This study by the WTO explains the basic links between trade and the financial sector, and how financial crises are interrelated with trade. This study also includes case studies on past financial crises.

I. Introduction and Summary

A well-developed and stable financial sector and an open international trading system are two key components of prosperous economies. Finance and trade are linked in a number of ways that are not always obvious. What the World Trade Organization has to do with finance is probably even less obvious.

This study aims to show that trade cannot flourish without a stable financial system and financial stability is under threat without a well functioning trading system.

This study starts by explaining the basic links between trade and the financial sector, and then discusses how financial crises are interrelated with trade. It is shown how weak financial systems and financial instability hurt the flow of goods and services and why protectionism undermines financial stability. We go beyond a “theoretical” discussion of these links and review empirical evidence of the ways in which trade and finance interact.

Finally, we examine the role of the WTO framework of multilateral trade rules in underpinning a sound international economic order.

The rest of the study is divided into four sections. Section II starts out by briefly reviewing why trade openness and financial sector development are good for growth. The main purpose of this section, however, is to explain the ways in which trade depends on a well functioning financial sector. First, credits help to bridge the time between an order and payment for the order so that trade can take place even if none of the parties is liquid enough to finance the transaction. Second, the financial sector helps cover a number of risks for traders, such as commercial risk, transportation risk, exchange risk, and political risk.

Numerous trade-specific financial instruments have been developed and governments sometimes help to cover particularly large or unpredictable risks in trade through export credit agencies. Given the importance of exchange risk and the significant turmoil in exchange markets during the past two years, an appendix to Section II briefly reviews the principles of exchange rate formation, and discusses the advantages and disadvantages of various exchange regimes and exchange allocation mechanisms.

Financial crises are among the most important causes for disruptions in international trade. In such crises, trade-related financing may become very expensive or even unavailable, and economic disruptions depress demand for traded goods and services. Section III examines the nature of financial crises and what causes them. Particular emphasis is placed on understanding the role of banks—the key players in countries’ financial systems.

We continue with a discussion of the economic and trade effects of such crises. It is argued that trade is part of the solution to crisis rather than one of its causes. Trade is typically a very important element in maintaining and regaining financial stability, and open trade policies in the countries affected by crisis as well as in their export markets are key elements in the recovery from crisis. Finally, an appendix to this section provides a brief summary of strategies for crisis prevention and resolution outside the trade area.

Section IV presents case studies on past financial crises. We look at (i) the causes of crisis; (ii) empirical evidence on the economic, social and trade implications of these events; and (iii) the potential and in some cases actual role of trade policies in spreading and worsening financial crises. We have focussed on the Great Depression, a number of crises between the late 1970s and mid-1990s, and finally, the recent Asian Crisis.

Most factors contributing to financial crisis have occurred repeatedly over the past 70 years, with the exception of trade protection, which only played a major role during the Great Depression. It is argued that the absence of major protectionist backlashes in post-World War II crises is one of the main reasons why these crises did not become global. Evidence for a number of countries also suggests that trade and open trade policies have played a major role in economic recovery following financial crises.

Finally, Section V analyzes the role of the multilateral trading system with regard to the trade and finance nexus.

We find that WTO rules constrain adverse public interventions in trade financing in important ways, including with regard to provisions on restrictions on payments and transfers and on financial services trade, multiple exchange rate practices and exchange rationing, and export subsidies. Second, the multilateral trading system contributes to financial stability by promoting non-discriminatory trade liberalization, rule-based and predictable trade policies, and orderly trade conflict resolution. Furthermore, well-conceived liberalization of financial services trade can contribute to financial stability, and thereby indirectly benefit international trade.

In short, this study demonstrates that the WTO framework and the international financial system are interdependent elements of one global economic order, where trade cannot flourish without financial development and stability, and financial stability is unlikely to prevail without trade.

Download Trade, Finance and Financial Crises

PDF format, 587KB, 62Pages.

WTO Publications
Centre William Rappard
154 rue de Lausanne
CH-1211 Geneva
Tel: (41 22) 739 5208/5308
Fax (41 22) 739 54 58
E-mail: publications@wto.org

ISBN 92-870-1210-5
Printed in Switzerland

Table of Contents:
I. Introduction and Summary 1
II. The Links Between Trade and Finance 3
A. The importance of finance for trade and growth 3
B. Trade-related financial instruments 5
C. Export credit agencies and the role of government in trade financing 9
Appendix to Section II: Trade and exchange policy 13
III. Financial Crises and Trade 17
A. Why worry about financial crises? 17
B. The causes of financial crisis 19
C. The economic, social and trade implications of financial crisis 22
D. The role of trade in crisis prevention and resolution 26
Appendix to Chapter III: Strategies for financial crisis prevention and resolution outside trade policy 29
IV. An Historical Perspective on Financial Crises and their Economic and Trade Implications 31
A. The Great Depression 31
B. Financial crisis from the late-1970s to mid-1990s 33
C. The Asian Crisis 43
V. Trade, Finance and the Role of the WTO 51
A. Trade distortions through the trade and finance nexus, and WTO disciplines 51
B. The multilateral trading system and financial stability 53
VI. Conclusion 57
Bibliography 59

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What is the WTO?

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

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