WORLD TRADE
ORGANIZATIONWT/WGTDF/W/18
19 December 2002
(02-7002)
Working Group on Trade, Debt
and FinanceOriginal:  Spanish
COMMUNICATION FROM CUBA
The following communication, dated 17 December 2002, has been received from the
Permanent Mission of Cuba.
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I. INTRODUCTION
1. Any analysis of the relationship between trade, debt and finance must start by recognizing the
complex and intrinsic linkages involved, stemming from the fact that both domestic and external
funding sources are essential to enhance trade, promote development and reduce poverty.
2. The study of this inter-relationship needs to id entify the channels through which trade policies
affect a country’s capacity to raise development finance and meet its debt-service commitments.
3. The financial problems of less-developed countries are set in a broader context, in which key
issues include market access, declining world commodity prices, deindustrialization resulting from
imbalances in the multilateral trading system, and problems of technology transfer.
4. The subject has a significant institutional dimens ion linked to the design of the international
trade and financial architecture, and the way less-developed countries integrate into the corresponding
systems.
II. THE RELATIONSHIP BETWEEN TRADE AND FINANCE
5. It is important to stress the link between the expansion of international trade and a properly
functioning international financial system, with key relationships existing between exchange rates
and trade, financial flows and trade, and balance-of-payments adjustment and trade.
A. EXCHANGE RATE AND TRADE
6. Exchange-rate volatility can project financial instability into the real sector of the economy.
Sharply fluctuating exchange rates can destabilize trade by altering export and import
competitiveness, generating inflationary pressures, influencing capital movements, and making debt
service more difficult.
B. FINANCIAL FLOWS AND TRADE
7. Trade expansion depends on a reliable, adequate and efficient source of long- and short-term
financing.WT/WGTDF/W/18
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8. With respect to the short term, the use to be  made of financial instruments that afford
protection from price instability and at the same time facilitate trade is an issue that needs to be
considered.  Export credit programmes and export insurance agencies have a decisive role to play
here.
9. As regards the long-run, it should be stressed that an efficient domestic banking system is the
key to trade financing.  The feasibility of liberaliz ing trade in financial services needs to be balanced
against ensuring that liberalization is suitably timed and sequenced, and prudentially managed, to
prevent it becoming a source of financial instability in its own right.
10. Currently prevailing trends in financial flows do not favour less-developed countries for
several reasons:
• Firstly, private financial flows are larger than official ones.  The former grew by an
average of 17 per cent per year during the last decade, while official flows shrank by
5 per cent.  As a result, financing is now more expensive.
• Secondly, sovereign borrowers are being displaced by private borrowers.  Whereas
public debt grew by an average of 3 per cent per year over the last decade, private-
sector debt increased by 24 per cent.  Thus, it is not governments that are borrowing,
but private agents from private sources;  the fact that this is an entirely private-sector
flow makes any arrears process and the consequent debt rescheduling much morecomplex.
• Thirdly, the pattern of international financing has changed;  bank loans have given
way to operations involving securities and financing has become highly securitized.Although foreign direct investment (FDI) is  now the largest financial flow, portfolio
investment is growing the fastest.  While FDI grew by an average of 22 per cent peryear between 1990 and 2000, portfolio investment expanded by 30 per cent.  As
portfolio flows are extremely volatile, this change in the pattern of financing puts
less-developed countries in a highly vulnerable position.
C. 
BALANCE -OF-PAYMENTS ADJUSTMENT AND TRADE
11. Trade expansion depends on an appropriate mix of domestic macroeconomic management,
together with sufficient external financing to prev ent balance-of-payments deficits putting pressure on
governments to implement restrictive trade or exchange-rate policies.
12. Large, frequent and unpredictable changes in capital inflows and outflows that are not
justified by solid macroeconomic fundamentals can put pressure on the balance of payments.  Thiscan undercut sound monetary and fiscal policies, leading to wide fluctuations in exchange-rate
polices.
13. It is important to consider the repercussions which balance-of-payments deficits or surpluses
in industrialized countries have on less developed economies, since one country’s deficit is another’s
surplus.  The current account matters for a number of reasons, especially because levels of integration
between countries remain moderate despite globalization, so a relatively small external adjustment is
likely to be accompanied by significant changes in the tradable goods sector.  Secondly, sharp
exchange-rate variations can cause disruptive macroeconomic changes, through their effects on
wealth, investments, corporate profits and asset prices.WT/WGTDF/W/18
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D. THE NEED TO LINK TRADE INTEGRATION WITH FINANCIAL INTEGRATION
14. Despite the burgeoning internationalization of trade and financial activity as part of the
globalization process, trade and financial integration have not always gone hand in hand.
