8/9/2019 Bulletin 2010 Jul 7

1/10

To: Organizations addressing Trade-Finance Linkages

1)RegulatingFinancialMarketsKeytoEndingGlobalFoodCrisis,Experts

Concur

2)NewBook:FinancialCrisisandTradeinLatinAmericaandtheCaribbean

3)ECthrowsfreshdoubtsonGATScompatibilityoffinancialregulatory

measures

4)SubregionalSummitaddressesAidforTradeinECOWASregion

5)UsingTaxestoChangetheStructureofInvestmentandTradeinAfrican

resourcebasedeconomies

6)WorldBankpapersfocusontradeamidsttheglobalfinancialcrisis

7)IMF

staff

bent

on

supporting

liberalization

through

WTO

Doha

Round

1) Regulating Financial Markets Key to Ending Global Food Crisis, ExpertsConcur

The sustained increases in food prices that took place between 2006 and 2008,

resulting in some countries in riots and extreme acts of violence, alarmed theinternational community and placed the food crisis at the top of the internationalpolicy agenda. The Food and Agriculture Organization (FAO) index of food pricesrose by 9% in 2006, 24% in 2007 and 51% in the period July 2007 - July 2008. TheWorld Bank reports that the sudden increases in food prices in 2008 had driven anestimated 100 million more people into poverty while the FAO reports an increaseof 200 million in the number of people going undernourished.

At that time, the most often heard explanations attributed the price movements toreal demand and supply factors, such as, in particular, increases in demandtriggered by the greater purchasing power in China and India.

This view was contested by some analysts. Examples of this are a paper by JayatiGosh and C.P. Chandrasekhar, "Global Crisis and Commodity Prices," [1] and

8/9/2019 Bulletin 2010 Jul 7

2/10

another by Institute for Agriculture and Trade Policy paper, "Commodity MarketsSpeculation: The Risk to Food Security and Agriculture."[2] While these papers didnot question the need to pay attention to a number of factors that affected realsupply and demand, they asserted the global financial and food crises could not bedealt with separately. They also made it clear that it would be impossible to give

appropriate response to the latter without important reforms to address the financialmarkets dimensions behind price rises.

In recent months, a number of new studies concur on the impact that speculation infinancial markets has had on the price movements of agricultural commodities.

A paper by SOMO, "Financing Food: Financialization and Financial Actors inAgricultural Commodity Markets,"[3] supports such a conclusion with anexamination of commodity exchanges -where derivatives are transparent in terms ofprices and risky positions-- and Over-the-Counter derivatives markets that takeplace outside those exchanges. Then it discusses different investment vehicleswhose use has increased: Commodity Indexes, commodity Exchange-Traded

Funds and Commodity Index Swaps. The paper traces back the increase inspeculation on commodity markets to the growing influence of "non-traditional"speculators. These include hedge funds, pension funds, other institutional investorsand large banks, often investment banks, operating as dealers whose definingcharacteristic is that they have only financial motives and no interest or knowledgeon the underlying commodity or their delivery.

In a pair of papers commissioned by World Development Movement, "Speculationin Food Commodity Markets" and "Regulating Speculation in Food CommodityMarkets," [4] Tom Lines also supports the view that speculation had a large impacton prices of food. "Most of the recent financial investment in commodities has been

'passive' and 'long-only'. In principle, that should not make prices more volatile frommonth to month, whatever other disruption it may cause on the market. But it willtend to increase prices overall, simply by providing an extra source of demand... Itis by this route that price changes on the Chicago futures markets fed into wider,domestic food price movements on other continents in 2007-08."

Like the one by SOMO, the first of these studies contains a typology of theinvestment instruments that allowed these new forms of commodity speculation.Lines lists among these: Managed futures funds and Commodity collateralizedobligations (CCOs). In the first, a 'Commodity trading advisor' (CTA) collects fundsfrom investors, which the CTA then places on the market as though an investmentfrom a single source. There is no index involved and the funds are actively traded.The second is a commodity equivalent of the collateralised mortgage securities thattriggered off the credit crisis in 2007. It uses the same 'slice and dice' principle tocombine the prices of several commodities into a package in the form of an interest-bearing bond, the principal amount of which is related to the prices of the underlyingcommodities.

