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1、Trade finance in the Mekong regionA study of Cambodia,the Lao Peoples Democratic Republic and Viet NamAbout the IFCThe International Finance Corporation a member of the World Bank Group is the largest global development institution focused on the private sector in emerging markets.It works in more t
2、han 100 countries,using its capital,expertise and influence to create markets and opportunities in developing countries.About the WTOThe World Trade Organization is the international body dealing with the global rules of trade between nations.Its main function is to ensure that trade flows as smooth
3、ly,predictably and freely as possible,with a level playing field for all its members.Cover:A worker tests electronic components at a factory in the Bac Ninh Province,Viet Nam.Foreword3Acknowledgements4Executive summary51.Trade profiles of the Mekong-38Trade dynamics in the Mekong-310The two-speed gr
4、owth of trade10Product diversification16Trade of goods at different stages of processing20Competitiveness and trade costs24Participation in global value chains272.Trade finance in the Mekong-332Local trade finance markets34Trade finance instruments35Trade finance across sectors39Trade finance for fi
5、rms owned or led by women40Trade finance for climate-related activities41Trade finance constraints43Supply chain finance and reverse factoring44Trade finance rejection rates44Correspondent banking relationships49Trade finance prices493.The impact of closing the trade finance gap52The costs of financ
6、ing international trade under different instruments54Five counterfactual scenarios55Projected trade cost reductions55Projected changes in aggregate exports and imports58Zooming in on trade patterns:detailed results for sectors and trading partners60Robustness checks60Conclusions64Annex I.Mekong-3 tr
7、ade and global value chain performance67Annex II.Estimating total trade finance assets:methodology71Annex III.Counterfactual analysis73Abbreviations89Bibliography90ContentsDisclaimerThe opinions expressed in this publication are those of the authors.They do not represent the positions or opinions of
8、 the IFC,its Board of Directors or the governments they represent nor do they represent the positions or opinions of the WTO or its members and are without prejudice to members rights and obligations under the WTO.Any errors are attributable to the authors.The designations employed in this publicati
9、on and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the IFC and the WTO concerning the legal status of any country,area or territory or of its authorities,or concerning the delimitation of its frontiers.Foreword3FOREWORDThe expansion of tr
10、ade depends on reliable,adequate and cost-effective sources of trade financing,which help to fill the time gap during which goods are produced,shipped and paid for.Trade finance is routinely supplied to exporters and importers by banks and other financial intermediaries,which mitigate the financial
11、and payment risk involved in cross-border trade.While developed countries can often rely upon large and advanced economic sectors mobilizing sophisticated trade finance instruments,such as supply chain finance,significant shortages exist in developing countries.These shortages can have many reasons,
12、both international(inflation,availability of correspondent banking relationships,country risk)and local(level of development and expertise of the financial sector,cost,access to finance by local firms).To better understand the trade finance ecosystem in developing countries,the constraints to trade
13、finance and gaps in provision,the International Finance Corporation(IFC)and the World Trade Organization(WTO)pledged in November 2021 to enhance their cooperation in this area.They engaged in a series of surveys aimed at examining the specific obstacles faced by lenders and borrowers in low-income r
14、egions.In 2022,the first study looked at the trade finance markets of the four largest economies of the Economic Community of West African States(Cte dIvoire,Ghana,Nigeria and Senegal,referred to as the ECOWAS-4).This report focuses on trade finance in Cambodia,the Lao Peoples Democratic Republic an
15、d Viet Nam the Mekong-3.It examines the characteristics of trade finance in these fast-growing markets,helping to quantify how much trade is supported by trade finance,at what cost and how much trade could grow further if obstacles to trade finance were reduced.The report offers insights into which