15. Countries that are open to trade but closed financially are prone to major macroeconomic
volatility, because capital flows alone are unable to mitigate shocks.  Conversely, countries that areopen to international financial markets while restricting their trade are more susceptible to financial
crisis, because trade may not generate sufficient foreign exchange to quell the volatility of capital
flows.
16. The need for balanced integration is particularly important at the present stage of
globalization.  Current experience clearly demonstrates  the risk entailed when financial
integration lags behind trade integration, or vice versa .  In the particular case of Latin America,
the financial dimension is barely moving ahead in the regional integration process that is beginning tounfold.  To give just one example, it is impossible to achieve genuine trade integration between
countries that have totally different exchange-rate regimes.  On the other hand, a dollarization trend is
rapidly gaining force, which has nothing to do with the required financial integration.
E. 
THE ISSUE OF INSTITUTIONALITY
17. Thought needs to be given to the link between Financial Architecture and Trade, on the one
hand, and the advisability of linking trade policy coordination with other aspects of domestic and
external macroeconomic policy in the WTO context, on the other.
18. The world economic system needs greater coherence and consistency.  The recurrent financial
crises recently experienced in less-developed countries suggest that existing global arrangements are
unable to provide the monetary and financial stab ility required to maintain the employment and
production growth needed to ensure the success of  the international trading system and improve
conditions for less-developed countries.
19. The current international financial system clearly fails to respond to the demands imposed on
it by financial globalization;  and the initiatives considered thus far as part of the reform of the
international financial architecture have proved unable to avert financial crises in emerging markets.
20. Reform of the financial architecture  continues to focus on the now well-worn issues of
seeking more transparent information, heightened supervision and control, indiscriminate opening-up
of the financial sector, and greater private-sector participation in preventing and managing financial
crises.
21. The roles played by the WTO and the Bretton Woods institutions need to be coordinated, in
order to address financial concerns and the linkages between trade, finance and debt. But this must not
result in additional constraints being placed on less-developed countries, let alone paralyze or hinderthe necessary reform process.
III. THE RELATIONSHIP BETWEEN TRADE AND DEBT
22. The expansion of the trade of less-developed countries depends on the availability of reliable
and profitable trade-financing services. Our countries often find it difficult to gain access to this type
of financing in times of recurrent financial crises;  and sometimes they borrow to invest ininfrastructure, human resource development and information technology, which are essential for
establishing a competitive and efficient economy.WT/WGTDF/W/18
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23. Trade policies in industrialized and less-developed countries alike have a significant impact
on the latter’s capacity to raise financing for development.
24. The nexus between trade and finance is fund amental for balance-of-payments equilibrium.
Large balance-of-payments deficits can make it impossible not only to finance imports but also to
meet external debt-service obligations;  hence the importance of synchronizing macroeconomic,monetary, fiscal and trade policies in order to restore balance-of-payments equilibrium and underpin
sustainable growth.
25. In the specific case of less-developed countries, a comprehensive approach needs to be
adopted that embraces the following:
• Market access.   A broad-based approach is needed, which, apart from the removal of
trade barriers in developed countries, includes positive support for less-developedcountries in the form of exemptions, guarantees and other facilities.
• Terms of trade.   The development dimension needs to be integrated into trade
issues;  tariff protection, far from being dismantled, needs to be maintained to enablecountries to develop their incipient industries and participate in world trade.
• Trade liberalization and deindustrialization.   Many countries have undertaken
reforms believing this would enable th em to increase their participation and
integration in the world trading system.  Nonetheless, very few countries havebenefited from such policies;  most have watched their economies deindustrialize as
domestic firms have had to face foreign competition in their own markets.
• Trade policy.   Less-developed countries are caught in a trade and finance trap
generated by their own underdevelopment.  They are urged to expand their exports of
primary products;  but this risks increasing supply, resulting in lower prices,diminished export earnings, and less capacity to reduce debt.  In addition, the level
and volatility of world commodity prices has a significant effect on economic growth,
with implications for extreme poverty.
• The international financial architectu re and debt rescheduling procedures.  There
is increasingly broad acceptance of the need to create international rules on debt
moratoria;  and the recent IMF proposal to establish an international bankruptcy law
has given momentum to international debate on the subject. Nonetheless, none of
these proposals addresses the underlying causes, which stem from the irrational and
unjust nature of the existing world economic order.
