U.S. Council for International Business

Approximately 90 percent of world merchandise trade valued at more than $13 trillion annually is funded by letters of credit and other forms of trade finance. But the credit crisis is causing normal sources of trade funding to dry up. Unless something is done, international trade could grind to a halt. A recent report from the International Chamber of Commerce highlights an emerging culture of risk aversion. Banks report customers asking for confirmed letters of credit where previously they were content to deal on cash against delivery or open account. Heightened perception of risk is tightening overall liquidity, leading to greater difficulty in getting bank confirmations and financing for export transactions. The liquidity gap in trade finance is currently estimated at about $25 billion. While traders and banks in emerging markets are feeling the impact most acutely, there is growing evidence that the credit shortage poses a threat to world trade as a whole. The ICC report also highlights growing concern over the pricing of trade finance. Rates have jumped significantly from a year ago. Moreover, there has been a worrisome increase in the number of court injunctions barring payment under letters of credit on unsound technical grounds. Some companies report intense scrutiny from banks, as well as rejection of trade documents on the basis of minor discrepancies. ICC Chairman Victor Fung, the Hong Kong-based executive whose company, Li & Fung, has done so much to make China the world’s workshop, has called on governments worldwide to expand export credit insurance facilities and coverage. Our own government needs to make sure it is doing all it can to fill the gap in financing caused by the credit crisis. This is not an issue we can afford to let go unaddressed.