraine and Latvia received a combined $2bn in assistance.

In other World Bank news, Robert Zoellick will be leading a discussion on the financial crisis next Monday (the 28th) from 1100-1230 EST. Crisis Talk will be Tweeting the event live.

Trade Finance and the Curse of Soft Commodities

There is a fascinating article in this month's Africa Investor on the difficulties many African commodity exporters face in securing sufficient trade finance. The IMF estimates that, as a result of the crisis, there is a trade finance shortfall of $100-$300 billion, with Africa being the most affected by this dearth in funds.

Soft commodity products, such as cocoa and flowers, typically require advance financing to fund cultivation and production, which is repaid once crops are harvested and exported. Most African producers prefer dollar loans, as their costs are primarily denominated in dollars. Yet, because Europe is Africa's largest export market, most export revenues are denominated in pounds and euros. This creates a currency mismatch, which discourages lenders.

The situation is further complicated by an overall shortage of dollars, and Africa's dependence on commodity exports:

Trade Finance in Times of Crisis Revisited

Editor’s Note: Jean-Pierre Chauffour and Thomas Farole are, respectively, Lead Economist and Senior Trade Specialist in the World Bank’s International Trade Department. They are authors of an upcoming paper, "Trade Finance in Crisis: Market Adjustment or Market Failure?" and have been invited by Crisis Talk to share their thoughts on trade finance and the crisis.

World leaders at their April 2009 G-20 Summit agreed to massively support trade finance. Yet, little is known about the singularity of the issues related to trade finance in the context of the global economic crisis. Why should international trade finance be a particular issue of concern in the current circumstances? Are there specific market or government failures associated with trade finance that justify a special and differential treatment of the issue by policymakers? If so, what would then be the most appropriate policy instruments to address those concerns?

A Spark in International Trade

Editor's Note: This post was co-authored by Caroline Freund and Matias Horenstein, a consultant with the World Bank's Development Economics and Chief Economist group.

After five months of severely depressed world trade, there is finally some good news. Eighteen countries now report trade data for the month of June, and almost all of them exhibit an increase in imports and exports. On average, imports were up 9 percentage points and exports 5 percentage points relative to the previous month (Figure 1). Although trade was still 25 percent lower than in June of last year, this is the first generalized spark in trade flows since the beginning of the crisis. (The group of 18 appears to be a representative sample. It closely tracks a wider sample of 65 countries reporting data through May, which make up 96 percent of trade.)

An Optimist's View of Declining Trade

Last week I discussed the relationship between falling GDP growth and the decline in international trade. Today, I will go beyond why trade is falling, and take a look at how it is doing so.   

A recent article by Brad Setser from the Council on Foreign Relations analyzes the effects of diminishing international trade on global imbalances. The pattern of these declines is not symmetrical. In the US, falls in income have had a stronger impact on imports than exports. The opposite is true in China. This is good news:

Demystifying the Collapse in World Trade

Last week I pondered whether Europe was the biggest loser in the crisis. It appears that collapsing world trade volumes are giving the Old Continent a run for its money. 

In the first quarter of 2009, year-on-year nominal trade volumes dropped by 30 percent. World trade has fallen by 15 percent during the same period. 

What has happened?

A new paper by Caroline Freund (who is also a contributor to Crisis Talk) aims to explain why trade has suffered so much over the past year. Freund reexamines the relationship between trade and income, uncovering an important explanation. 

CEPR on Trade Policy in the Crisis

In the wake of the financial crisis, export credit is scarce. While comprehensive data is not available, it stands to reason that, when banks worldwide are shrinking their balance sheets to ensure their own survival, the financial system would be less willing to extend new export credits. Marc Auboin reports a financing gap of around $25 billion, based on the main Wall Street banks, and spreads of 300 to 600 basis points over Libor, contrasted with normal spreads of around 30 basis points (Auboin 2009 and Canuto 2009).

That statement comes from a recent policy paper from the Centre for Economic Policy Research on Trade Policy in a Time of Crisis. The authors recommend subsidies for trade finance to support the export sector in developing countries. One question for the authors: Of course the spreads on trade finance have widened (just like on almost every other kind of finance) - isn't the relevant issue whether the spreads on trade finance have widened more than other spreads?  

Trade Finance in Africa

According to a recent World Bank press release, "Africa is likely to be the worst-hit region by the global financial crisis." This seems to be the height of unfairness, given that African countries had little to do with creating the current global crisis. How then best to mitigate the effects on the region of the world that is expected to be hit the worst?