IV. ISSUES FOR CONSIDERATION IN THE 2003 AGENDA OF THE WORKING
GROUP ON TRADE, DEBT AND FINANCE
26. The work programme should address the linkages between trade, external debt and finance
from a global and multidimensional perspective, focusing on systemic problems.  The debt problem
cannot be solved without adopting a comprehensive approach that embraces trade-policy issues(market access, falling commodity prices, supply constraints in less-developed countries, and
imbalances in the multilateral trading system) on the one hand, and development finance issues
(official development assistance, debt relief and FDI), on the other.
27. Possible solutions for consideration should include those that address the problems of
commodity trade (which are closely linked to the financial constraints faced by less-developed
countries), and at the same time support efforts to diversify their economies.  Only by improvingWT/WGTDF/W/18
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opportunities to expand export earnings will it be possible to significantly ease the foreign-exchange
constraint and help make debt sustainable.  This means reversing unequal trading patterns.
28. The imbalances caused by the multilateral trading system’s promotion of all-out trade
liberalization need to be identified, since they are resulting in the deindustrialization of domestic
economies.
29. We do not see liberalization as synonymous with a lack of regulation;  on the contrary,
liberalization needs to be accompanied by new, highly effective regulations and prudential controls, in
keeping with the demands imposed by economic globalization.  The Working Group should consider
measures that ensure the gradualness, coherence and correct sequencing of the liberalization process,
to enable less-developed countries to integrate into the world economy on a sustained basis, bearing in
mind their economic and institutional development and protecting their national interests.  This
depends entirely on coherent policy design at the national and multilateral financial and trading levels.
30. Trade policies need to be accompanied and reinforced by a broad reform agenda covering
regulatory issues, institutional dispute-settlement mechanisms, sound macroeconomic management,
and greater labour-market flexibility.  The Working Group’s agenda should include activities to
identify technical assistance modalities, together with capacity-building to create the infrastructure
and technical capabilities needed to exploit the opportunities provided by trade liberalization, and toattract export-oriented productive investment.
31. As long as less-developed countries continue to face major access barriers to rich country
markets, the Working Group should focus on consolidating the principle of Special and Differential
Treatment, and on strengthening and broadening its modes of application.  It should likewise focus on
the removal of tariff and non-tariff barriers, unfair trade practices, unilateral trade measures and thosewith extra-territorial effects, and protectionism.  Solving these problems would ensure a flow of
resources from exports that could be used to reduce the debt burden and alleviate poverty.
32. The Working Group should evaluate the underlying coherence of policies emanating from the
cooperation agreements between the WTO and the Bretton Woods institutions.  It should not only
monitor their mutual coherence, but also ensure th ey are compatible with development of the poorest
trading partners. In the framework of this WTO-IMF-World Bank cooperation, alternative
arrangements need to be found to guarantee neutrality in debt rescheduling processes and mechanisms
for resolving related disputes, since current debt rescheduling arrangements only favour creditors.
33. There is recognition in the international community that less-developed countries need a large
flow of financial resources to make up for their sa vings deficit.  Although financial flows are known
to be insufficient and volatile, there is a lack of political will to break this vicious circle and thereby
help such countries integrate into a new international economic order that would help them escapefrom the dependency syndrome.  The Working Group could act as a mechanism for monitoring
compliance with international commitments on development financing, particularly those arising from
the Monterrey Summit.
34. There is widespread recognition of the need for the international financial system to work
properly to enable trade and the multilateral trading system in turn to operate properly.  The Working
Group should seek to establish an effective bridge  between the two systems,  to prevent the policies
and constraints imposed by international financial institutions from eroding the advantages of trade
liberalization for less-developed countries, and from undermining the potential development
advantages afforded by special and differential treatment in the trading system.
35. The Working Group should continue to scrutinize WTO agreements and provisions wherever
links can be established between trade, debt and finance issues. It should propose specific additions orWT/WGTDF/W/18
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corrections and evaluate how best to link the corresponding WTO rules and the policies promoted by
IMF and the World Bank, seeking to reform these institutions internally.
36. The Group should also create a conceptual framework to underpin the relationship between
trade, debt and finance. This document represents an initial approach in this direction, mindful of the
need for deeper technical analysis of the linkages involved.  The political will of all Members needs tobe mobilized to achieve the stated aims of this WTO Working Group.
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