16、solutions could be promoted,locally and internationally,for trade finance to be a driver of greater trade inclusiveness.The IFC and the WTO are committed to further fostering of trade growth to support development outcomes,drawing on our knowledge and track record of mobilizing capital.We are thankf
17、ul to the joint IFCWTO team that produced this report and look forward to the findings and recommendations that will inform debates and decision-making across various stakeholders.Dr Ngozi Okonjo-Iweala Director-General World Trade OrganizationMakhtar Diop Managing Director International Finance Cor
18、poration4ACKNOWLEDGEMENTSAcknowledgementsThis publication is the result of a joint effort of the IFC and the WTO and was prepared under the guidance of Susan Lund,Vice President of Economics at the IFC,and Ralph Ossa,Chief Economist of the WTO.Nathalie Louat and Denis Medvedev of the IFC and Marc Au
19、boin of the WTO provided leadership for the research.Marcio Cruz,Maty Konte,Francesca de Nicola,Alexandros Ragoussis and Trang Thu Tran of the IFC and Eddy Bekkers and Alexei Timofti of the WTO managed the project teams across the two organizations.Working team members included:Karlygash Dairabayeva
20、,Milagros Deza and Gianluca Santoni of the International Bank for Reconstruction and Development(IBRD);Stephanie Annijas,Gbenoukpo Robert Djidonou,Sarah Hebous,Ibrahim Nana,Alexander Vanezis and Ariane Volk of the IFC;and Kirti Jhunjhunwala,Saptarshi Majumdar and Ruoyi Song of the WTO.The IFC survey
21、 of banks and the stakeholder interviews were completed through the substantial contributions from Loan Mai Thi Cung,Zeynep Ersel,Ngoc Thi Minh Ha,Huong Mai Huynh,Ahmed Hanaa Eldin Mohamed,Nhung Cam Nguyen,Hanh Phuong Nguyen,Akintunde Ogunmodede,Nim Vonglatda Omany,Lien Anh Pham,Arun Prakash and Pha
22、lly Puth of the IFC,and Phal-Chalm Theany of the Association of Banks in Cambodia.The Association of Banks in Cambodia,the Lao Bankers Association and the Vietnam Banks Association provided invaluable support with the implementation of the bank survey.The production of the publication was overseen b
23、y Ross McRae and Anthony Martin of the WTO.Expertise and insights on the project were provided by Thomas James Jacobs,Susanne Kavelaar,John L.Nasir,Phongsavanh Phomkong and Makiko Toyoda of the IFC,and Lori Chang,Florian Eberth,Roberta Piermartini,Stela Rubinov and Yan Ying of the WTO.Special thanks
24、 go to the peer reviewers Enrique Aldaz-Carroll(IBRD),Banu Demir(University of Oxford)and Ousman Gajigo,Ha Thu Nguyen,Lien Anh Pham,Bryce Ramsey Quillin and Shawn W.Tan from IFC regional offices for their insightful comments and suggestions.Christopher James Vellacott of the IFC provided helpful edi
25、torial suggestions on earlier drafts.5EXECUTIVE SUMMARYExecutive summaryCambodia,the Lao Peoples Democratic Republic(PDR)and Viet Nam referred to here as the Mekong-3 have established themselves as one of the most dynamic and trade-led regions of the world.In 2022,the value of trade flows surpassed
26、GDP in all three economies.The trade-to-GDP ratio was particularly high in Cambodia and Viet Nam at over 210 and 185 per cent,respectively several times higher than the global average of 62 per cent.The value of total trade flows has tripled in Cambodia and Viet Nam and more than doubled in the Lao
27、PDR in the past decade.The rapid trade growth reflects a complex web of domestic and international factors.The integration into global supply chains has been a key driver of trade growth and development,underpinned by better export performance and a favourable environment for foreign direct investme
28、nt.Cambodia and Viet Nam have also benefited from the relocation of production away from economies with higher manufacturing costs,trade diversion linked to trade conflicts between large countries and the fostering of foreign investment.However,trade growth in Cambodia and Viet Nam has not been even
29、.It has followed a two-speed trajectory,with exports from subsidiaries of foreign-owned firms outpacing exports from locally owned supply chains.Foreign investments,most notably in the electronics and garment sectors,have in the past decade shifted the structure and direction of imports and exports
30、in favour of these products,towards large suppliers(China)and buyers(United States)who now jointly account for over 40 per cent of the regions total trade.As a result,exports in a narrow set of activities controlled by foreign subsidiaries outpace exports from locally owned supply chains,for example