The paper then has a summary of the problems created by these commodityinvestment vehicles. The study contains not just a typology of the actors in thecommodity markets but also makes an attempt at naming who are today the mainplayers in these markets.

The companion paper has a useful summary of the EU and UK regulation ofcommodity markets and of initiatives to overhaul such regulations currently under

8/9/2019 Bulletin 2010 Jul 7

3/10

discussion in the European Union.

The impact of speculation on commodity price rises also is addressed in a paperwritten for UNCTAD by Joerg Mayer. The study, "The Growing InterdependenceBetween Financial and Commodity Markets,"[5] as suggested by the title, supportsthe notion that financial market developments are deeply intertwined now with

commodity price dynamics. In direct contrast with the explanation that attributesprice increases to changes in fundamentals, the paper concludes that financialinvestment in commodity trading has caused "commodity futures exchanges tofunction in such a way that prices may deviate, at least in the short run, quite farfrom levels that would reliably reflect fundamental supply and demand factors."

According to Mr. Mayer, financial investors in commodity futures markets regardcommodities as an asset class, comparable to equities, bonds, real estate, etc.Evidence that this asset class is negatively correlated with stocks and bonds'returns made it a target for portfolio managers seeking to diversify their holdings.His analysis of several markets finds that, however, over time, position taking for

speculative reasons has increased.

Additional aspects of the link with the financial crisis are raised in "The UnnaturalCoupling: Food and Global Finance," a paper prepared for the Group of 24 byJayati Gosh.[6]

As the financial crisis brought a sudden fall in commodity prices, the food crisis iswidely regarded as over. However, according to that study "the food crisis hasactually grown more intense in many developing countries since the middle of2008."[7] Among these additional effects to consider are currency depreciations -which affect access to imported food--, lower fiscal government capacity toimplement interventions-due to less revenue--, and the fall of real wages in relation

to food prices-- which means that lower nominal food prices do not necessarilymean lower shares of income being spent on food.

Moreover, after the paper was written the prices have resumed an upward path.According to the FAO's latest food situation update, the Food Price Index went upbetween August 2009 and January 2010. In May 2010 was up 7 percent in relationto the May 2009 -this continues stable at this level, which is only 23 percent downfrom the peak reached in 2008 and, thus, still has not gone back to even thehistorically high 2006 levels.[8]

The view that financial speculation on commodity -including agricultural commodity-

prices had a large impact on price rises is also espoused by Jan Kregel in"Financial Markets and Specialization in International Trade: The Case ofCommodities."[9]

An additional angle Kregel's piece brings to attention is the impact that commodityprice increases have on the structure of the economies of Latin American countries.The result has been a combination of current and capital account surpluses thathave brought rapidly increasing foreign exchange reserves and appreciatingcurrencies. "Thus, financial market conditions are producing real changes in theproduction and export structure of most Latin American countries - changes that arenot sustainable and produce substantial disruption when they are reversed. Inparticular, the bubble in commodity prices is reflected in what should be considereda bubble in real exchange rates throughout the region."

8/9/2019 Bulletin 2010 Jul 7

4/10

The Role of Financial Regulation and the US Financial Reform bill

Not surprisingly, thus, many of the proposals for addressing the food crisis have todo with re-regulating commodity futures markets.

The main measures recommended in the papers mentioned above can beclassified into three broad categories:

One category involves measures to improve transparency of derivatives trading,especially OTC derivatives. Some of these reforms cannot be enforced unless allexchange and clearing entities are regulated- -and either all derivativestransactions are pushed onto such entities or those trading OTC derivatives arerequired to report such transactions to some public agency.

A second category includes measures that would establish speculative positionlimits for traders (by commodity and by value of contract) and margin requirements.

The purpose of such measures is to make speculation more difficult and to increaseits costs.

The third category are measures that would reduce or ban altogether theparticipation of some actors in commodity derivatives trading, such as banks thatcan rely on government-insured funds to speculate in markets or exchange-tradedfunds.

In addition to these measures, which are generally applicable in major financialcenters, Gosh mentions some measures that developing countries could attempt touse to mitigate the effects of price movements. She recommends banningcommodity futures markets in countries where public institutions play an important

role in such markets and capital controls as a way to prevent inflows that enter themarket with speculative purposes.