Among its many pronouncements, the recent G20 summit stressed the importance of supporting trade finance in responding to the crisis. But a recent article in VoxEU.com suggests that trade finance is not really the problem - at least for firms in Sub-Saharan Africa. Researchers contacted SMEs in export-oriented sectors in the region, and this is what they found:

Obama’s Trade Policy Test

A special safeguard case against imported tires from China, initiated by the United Steelworkers (USW), was announced this week. Under China's WTO accession agreement, members are permitted special safeguards until 2013. This is the first such case filed under the new administration. The U.S. International Trade Commission has 60 days to rule on the petition and make a recommendation. If it rules in favor, President Obama will have 90 days to decide on a remedy. 

During the previous administration, six special safeguard cases were filed, four went to President Bush, but none were acted on. Bush cited standard free trade principles in declining to act.

Searching for Bright Spots in Trade

I have been following the decline in trade closely. The numbers for February are a disaster. Trade is down over 30 percent relative to the same month last on average across a wide range of countries (for detailed data, click to read Trade Collapses in the New Year: Update). The only consolation is that February is just slightly worse than January. 

I decided to look for some bright spots, no matter how small. Taking U.S. and Japanese import data at the 6-digit level (more than 5000 products), there are bound to be some. While over 75 percent of categories in both countries declined in February, there are indeed a handful of bright spots in important categories. 

The View from Hong Kong (China)

I spent the last couple of days in Hong Kong (China), talking mainly with academics, but also with people closer to the markets. The recession (or is it already a depression?) has hit Hong Kong (China) quite hard, with exports dropping substantially. This has actually resulted in the challenge to find storage space for empty ship containers; well, as many ships idle in the port anyway, empty containers can just be left on the ships. Unemployment has increased, though still in the single digits. There has not been as much of an impact on peoples’ lives as perhaps in the U.S., as the savings rate is quite high and people can live off reserves.

One wonders, however, how long this will hold. Housing prices have already dropped by 20%, but with maximum loan-value ceilings of 70% – imposed by the regulators – this will not lead to immediate distress in the banking sector. The recipe applied so successfully after the East Asian crisis – export yourself out of the crisis – will be much harder to apply, as the target markets are certainly less willing customers this time around, which also makes a quick recovery unlikely. As In Europe, the Lehman insolvency has also left its mark in Hong Kong (China), with bearers of Lehman’s mini-bonds losing their shirt, and consumer complaints of sales techniques rising. Rather than bailing out customers, however, the Hong Kong (China) approach seems to force more transparency in the sales process, including audio-taping sales conversations. Of course, this might just lead to a migration of certain conversations towards bars and coffee shops.

IMF Gets a Deserved Boost

A big outcome of the ongoing G20 meeting is a commitment to triple the amount of money the IMF has for lending (see the BBC story), to $750 billion. This is welcome news. Of all the possible things the G20 leaders could have done, this one would ease the crisis the most.

The G20 has also committed about $250 billion to boost global trade. This one I don't get. Exactly how will this money be used? Perhaps for trade finance. If so, there is no evidence this is a real bottleneck to trade. Or, alternatively, the money could be used to buy products and thus spur demand. But what to buy? This reminds me of one of my first visits to Ukraine. I went to a heavy machinery factory and was shown a huge tank. So huge, in fact, that it couldn't leave the factory - the doors were not large enough. The manager was very proud of it nevertheless.

Why Are Forecasters (Fairly) Positive about 2010?

While the forecasts for this year have gotten continuously darker, the numbers for 2010 mostly show a return to normality. Which has made me wonder what forecasters know that I don't.

Last week, I spent some time figuring out the answer. It is simple and sinister: forecasts use historic trends to map what the future will be. Forecasters will tell you that at best their "long-term" models see 2 years in the future. They use high frequency data - for example trade flows and credit flows to adjust the long-term models. Once in a while, the models snap. This is when the high-frequency numbers gyrate so much that the model can't calibrate. And guess what? This is happening now. International trade has fallen so much in the last 3-4 months that you can't get a reasonable forecast beyond the next few months.

Trade Protection: What's Good for the Goose...

A new note from the World Bank International Trade Department describes the recent growth of protectionist measures. Money quote:

G-20 leaders signed a pledge on November 15, 2008, to avoid protectionist measures. However, since then, several countries, including 17 of the G-20, have implemented 47 measures whose effect is to restrict trade at the expense of other countries.