31、 in(agri-)food and fisheries,industrial parts and manufactures,where growth has also been strong and a source of economic diversification for these countries.Viet Nams import and export product basket is the largest and most diversified,expanding recently into chemicals,machinery and electric batter
32、ies.Starting from a lower base,the respective import and export baskets of Cambodia and the commodity-oriented Lao PDR have been diversifying faster than Viet Nams.A question is the extent to which the local financial sector has contributed to the integration and internationalization prospects of th
33、e region.In 2023,the IFC conducted a survey of banks in the Mekong-3 and a second survey of hundreds of traders in Viet Nam to gather information on trade finance needed by exporters and importers.The surveys revealed that local trade finance is not only relatively scarcely used in the Mekong-3 but
34、also segmented and traditional.In terms of size,coverage of trade,sector diversity and range of trade finance instruments,Viet Nams trade finance market can be regarded as more advanced.In 2022,Vietnamese banks supported 21 per cent of the countrys exports and imports,with funds representing 22 per
35、cent of the countrys total banking assets.The local banking sector in Cambodia supported a much smaller share of the countrys importexport operations,some 3 per cent of total trade,accounting for only 2.5 per cent of banks total assets.These numbers are low not only compared to developed country lev
36、els of 60-80 per cent but also relative to the coverage of trade recorded in other developing regions,such as West Africa.Viet Nams local trade finance market is estimated at US$150 billion in value,about 100 times that of Cambodia,at US$1.6 billion,even though the difference in trade flows is only
37、12 to 1.Data collected for the Lao PDR suggest that local trade finance supports an even smaller share of trade than Cambodia.Moreover,while the distribution of trade finance between imports and exports is relatively balanced in Viet Nam,with assets concentrating on intermediate goods and inputs,in
38、Cambodia and the Lao PDR trade finance is mainly supplied for imports,notably goods for wholesale distribution and construction.The segmentation of local trade finance markets in Viet Nam follows the dynamics of trade in reverse:high-growth and high-value exports of electronics and garments producti
39、on tend to rely less on local trade finance.Local banks are more likely to support intra-regional trade than global trade operations.Lacking more evidence,the existence of alternative,foreign supply chain finance(SCF)arrangements provided by large multinational companies to their subsidiaries and 6T
40、RADE FINANCE IN THE MEKONG REGIONtier 1 suppliers may explain the limited share of trade finance provided by local banks.However,it is unlikely that local,lower-tier suppliers within foreign-controlled supply chains benefit from such SCF.This would be even more unlikely in the case of Cambodia and t
41、he Lao PDR.Removing constraints to trade finance would significantly boost trade flows further and increase trade inclusiveness.Data collected from banks and traders surveyed in the Mekong-3 were analysed with the WTO Global Trade Model.According to the simulations for Cambodia and Viet Nam,increasi
42、ng the coverage of trade by local trade finance by an additional 20 percentage points while reducing the cost of loans and letters of credit to international benchmarks would raise imports by more than 5 and 6 per cent,respectively,and raise exports by more than 8 and 9 per cent annually.This corres
43、ponds to annual increases in merchandise trade of more than US$3.5 billion in Cambodia and US$55 billion in Viet Nam.Improving the coverage of trade by bank-intermediated finance holds the greatest potential to expand trade.The sectors delivering the largest contribution are textiles,wearing apparel
44、 and leather.The electronics sector plays a moderate role in this expansion owing to large shares of related-party trade(i.e.trade with subsidiaries of multinational enterprises and large conglomerates),which are less likely to use domestic trade finance.The trade partners that stand out as the larg
45、est beneficiaries of this scenario are China and East and Southeast Asia on the import side and Europe(for Cambodia)and North America,China and East Asia(for Viet Nam)on the export side.Increasing the share of trade supported by local trade finance would require local supply and demand constraints b