Several of these analyses consider the deregulation of US commodity futuresmarkets after year 2000, with the Commodity Futures Modernization Act, a criticaljuncture. This legislation, as described by Gosh, "effectively deregulatedcommodity trading in the United States, by exempting over-the-counter (OTC)commodity trading (outside of regulated exchanges) from CFTC oversight. Soonafter this, several unregulated commodity exchanges opened. These allowed anyand all investors, including hedge funds, pension funds and investment banks, totrade commodity futures contracts without any position limits, disclosure

requirements, or regulatory oversight."

Against this context, the recent process to overhaul financial legislation in theUnited States obviously raised great expectations. However, after the bill emergedfrom the conference process - conference is a part of the legislative process where"conferees" from both the House and Senate meet to reconcile different versions ofa bill passed in those respective Chambers-the picture is a mixed one.

The bill will require a large portion of derivatives transactions to be standardizedand traded in public and electronic exchanges to increase transparency and to gothrough central clearing houses to ensure risks being built are also transparent.However, there are exceptions to these provisions for "nonfinancial companies"

8/9/2019 Bulletin 2010 Jul 7

5/10

using the contracts to hedge risk. Non-cleared derivatives still have to be reported.They will seemingly be subject to higher margins, too, though the exact scope of therespective provision is still under debate and may be narrowed in its application.

The bill also mandates the establishment of speculative aggregate position limitsacross different markets for all contracts, and capital and margin requirements for

dealers. Earlier in the process it was feared the legislation would authorize, ratherthan mandate, regulators to impose such limits (this was the language used in theHouse version). In this regard the bill out of conference is an improvement.Obviously, the legislation could not state what those requirements will actually be inpractice, a not minor detail that will be essential that regulators get right, if therequirements are not to become meaningless.

If passed as legislation, the current bill will also require banks to spin off derivativesoperations into separately capitalized units and ban them from proprietary tradingwith bank capital. But these rules have been so narrowed with exceptions that theireffect on banks' ways of doing business will be quite limited. The restrictions on

derivatives operations do not cover interest and exchange rate swaps, as well assome investment grade products. Interest rate swaps alone constituted, to go byfigures the BIS provided in late 2009, 70 percent of OTC derivatives trading. Thebanks will also be able to keep hedge funds and private equity fund units in house.They are allowed to invest up to 3 percent of bank capital in them, and to engage inproprietary trading of their own to hedge bank's risk and facilitate clients' needs.

An additional point to mention is the important role that the regulators will play inclarifying myriad details that the legislation leaves open, and doubts remain theCommodity Futures and Trade Commission, with its 600-person staff, is adequatelyresourced to carry such burden.

To those who have argued that a thorough reform of financial markets in majorfinancial centers is a crucial part of the response to the food crisis, the USlegislation will remain a step in the right direction. The measures that developingcountries might be able to implement on their own to curb such impacts remain asessential as ever.

[1] Available at http://www.networkideas.org/featart/dec2008/Global_Crisis.pdf

[2] Available at http://www.iatp.org/tradeobservatory/library.cfm?refID=104414

[3] Available at http://www.tni.org/sites/www.tni.org/files/download/Full%20document_0.pdf

[4] Links to both papers are available at http://www.wdm.org.uk/report/speculation-and-regulation-food-commodities

[5] This UNCTAD paper is available at http://www.unctad.org/en/docs/osgdp20093_en.pdf

[6] Available at http://www.g24.org/jg0909.pdf

[7] Gosh, J. The Unnatural Coupling: Food and Global Finance, p. 11.

[8] See FAO Food Outlook, June 2010.

[9] See next item on this update. This study is available in Spanish in book published as a result ofthe consultation, in turn available at http://www.coc.org/node/6542

8/9/2019 Bulletin 2010 Jul 7

6/10

2) New Book: Financial Crisis and Trade in Latin America and the Caribbean

A new book (published in Spanish only) "Financial Crisis and Trade: Towards anIntegrated Response in Latin America and the Caribbean," is now available (visithttp://www.coc.org/node/6542 ).

