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Viewing cable 08LONDON3196, TRADE AND FINANCE EXPERTS SOUND THE ALARM

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Reference ID Created Released Classification Origin
08LONDON3196 2008-12-22 16:12 2011-08-25 00:00 UNCLASSIFIED Embassy London
VZCZCXRO2580
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHLO #3196/01 3571612
ZNR UUUUU ZZH
P 221612Z DEC 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0762
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 LONDON 003196 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECIN ETRD EINV EUN EU UK
SUBJECT: TRADE AND FINANCE EXPERTS SOUND THE ALARM 
 
Summary 
------- 
 
1. European trade and finance experts speaking at a December 
18 HMG-sponsored conference in London spoke of an "acute 
crisis" in trade and finance that "puts world trade genuinely 
under threat."  The credit crisis has administered two blows 
to world trade by: (1) decreasing economic activity and (2) 
by disrupting the system of trade finance and insurance that 
80 to 90 percent of trade depends upon.  They urged the UK 
government to make trade an important focus of its G20 
presidency and urged international cooperation in propping up 
trade finance and insurance.  End summary. 
 
Trade is in Trouble 
------------------- 
 
2.  At a December 18th conference in London titled, "What 
world leaders must do to halt the spread of protectionism," 
academic economists and WTO staff (speaking in personal 
capacities) agreed that the $12 trillion world trading system 
is already showing signs of distress and government action is 
required to prevent it from "collapsing." 
 
3.  Richard Portes (London Business School) and Richard 
Baldwin (Center for Economic Policy Research, CEPR) said that 
trade statistics and indicators are bleak.  Recent figures 
show Chinese imports decreasing by 18 percent.  The "Baltic 
Dry Index" which shows the cost of shipping goods is falling 
precipitously, an indicator of shrinking trade.  Their 
international network of analysts believes that trade 
barriers are increasing as countries are beginning to try to 
protect domestic employment.  Their conclusion is that 
international trade is heading towards a "radical and rapid 
fall." 
 
4.  Portes and Baldwin said that this crisis is unlike 
previous recessions because it is "not your usual capital 
account crisis"; the trade shock set off by the credit crisis 
is striking at manufacturing.  The 2009 recession is going to 
be "sector specific" rather than with widespread, balanced, 
effects, making it difficult to deal with using traditional 
tools.  The emerging markets cannot "ride out" this type of 
crisis and will have to resort to policies to stimulate 
exports, including competitive devaluations.  Given that the 
alternative will be social unrest, it will be hard to 
persuade them to do otherwise.  The U.S. Congress, they 
predicted, will not be passive in the face of cheapening 
imports and the international dialogue will sour.  Congress 
is already "angry" with Chinese exchange rate policies; China 
is increasingly "angry" with the U.S. for having "mismanaged 
its economy."  The atmosphere for cooperation in trade or 
climate change will be poisoned by the trade crisis. 
 
5.  Portes and Baldwin had three recommendations for the G20: 
(1) agree to use macro approaches to promote economic 
recovery, not trade restrictive measures; (2) wrap up the 
Doha modalities; and (3) ask the WTO and IMF to set up a 
surveillance mechanism to record protectionist measures. 
They may be impossible to prevent, but at least keeping track 
of their introduction may make it easier to dismantle them 
quickly after the economy eventually improves, rather than 
having to painstakingly negotiate them away. 
 
The Crisis in Trade Finance and Insurance 
----------------------------------------- 
 
6.  Marc Auboin of the Trade and Finance Division of the WTO 
told the conference, speaking "in a personal capacity" that 
it is very difficult to obtain reliable statistics on trade 
finance (the IFI's gave up trying in 2003) but it appears 
anecdotally that the cost of credit and insurance has tripled 
in the past few months -- for those companies that can obtain 
them.  New customers have little chance of convincing 
increasingly conservative banks to assist them.  Auboin 
estimated that in November 2008, $25-30 billion in trade did 
not happen because the companies involved were unable to 
obtain credit or insurance.  The situation is becoming worse. 
 
7.  Auboin said that part of the crisis is because over the 
past 10-15 years, an increasing amount of international trade 
was financed on an "open account" basis, meaning simply that 
traders were prepared to ship on the basis of a handshake -- 
without any formal credit or insurance at all.  This has 
stopped cold because the companies' banks now demand formal 
assurances and protections.  The credit and insurance markets 
are being overwhelmed by the demand for new (and old, such as 
letters of credit) financial instruments.  Even for 
credit-worthy traders, the cost of the time it takes to 
arrange the credit and insurance instruments is a significant 
new burden -- a further drag on economic activity. 
 
LONDON 00003196  002 OF 002 
 
 
 
8.  Trade finance has not received much attention in the past 
because it was considered one of the safest and most routine 
investments.  This required a shared assumption that the flow 
of materials, parts, and support of major manufacturers could 
not be considered risky.  Auboin said that if a 
globally-playing major manufacturer fails in the next few 
months, the global trade finance and insurance system could 
become paralyzed, with incalculable effects on world trade. 
 
9.  Auboin's advice to the G20 was that they initiate a 
coordinated effort to prop up trade finance and insurance -- 
through co-financing or risk-sharing.  In the past, such 
steps would have been considered questionable trade subsidies 
"but no one is going to be litigious in the current crisis -- 
everyone knows they may have to do the same."  The amount of 
money required would be modest because most trade financing 
remains objectively safe -- contrary to the bankers' fears. 
A more difficult question is what can be done to help 
countries such as Pakistan and Ukraine, which are rapidly 
becoming uncreditworthy.  Because the elements that 
contribute to their lack of creditworthiness are difficult to 
untangle, it is difficult for the international community to 
know what specific actions can be taken to make them appear 
to be safe borrowers. 
 
Comment 
------- 
10.  This conference was not the first time we've heard in 
London that the credit crisis is overshadowing an impending 
trade crisis.  One of the speakers noted that the estimated 
annual benefits of a successful trade round are less than the 
financial markets have had wiped off their books on any one 
of several days in the past four months.  However, trade will 
be key to the recovery, when it comes, and a round of 
protectionist measures would alarm world markets even more 
than they are already alarmed.  As one of the speakers put 
it, "A new round of protectionism could turn a "V-shaped" 
recession into one that is "L-shaped." 
 
Visit London's Classified Website: 
http://www.intelink.sgov.gov/wiki/Portal:Unit ed_Kingdom 
 
TUTTLE