So far, the measures haven't had a major impact on trade - major declines are largely due to falls in aggregate demand - but they lay the groundwork for a protectionist world in the not-too-distant future. What could precipitate this outcome? "...Once economic pressures to stimulate economies are replaced with inevitable needs to reduce deficits, this pattern may portend equally severe pressures to wall off trade competition." In other words, look for battles over trade once stimulus measures have run their course.

Also see the related press release from the World Bank and a write up by the Washington Post.

Trade Finance: Just an Excuse

Previous posts - see here and here - have raised doubts about trade finance being an important factor in the collapse of international trade. This hasn't cooled the enthusiasm of development institutions to pour money in this area. I have started wondering why.

A recent Financial Times article comes up with a good answer. Alan Beattie writes that "It could be easier politically to justify targeting government support on trade finance than boosting bank liquidity, but the effect of such subsidy is unclear."

That's it. If you go and say you are putting money into saving big banks, this may be frowned at. If, on the other hand, you say you are putting money into saving small exporters, that is ground for applause. Even if in reality the money goes to big banks, who sit on it.

Assessing the Trade Finance Situation

It is difficult to find reliable information on how severe the trade finance problem really is. There are a lot of numbers circulating, all of questionable quality. Take, for example, the figure on the importance of trade credit. Recent news reports state that 90 percent of the US$14 trillion in world trade is financed by trade credit (see, for example, the International Herald Tribune, Forbes, and the WTO). But, where does this “90 percent” come from? I traced the number from various WTO documents, and it appears to come from a 1998 paper by Malcolm Stephens at the IMF. However, the statement in the paper is quite different: “90 percent of world trade is conducted on the basis of cash or short-term credit” [p.5, emphasis is mine]. 

An additional reason the number is suspect is because of the growing share of trade between a parent firm and its affiliate. This so-called intrafirm trade is unlikely to use external financing. The OECD reports that approximately one-third of trade for the US and Japan (countries for which data are available) is intrafirm. More than two-thirds of Austria’s imports from Eastern Europe are intrafirm. This makes the 90 percent even harder to swallow.

Another number that has been circulating in these articles is a $25 billion “liquidity gap” in financing by the private sector. This is the "market's estimate" - $25 billion is less than two-tenths of one percent of the value of trade, so it is quite small in the grand scheme of things. How can trade finance be a major issue in the stunning decline in trade (trade was down about 15 percent from the previous year in November and December, and available data for January looks worse) if the liquidity gap is just 0.16 percent?

In order to diagnose and improve the trade finance situation (if necessary), we must first measure it.  Given the market's failure at quantifying assets, liabilities, and risk, we cannot rely on its estimate of the trade finance gap without any supporting data. It is unfortunate that reliable data from banks working in trade finance have not been made available.

The Walmart Effect

Fourth quarter sales at Walmart went up 6 percent in the U.S. market. This suggests that as the financial crisis spread people substituted toward lower cost goods. The substitution effect can also be seen in U.S. imports of textiles and apparel. While imports of textiles and apparel fell 10 percent in November and 4 percent in December (relative to the same month the previous year), not all exporters were equally affected. Of the top 25 exporters, only exports from the low cost producers, Bangladesh, China, and Vietnam, grew in both months. In contrast, Canada, Hong Kong (China), Italy, Korea, Macao, Turkey, and Taiwan (China) all experienced declines over 20 percent in both months. The remaining large exporters, nearly all in Latin America and Asia, are struggling somewhere in between.

As the recession deepens, it is likely that there will be increasing substitution toward cheaper goods.  This offers a small silver lining to the low wage countries that produce them.

Trade Still Weak but Not Worse in December

More than 60 countries have now reported trade data for November and they are uniformly weak, with imports on average down 14 percent and exports down 17 percent, as compared with the same month last year. In addition, 22 countries have now reported December data. While trade continues to be weak, there is little change since November, and nearly half of the countries show some improvement. So, while conditions did not improve in December they did not worsen significantly either.

Another indicator that the trade situation did not deteriorate further in December comes from the Baltic Dry Index. (The BDI is issued daily by the Baltic Exchange, which canvasses brokers around the world about the cost of shipping cargo of raw materials on various routes.) After a 93 percent drop since the early summer, November is the month when the Baltic Dry Index (BDI) appears to have bottomed out, suggesting that demand for shipping was at a low in that month.   

While this is not exactly positive news, it could have been a lot worse.

