Trade Finance in East Asia: Potential Responses to the Shortfall

By Buckley, Ross P.; Arner, Douglas W. et al. | Melbourne Journal of International Law, June 2014 | Go to article overview

Trade Finance in East Asia: Potential Responses to the Shortfall


Buckley, Ross P., Arner, Douglas W., Stanley, Rebecca L., Melbourne Journal of International Law


CONTENTS   Introduction  II Trade Finance after the Global Financial Crisis III Europe's Withdrawal of Trade Finance to Asia IV Basel III V Potential Responses to These Challenges   A Further Adjustments to the Basel III Rules   B A Crisis Contains within It an Opportunity--For China   C Deepening Cross-Border Cooperation   D Creating a Ring-Fenced Liquidity Pool for Trade Finance   E Encouraging Co-Finance between the Various Providers of Trade     Finance, including Public Sector-Backed Institutions   F Establishing a Regional Trade Finance Database to Facilitate the    Collection and Exchange of Information VI Conclusion 

I INTRODUCTION

Trade finance is essential to support global trade, and the region that finances more trade transactions than any other is East Asia. (1) Historically, trade has been important in the evolution and development of civilisations. (2) Today, international trade enhances efficiency and competitiveness within economies and promotes economic development.

Some 80-90 per cent of trade transactions are supported by some form of credit financing, making trade finance an integral part of the world economy. (3) Finance for international trade transactions is important for wealthy nations and often critical for developing and emerging markets, where both exporters and importers may be severely constrained by limited working capital.

This paper starts by examining the impact of the global financial crisis on trade finance and how the world responded to the subsequent trade finance shortfall, with a particular focus on the East Asian region. While the response of the Group of Twenty ('G20') proved effective in increasing the availability of trade finance, a substantial trade finance gap has remained in East Asia. The next part of the paper examines the two greatest challenges facing trade finance in Asia today: the withdrawal of credit from European banks and the implementation of the Basel III Regulations. (4)

The second half of the paper moves on to analyse the potential responses to these challenges, including making further changes to the Basel III requirements, deepening cross-border cooperation, encouraging co-finance between public and private institutions and creating a ring-fenced liquidity pool for trade finance. It also suggests the establishment of a regional trade finance database.

Finally, we explore why china has not yet stepped in to address the trade finance gap within the region. Trade finance offers China's banks a low risk means of expanding into international business and it is likely that china will play a role in addressing the trade finance gap in the next few years.

II TRADE FINANCE AFTER THE GLOBAL FINANCIAL CRISIS

The global financial crisis that commenced in 2007-08 sparked a substantial worldwide shortfall in trade finance in a global market which was then estimated at USD10-12 trillion a year. (5) The effects of this contraction were markedly different in different regions. (6) South Asia, Korea and China were particularly affected, with China experiencing a double-digit decline in the availability of trade finance during 2008. (7) The G20 responded with its 'trade finance package' in April 2009. (8) In the words of the communique:

   we will take, at the same time, whatever steps we can to promote    and facilitate trade and investment; and we will ensure    availability of at least [USD]250 billion over the next two years    to support trade finance through our export credit and investment    agencies and through the [multilateral development banks]. We also    ask our regulators to make use of available flexibility in capital    requirements for trade finance. (9) 

The package provided a much-needed boost and financial agencies worldwide responded by making substantially more finance available for trade.

Export credit agencies ('ECAs') increased credit insurance and risk mitigation capacity by creating programs for short-term lending of working capital and credit guarantees aimed primarily at small and medium enterprises ('SMEs'). …

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