46、e addressed.The surveys point to macroeconomic constraints weighing on both the demand and supply of trade finance,such as persisting disruptions to mobility and operations due to the impact of the COVID-19 pandemic,inflation and limited availability of low-cost funding.Structural constraints includ
47、e the lack of information about new trade finance instruments,and for which technical and financial assistance is sought.High collateral requirements and onerous application processes are moreover highlighted by hundreds of traders as reasons for not approaching banks in Viet Nam.Women find it more
48、difficult than men to access trade finance.Only four in ten banks in the survey report that they provide trade finance to women-owned or led small and medium-sized enterprises(SMEs).The gender disparity in access to trade finance appears more accentuated in Cambodia and the Lao PDR,where only 37 per
49、 cent and 33 per cent of banks,respectively,report allocating trade finance to women-owned or led SMEs,compared to 47 per cent in Viet Nam.However,over half the banks in the Mekong-3 do not track whether or not they provide trade finance to female entrepreneurs,which makes it difficult to capture fu
50、lly the gender gap in accessing trade finance.Only a small fraction of the banks surveyed fund climate-related trade activities.The share of banks in the Mekong-3 which report that they provide trade finance to climate-related trade activities is low.Only 11 and 29 per cent of the banks in Cambodia
51、and Viet Nam,respectively,report that they provide trade finance to climate-related trade activities.Of the banks surveyed in the Lao PDR,none reports providing trade finance for this category of trade activity.Harnessing trade opportunities through global value chains(GVCs)and expanding into new pr
52、oducts will also require deeper and more diverse trade finance markets.The bank survey confirms the prevalence of traditional trade finance instruments(letters of credit and other guarantees,pre-export loans),routinely provided by nearly all banks involved in trade finance.Short-term working capital
53、 lines are often used by importers and exporters as a substitute to more structured and documented trade finance instruments particularly in Cambodia,where 40 per cent of total trade finance is provided in this form.Working capital loans are preferred for their flexibility but are also typically mor
54、e expensive and accessible only to clients with sufficient land or building collateral.Innovative trade finance instruments are still nascent:although a quarter of banks surveyed envisage expanding its provision within the next two years,SCF currently supplied by local banks in Cambodia and Viet Nam
55、 accounts only for 2 per cent of available trade finance.The potential for growth stems from the fact that,while SCF is provided by foreign banks to large subsidiaries of foreign firms for the export of finished products,the number of local producers of parts and components not involved in such arra
56、ngements but involved in international trade is growing.In general,unlocking meagre cash resources trapped in those supply chains is a necessity for local firms particularly SMEs to survive,invest and move-up technologically within the value chain.However,many of them still do not have access to 7EX
57、ECUTIVE SUMMARYtrade finance,as exemplified by the low share of trade covered by trade finance.At best,some firms will have access only to expensive working capital.Coordinated action by the corporate sector,financial institutions,national policymakers and international organizations could help to i
58、ncrease the uptake of trade finance in the Mekong-3.The most effective measures vary by country.In Viet Nam and to some extent Cambodia,they include:diversifying the range of trade finance instruments;strengthening the regulatory framework;broadening the local customer base for trade finance to SMEs
59、;and improving banks agility,risk management capacity and international relationships.In Cambodia and the Lao PDR,the capacity of the local banking system to support the internationalization of the economy is more limited than in the case of Viet Nam.Actions in these two countries could focus on the
60、 expansion of traditional trade finance instruments such as letters of credit and basic capabilities of banks,without neglecting ways to promote the use of innovative instruments such as SCF to facilitate the integration of smaller,local producers into GVCs.Examples of successful engagements of deve