Guerilla Trade Tactics

In 1930, the Smoot Hawley tariff was implemented in the United States, raising tariffs on nearly 900 goods. The Europeans retaliated with similar tariff hikes. World trade fell by two-thirds from 1929 to 1934 largely as a result of declining demand during the world depression, but also because of the increased tariffs. Such conventional trade warfare finally came to an end with the advent of the GATT in 1947.

Thanks to the rules provided in the WTO, the successor to the GATT, a conventional trade war is now unthinkable. But as demand is plummeting, countries are seeking ways to shift it to domestic goods. This is where guerilla trade tactics come in. The WTO Secretariat reported that in the first half of 2008 (the most recent data available) there was a 39 per cent increase in antidumping investigations among members as compared with the same period in 2007. Subsidies around the world are being directed at specific domestic industries. Now, the U.S. stimulus package appears likely to include a “buy American” clause. 

Such guerilla trade tactics may be just as dangerous as a conventional trade war. A key issue is the non-transparency of these antidumping duties, countervailing duties, and targeted domestic subsidies. If these modes of discrimination explode it will take a long time to disentangle them and reopen the trade system. Not to mention the resources wasted and uncertainty they generate for importers (for example, in the United States, it takes the ITC and ITA between 235 to 390 days to reach a final conclusion in an antidumping investigation!). 

The WTO has been among the most successful of the international institutions. The ongoing Doha Round—with all its promises—may be able to claim victory after all if it can simply prevent protectionism from surging during the global recession.

A Broken Record on East Asia

James Seward, a financial sector specialist working in East Asia and Pacific, admits that he is "beginning to sound like a broken record." Unfortunately, he has good reason. Most of the recent news coming out of East Asia does not sound good at all. Seward reports the following scary news on the East Asia and Pacific blog:

Banking problems are now increasingly expected to begin emerging across East Asia. Fitch just released a report that Chinese banks’ expected losses are mounting and projected that the loan losses would be 6 percent or more by end-2009. However, this was hedged by stating that “there are concerns with weaknesses in the banks' loan classification, the rise in hidden credit risk, and uncertainties about the reliability of collateral and guarantees, which may be contributing to widespread under-capturing of Chinese banks' credit risk exposure.” The Chairman of the banking regulator, the China Banking Regulatory Commission, stated that there will be a “reasonable tolerance” for rising bad loans in the banking system this year. Also, the various announcements by governments to push commercial banks into supportive lending may also result in additional problems.

In addition to nascent banking problems, countries across the region are seeing painful declines in trade accompanied by hits to employment. Perhaps most telling, Seward reports that some 1/3rd of crains in Singapore are sitting idle. Trade statistics see a delay of some months - crains don't. As for rising unemployment, the lunar new year is not looking too bright:

...about 10 million migrant workers [in China] lost their jobs by November, and many migrant workers are returning home for the lunar new year on one-way tickets. To round out the bad news on China, in December housing prices dropped for the first time on record and construction is projected to shrink by 30% this year.

Governments across the region continue apace with fiscal stimulus plans. How much of this will take the form of increased spending and how much the form of tax cuts? Seward doesn't offer a breakdown, although the repeated use of the term "infrastructure" suggests that most if not all will be in the form of increased government spending. If this is the case, hopefully these countries won't run into the kind of problems of 'disappearing money' that Simeon Djankov warns about in Bulgaria.

Tomorrow's Trade

Editor's Note: Caroline Freund is a Senior Economist in the Research Department of the World Bank and runs a research project on the effects of the economic crisis on trade.

Tension is developing between trade and employment policies in some countries. The need to reduce costs and improve profits has pushed many companies to restructure production globally, with the result of increased foreign outsourcing. For example, Dell, the world's number two PC maker, recently announced plans to shift manufacturing from Ireland to Poland to cut costs. The monthly minimum wage is over $2,000 in Ireland, compared to $406 in Poland.

Other firms that are reportedly planning to expand outsourcing in emerging markets include: the major entertainment company Warner Brothers, Ireland's Wedgewood, and Japan's Renesas. Financial companies - which already account for about 25 percent of revenues of the large Indian service offshoring companies Infosys and Wipro - are also expected to increase outsourcing to cut costs. This fragmentation of production will help firms improve productivity, while softening the blow of the financial crisis on low and middle income countries, which gain both jobs and technology. The allocation of resources around the world will be improved, leading to gains from trade.

However, government policies are countering this force. The incoming U.S. administration has signaled an end to tax breaks for companies that outsource abroad and promised tax credits to companies that maintain or increase U.S. workers relative to those abroad. In France, state aid will not be offered to
auto companies that plan to shift jobs to lower wage countries. Lou Dobbs, among others, is calling for similar restrictions on a U.S. auto package.