The book, co-published by Center of Concern and the Sistema EconomicoLatinoamericano y del Caribe (SELA), gathers selected presentations delivered at aconsultation with Ministers and senior officials from governments of the region. Theconsultation, held in September 2009, brought together near forty participants fromgovernments, intergovernmental organizations, academics and civil society, andwas organized by the Hemispheric Working Group on Trade-Finance Linkages, in

cooperation with UNCTAD and Sistema Economico Latinoamericano y del Caribe(SELA)

Goals of the meeting were to assess the role that trade structures and their linkageswith finance have played in the unfolding of the crisis in Latin American/ Caribbeancountries and ensure such assessment is included in the responses and to explorethe practical applications that an integrated approach to trade and financial policiescould have on improving specialised policy-making on both the trade and themacroeconomic and financial fields, domestically and internationally.

For an Outcome Document emerging from the meeting (not included in the book)visit http://www.coc.org/system/files/InformeFinal-eng.pdf

(for a Spanish version visit http://www.coc.org/system/files/InformeFinal.pdf )

For more documentation and available papers delivered at the meeting visithttp://www.sela.org/sela2008/CrisisFinanciera2009.asp (orwww.coc.org/node/6476 )

3) EC throws fresh doubts on GATS compatibility of financial regulatorymeasures

A recent European Commission staff working document, "Innovative Financing at aGlobal Level" dismisses Financial Transaction Taxes resorting to some oldarguments (see http://www.coc.org/node/6531 for a general response to thearguments presented in the report drafted by CIDSE).

Surprisingly, though, the paper adds to such arguments one that raises theincompatibility of such taxes with the European Union commitments in the World

8/9/2019 Bulletin 2010 Jul 7

7/10

Trade Organization:

"the compatibility of such a levy with Article XI of the General Agreement on Tradein Services (GATS), which provides that WTO Members cannot apply anyrestrictions on international transfer and payments for current transactions relatingto their specific commitments, would have to be further assessed. As the EU has

taken specific commitments relating to financial transactions, including lending,deposits, securities and derivatives trading and these commitments relate totransactions with third countries, a currency transactions tax could constitute abreach of the EU's GATS obligations."

The EC document marks the first time since the financial crisis that a governmententity has been so explicit about the potential for GATS to conflict with financialregulation policies on size, or other prudential measures. This raises questionsabout the WTO Secretariat's assertion that regulation measures are all compatibleand would be protected from a WTO challenge, says Public Citizen Staff ToddTucker, in an article.

Read the full article athttp://citizen.typepad.com/eyesontrade/2010/04/europe-admits-speculation-taxes-a-wto-problem.html

4) Sub-regional Summit addresses Aid for Trade in ECOWAS region

In an Informal Report , ECDPM provides highlights of an Economic Community ofWest African States (ECOWAS) sub-Regional Aid for Trade Review was held inAbuja on 26 to 27 January

The report, "Maximizing the Impact of EU 'Aid for Trade' Support" is available here.

5) Using Taxes to Change the Structure of Investment and Trade in Africanresource-based economies

The second issue of the Tax Justice Network Africa newsletter "Africa TaxSpotlight" (link below) features short articles on some of the papers presented at thePan-African Conference on Taxation and Development, held in Nairobi, Kenyabetween on the 25th and 26th of March 2010.

8/9/2019 Bulletin 2010 Jul 7

8/10

A short article based on Aldo Caliari's paper "Changing the Investment Structure inNatural Resources," contributed to the conference, is included in the newsletter.The article argues that in African natural resource based economies the structure ofinvestment bears special relevance to reap the benefits from trade. In this context,taxation policies are an underexplored tool that can be deployed with the purpose of

shaping the structure of investment and also the structure of trade, via investment.

This conference the first made critical input into the issue of domestic taxation,resource-based taxation as well as international taxation and as a result maderecommendations for the many issues of critical concern for the improvement oftaxation and its re-distribution within individual states in Africa.

Find the full newsletter athttp://www.taxjustice.net/cms/upload/pdf/Africa_Tax_Spotlight-_May_2010.pdf

6) World Bank papers focus on trade amidst the global financial crisis

Please see below title, summary and links to three World Bank papers addressing anumber of issues related to the links between trade and the global crisis 2008-09.