61、lopment finance institutions in other countries in Asia suggest that progress towards these objectives is possible.Making data available to support decision-making,offering a modern and predictable legal framework on recourse for SCF creditors and providing for effective enforcement of rules for col
62、lateral could all significantly broaden access to trade finance in the Mekong-3.SCF expansion is a priority given the regions growing integration into GVCs.This will require technological solutions and training for staff in managing credit risk,which according to the survey is in demand.Technologica
63、l solutions could also facilitate the adoption of supply chain mapping and digital financing,while simultaneously helping banks to develop more sophisticated internal credit risk assessment systems for SMEs and new entrants in the trade finance markets.A higher level of digitalization could help to
64、reduce the processing costs for trade finance,which remain high in less developed countries of the Mekong region.Banks and other institutions can also provide training and outreach to firms currently excluded,to better inform them of which trade finance solutions are available and help them access m
65、arkets.Further evidence-based studies of trade finance and additional efforts by the research community would be welcome in identifying markets where shortages occur and the potential for trade finance expansion exists.This present study on the Mekong-3 and the earlier IFCWTO study on West Africa ou
66、tline how trade finance can lead to increased trade inclusion and economic integration for countries with different trade structures and comparative advantages.They serve as guides to explain how the level of development of domestic financial sectors and their orientation towards cross-border transa
67、ctions impact the ability of economies to participate more fully in the global trading system.Trade profiles of the Mekong-3CHAPTER 1 A worker checks circuit boards at an electronics factory in Hung Yen Province,Viet Nam.The Mekong-3 Cambodia,the Lao Peoples Democratic Republic(PDR)and Viet Nam form
68、 one of the most dynamic and trade-led group of countries in the world.In 2022,the value of trade flows surpassed GDP in all three economies.The trade-to-GDP ratio was particularly high in Cambodia and Viet Nam at over 210 and 185 per cent,respectively several times higher than the global average of
69、 62 per cent.China and the United States have grown to become the main export destinations from the Mekong-3,jointly accounting for over 40 per cent of the regions total trade.Trade growth in Cambodia and Viet Nam has followed a two-speed trajectory.Exports to China and the United States have grown
70、by a factor of five since 2012,while exports to other regions also grew,albeit at a slower pace.East Asia and Pacific countries continue to account for most of imports into Cambodia and the Lao PDR at over 58 and 70 per cent in 2021,respectively.Although intra-regional trade among the Mekong-3 has g
71、rown in value,its relative importance has declined.The growth of Viet Nams electronic industry and Cambodias textile exports are primarily driven by foreign investors.In 2021,multinational enterprises contributed to around 70 per cent of Viet Nams total imports and exports.Large and mega firms contr
72、ibuted more than 80 per cent of exports from the country.The Mekong-3 rely significantly on the import of intermediate goods and inputs,which more frequently require letters of credit.As a share of total imports in 2020-2022,intermediate goods comprised 64 per cent in Cambodia,45 per cent in the Lao
73、 PDR and 60 per cent in Viet Nam.Cambodia and the Lao PDR are diversifying fast.They have both expanded imports considerably,connecting with new markets.From 2012 to 2021,the number of products imported by Cambodia and the Lao PDR increased by more than 13 and 10 per cent,respectively.There has been
74、 significant growth in chemical products imported in Viet Nam,as well as machinery components in all of the Mekong-3.Exporters in all of the Mekong-3 have improved their performance.The expanded global footprint of Mekong-3 exporters can be attributed to distinctive developments within each country
75、including excess capacity from trade diversion,high-value exports along these routes and significant improvements in the productivity of their exporters.Trade costs remain a challenge for the Mekong region.While Cambodia witnessed reductions in trade costs of 13-22 per cent to its top ten partner ec