Even without restrictions, industrial subsidies are a threat to trade. They are contagious, and could result in a subsidy war that would leave everyone worse off. (See, for example, a recent article from Jagdish Bhagwati in the Financial Times on this type of scenario.) In addition, they pull resources away from more productive uses. It's not just the industrial countries at fault. Recent trade policy reversals in the developing and emerging markets are also of concern. At least 15 (including Brazil, China, India and Russia) have plans to expand protection in some sectors.

Yes, creating jobs and maintaining income during the downturn is crucial. But this is a global recession. World leaders should choose policies that stimulate domestic demand, without inflicting pain on others.

East Asia Feels the Pain

Who said this is a US crisis? East Asian countries are among the first to report trade statistics, and the numbers for November/December are eye-catching. According to analysis by Caroline Freund, the World Bank's top trade economist, Taiwan (China)'s exports in December fell 41% relative to December 2007. You read it right: 41%. In comparison, South Korea's exports fell a paltry 17%.

Other countries are reporting December numbers early next week.

One explanation for the rapid fall is that East Asia primarily exports to the United States, where demand is sagging. If so, Mexico is in trouble. Indeed, its November exports fell by 16% relative to 2007. Germany's November exports fell by 24%, perhaps for the same reason. And this means that in addition to part-nationalizing some banks like Kommerzbank, the German government may need to consider some boosters for the export sector. Did someone say tax cuts?

Japan's Trade Falls 27%

In a previous post, I wrote about the rapid decline in international trade. Today, Japan followed this trend and posted a 27% decline in exports in November relative to November 2007.

"Demand is rapidly cooling not only in the United States and Europe but also in Russia and the Middle East, and we are expecting a further plunge in exports as the global economy is deteriorating," said Hideki Matsumura, a senior economist at the Japan Research Institute in Tokyo.

Indeed, exports suffered their biggest year-on-year drop since the current system of statistics went into effect in 1980. Exports totaled 5.3 trillion yen ($60 billion), while imports fell 14.4% from a year earlier to 5.55 trillion yen ($62 billion).

Among U.S.-bound shipments, vehicle exports plummeted by 44% in the month, while exports of auto parts fell 40% and those of audio equipment were down by 48.2%.

Japan's exports to the European Union tumbled by 30.8%, with vehicle shipments to the region falling by 37.2%, the ministry said.

Asia-bound exports fell 26.7% as semiconductor shipments dropped by 30.2%. Japan's exports to China alone plunged by 24.5%.

Smoot and Hawley Resurrected?

Shortly after my arrival at Tilburg University, I was asked by the campus newspaper to comment on the current crisis. Among other questions, I was asked what I could see as the worst-case-scenario. Back in September, I responded that this would be the raising of tariff and non-tariff barriers, leading to a break-down of international trade, such as in the 1930s. 

At the end of 2008, we are certainly not there yet, but we are moving towards it rapidly.  Countries around the globe are raising tariffs or are planning to do so, partly in response to government aid in specific industries in trade partners’ countries. Take, for example, the bail-out of the U.S. car industry, which is – correctly in my opinion - perceived as an unfair government subsidy by other countries, but is a move that is certainly to be followed by other countries, such as in Europe. Let’s just hope that policy makers around the world, but especially in the large countries, do not forget the lesson of the Smoot-Hawley Tariff Act that helped deepen the Great Depression and had long-term negative consequences for the whole world. Certainly one sign of hope are the demonstrations across Russia this past weekend against import tariffs on used cars – it's not often that one sees popular outcry against protectionism.

Update: Check out a chilling photo of a Russian protestor standing up for free trade being arrested by riot police.

Much Ado About Nothing

In the last three months, international organizations have raised alarms that the supply of trade credit has dried up and international trade is suffering as a result. Various initiatives have been launched to address this problem. As it turns out, the problem lies elsewhere.

I just came back from a conference in Lima, organized by UPC university. The main focus was supposed to be globalization, but the events of late shifted it to the economic crisis. A number of bankers were present from across Latin America and Spain. They all said: yes, credit is now extended with more caution than before.