Caroline Freund. "The Trade Response to Global Downturns: HistoricalEvidence." Policy Research Working Paper 5015. World Bank, Washington, DC.

Summary

This paper analyses the impact of global downturns on trade flows. The studyoriginated results regarding trade drops, global imbalances, elasticity of global trade

volumes, trade rebound, the most and least affected regions, and improvements inthe ratio of the trade balance to GDP in borrower countries. The elasticity of trade toincome rose across time and the study finds that is due to the fragmentation ofproduction and/or lean retailing. East Asia has the largest elasticity, making it themost affected region as a result of trade linkages during the current downturn.

The study also found that downturns tend to moderate global imbalances. Theregions that mostly present imbalances are Latin America, East Asia, Europe andthe Middle East and North Africa. The effect is temporary unless the downturnchanges investment attitudes and/or government policies so the imbalances do not

revert to pre-crisis tendencies. North America stabilizes during the downturn but

8/9/2019 Bulletin 2010 Jul 7

9/10

worsens in its aftermath. The effect of exchange rates and commodity prices isreflected negatively on the real merchandise trade. When regarding products, foodand beverages, just as iron and steel, are sharply affected by the slowdown. Incontrast, trade in automobiles shows great recovery. Overall, the trade drop overthe last few months has been extremely high and more severe regarding effects

than other recent downturns.

Full paper available here.

Leonardo Iacovone and Veronika Zavacka. "Banking Crises and Exports:Lessons from the Past." Policy Research Working Paper 5016.

Summary

Based on 23 banking crises episodes involving both developed and developingcountries during the period 1980-2000, the paper analyses the impact of bankingcrises on manufacturing exports exploiting the fact that sectors differ in their needsfor external financing. Through the difference-in-difference identification strategy, itwas found that there is a negative and significant effect of banking crises on exportgrowth as sectors more heavily dependent on external finance are hit harder by afinancial crisis. Sectors characterized by a higher share of tangible assets areaffected significantly less by the crisis if collateral is provided. Another issue is theaccess to financial resources in a context of crisis. As it was observed, contractionis more visible in countries with a more developed financial system because itreduces output volatility in sector with higher liquidity needs. Higher financialdevelopment leads to a lower search cost for financial intermediaries and highershares of exports in industries more dependent on external finance. However, if thedependence on banks is too heavy, these industries suffer significantly more duringa banking crisis. For economies where financial markets are not sufficientlydeveloped, the use of collateral is relevant as industries with higher shares oftangible assets tend to grow relatively faster and export more

Full paper available at here.

Ingo Borchert and Aaditya Mattoo. 2009. "The Crisis-Resilience of ServicesTrade". Policy Research Working Paper 4917. World Bank, Washington, DC.

Summary

Based on new trade data from the United States, this study shows that servicestrade is withstanding the crisis when comparing to the outcome of goods trade.Trade growth has been significant other services such as insurance,

telecommunications and in business, professional, and technical types of services.Exports to the United States of developing countries are mostly specialized in

8/9/2019 Bulletin 2010 Jul 7

10/10

services. One of these countries is India. India`s export services has declined lessthan countries such as Brazil, China, and the African continent whose exports arebased in goods. Based on Indian services exporters, it was found that servicestrade has been rising due to the crisis-induced scarcity of finance since servicestrade are less dependent on trade finance less than goods. This happens because

of its limited tangible collateral. Another reason is that services are not storablemaking them less subject to declines in demand in downturns that affect durablegoods and a great part of services trade seems to involve long-term relationships inthe transactions.

Full paper available here.

7) IMF staff bent on supporting liberalization through WTO Doha Round

In a recent staff paper, "Trade and the Crisis: Protect or Recover", IMF researchersRob Gregory, Christian Henn, Brad McDonald, and Mika Saito state that while awidespread resort to protectionism as a result of the 2008-09 crisis has beenavoided, trade in those products that were targeted has suffered.

The authors warn that protectionist trends are likely to intensify in the comingmonths and call for the conclusion of the WTO Doha Round in order to lock insubstantial trade liberalization that has taken place but has not been locked in, yet.

The paper is available at http://www.imf.org/external/pubs/ft/spn/2010/spn1007.pdf

Aldo CaliariDirector

Rethinking Bretton Woods ProjectCenter of Concern