Boosting the Availability of Trade Finance: A Priority in the Current Crisis?

Abstract

Economists disagree on the role trade finance played in the recent collapse in world trade. In contrast, policy makers seem to have reached a consensus. In a nutshell, their reasoning is that trade finance is the lifeline of international trade. The decline in trade is larger than what would be expected given the drop in global output. So part of the fall in trade reflects a shortage of trade finance, which could amplify and extend the plunge in trade and make the current crisis worse. Hence, boosting the availability of trade finance has to be part of the international response to the crisis. In this paper, I examine the claims underpinning this storyline and highlight the uncertainties on the role trade finance played in the current crisis.

An updated version of this article was published as "Why Boosting the Availability of Trade Finance Became a Priority during the 2008-09 Crisis," Chapter 14 of J.P. Chauffour and M. Malouche (eds) "Trade Finance during the Great Trade Collapse" Washington, DC: World Bank, 2011

Keywords: trade finance, trade policy, economic crisis

JEL Classification: F13, E44, E61, F02, F34, G01