Here is the rub: none of them (0) said there was a particular problem with trade credit. The general view was that until recently times were so good that everyone received credit without loan officers having to look carefully at the company's income flows. Now there is increased vigilance. But that vigilance extends to the overall health of the business, and is not specific to companies dependent on international trade. Of course, if global demand for particular goods has fallen, with an associated collapse in prices, bankers will get worried. And as export prices for many goods has fallen by 30-60%, there is enough reason to worry indeed. This said, the main issue is falling demand, not lack of credit.

It could be that international organizations understand this (they have enough good economists) but think donors are more likely to fork out extra cash if the "international trading system is at risk." And it could be that this is a good strategy as it gives some businesses in emerging markets extra room to maneuver during the economic downturn. So all is good. Except if the new credits are really focused on international trade, despite the obvious lack of demand. That could finance excess capacity in the coming months, and further depress prices.

Fortunately, businesses, not bureaucrats, will in the end decide how to use the money. And they probably realize by now that the domestic market may be where they can focus the attention, and wait for demand in OECD countries to pick up.

Now Comes Real Trouble

Some leading exporters have just released their November data: start worrying. The data, analyzed by Caroline Freund and Matias David Horenstein of the World Bank, show that China's exports in November fell by 10.3 percent relative to October and 2.2 percent relative to November 2007. These data were widely reported in the international press: the first time China's exports have registered a monthly decline since 1999.

Other countries have bigger troubles. Chile's exports fell by 21.2 percent relative to October, and by 19.1 percent relative to November 2007. A lot of this can be explained by the fall in copper prices. Korea's exports showed similar declines: 21.7 percent relative to October and 18.3 percent as compared to November 2007. Taiwan (China)'s exports fell by 17 percent to October and 21.6 percent to November 2007. Israel, one of the few countries outside East Asia to already report data, showed a 17 percent decline in exports from a year ago. (Data for European exporters has a 3-months lag and will be available only in January).

Barking Under the Wrong Tree?

Andrew Long, group general manager and head of global transaction banking at HSBC, had this to say about trade finance problems: "It's a bit of a chicken and egg situation, is trade finance causing the problem or is the problem resulting in trade finance difficulties? I happen to think it's the second one -– we are in a global recession and therefore demand is falling off a cliff. So suppliers aren't sure they are going to get paid, and the buyers don't want to buy stuff anyway as they aren't sure they are going to be able to sell it.”  The quote is from his article "Credit Gets Tied up Tight," in the November issue of Trade Finance magazine.

Talking about the trade finance squeeze has been the craze in the last month. WTO head Pascal Lamy, OECD head Angel Gurria and just about everyone else have pointed with alarm at disappearing trade credit. Various fixes have been proposed, most in the form of trade finance facilities.

The more I look at the data and read the anecdotes in the newspapers, the more I doubt trade finance is the real issue. Tellingly, all the stories in the popular press come from countries whose exports are concentrated in a few commodities, the prices of which have plummetted in recent months. Whether it is palm oil and timber in Indonesia or copper in Chile and Zambia, Andrew Long's insight rings true: demand has fallen precipitously and creditors would be crazy to finance such exports right now.

More generally, what started as a crisis in the financial sector in several rich countries, seems to increasingly manifest itself as a generic-type economic slowdown in emerging markets. The construction sector goes first, then tourism, then parts of manufacturing, especially those dependent on exports. If you read the press in emerging markets (as I did yesterday), the concern is with the real economy not the financial sector. There will, of course, be a second-wave of financial sector woes as economies dive. Still, the majority of solutions are not financial-sector-related. For example, the European Commission announced a five-point plan yesterday on dealing with the crisis. The plan is going to be discussed at a meeting of heads of state in mid-December. Among the five points, reducing VAT to leave more money in the hands of consumers and businesses and "providing the ability to new businesses to register in less than 3 days in all EU countries, reducing the minimum capital requirement to 1 euro, and eliminating the need for annual statistical reporting for small businesses." Sounds like the Doing Business agenda.

The Crisis: Round Two

So far the crisis has largely come from banking sector problems. Prepare for round two: collapsing international trade, and the resulting hit on small export-oriented economies.

A leading indicator on how many trade shipments are in transit is the Baltic Dry Index. Every working day, the Baltic Dry Index surveys shipping brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g., 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo). A Slate magazine article from 2003 explains why the index is a leading indicator on trade volumes.

In the last two months, the index has fallen to an all-time low (closing at 842 on Friday, November 7). This from a high of 15,000 about a year ago.

Once trade slows down, some countries' economic growth will be reduced substantially: some East Europeans, some countries in East Asia, and Latin America. Experts forecast these slowdowns in early 2009. It will be a bleak winter.