76、onomies between 2008 and 2018,trade costs for Viet Nam fell only for exports.The Lao PDR experienced a sharp rise in average costs for exports of more than 35 per cent and 15 per cent for imports both of which from a high initial base.Key findings10TRADE FINANCE IN THE MEKONG REGIONTrade-to-GDP rati
77、o in 2022210%Cambodia185%Viet NamTrade dynamics in the Mekong-3Export-oriented nations depend disproportionately on trade,and by extension on trade finance,as a driver of prosperity (see Box 1.1).The Mekong-3 have established themselves as one of the most integrated and trade-led regions of the worl
78、d,with a trade-to-GDP ratio surpassing 100 per cent in all three economies and over 210 and 185 per cent in Cambodia and Viet Nam,respectively(see Figure 1.1).This is over three times higher than the global average of 62 per cent and has turned Cambodia and Viet Nam into trade leaders in Southeast A
79、sia.Cambodia and Viet Nam have become trade leaders in Southeast Asia.Cambodia and Viet NamWhile a high trade-to-GDP ratio is common in smaller economies,its growth over the last decade points to accelerating internationalization,with trade flows steadily outpacing GDP growth of between 5 and 8 per
80、cent annually well above the average for East Asia and Pacific.Viet Nam exemplifies and leads this trend for the region as a whole.Since 2012,the value of total trade flows more than tripled to US$754.8 billion in 2022 and is now valued at more than 185 per cent of GDP(see Figure 1.1).Cambodia has f
81、ollowed a similar trajectory,tripling the value of its trade since 2012 to US$60.2 billion and surpassing 210 per cent of GDP in 2022(see Figure 1.1).For comparison,Malaysia and Thailand,two notable economies in the region,have trade flows that exceed GDP at 146 and 123 per cent,This chapter provide
82、s a summary of key trade dynamics in the Mekong-3 that are relevant to trade finance,starting with trade flows in the region and an overview of what is traded and with whom.The chapter then explores:product diversification;the trade of goods at different stages of processing;the competitiveness of e
83、xporters in the Mekong-3 and the trade costs incurred;participation in global value chains;and the role of multinational enterprises and firms of different sizes as drivers of growing demand for trade finance.respectively.These economies have also tended to depend less on trade over time,while Cambo
84、dia and Viet Nam have consistently increased trade flows relative to GDP.Lao Peoples Democratic RepublicThe Lao PDR presents a separate case within the Mekong-3.Unlike Cambodia and Viet Nam,it has only recently experienced a sizeable increase in its trade-to-GDP ratio,surpassing 100 per cent of GDP
85、for the first time in 2022(see Figure 1.1).Since 2014,trade as a share of GDP had fluctuated around 75 per cent,which is still above the global average of 62 per cent and is a reflection of the continued importance of imports and exports for the countrys development.The two-speed growth of tradeTo c
86、omprehensively gauge the requisites and provisions of trade finance in Mekong-3,the dynamics of trade across origins,destinations and beneficiaries are examined.The structure of imports and exports from the Mekong-3 has undergone significant changes in the past decade driven not only by local develo
87、pment but also by the global geopolitical landscape.China and the United States began mutually escalating tariffs on hundreds of billions of dollars worth of trade flows in 2018.The study by Fajgelbaum et al.(2021),revised in 2023,argues that,while the two economies largely taxed each other 11CHAPTE
88、R 1:TRADE PROFILES OF THE MEKONG-3Source:IFCWTO calculations using WTOUNCTAD estimates for goods trade and IMF WEO and Balance of Payments for GDP and services trade,respectively.FIGURE 1.1Trade flows and GDP in the Mekong-3 (in current US$billion and as a share of GDP,and total GDP in 2022)US$754.8
89、 bn0050060070080090020000212022Trade value(US$bn)US$16.4 bnUS$60.2 bn210.8%107.0%185.7%61.8%0%50%100%150%200%250%20000212022Trade value/GDPCambodiaLao PDRViet NamWorldGDP in 2022Viet NamUS$406 bnCambodiaUS$29 bnLao PDRUS$15
90、 bnCambodiaLao PDRViet Nam12TRADE FINANCE IN THE MEKONG REGIONInternational trade is an important driver of productivity,jobs and development but,to be effective,adequate trade finance is essential.Trade finance,an umbrella term including a variety of financial instruments,helps to oil the wheels of
91、 trade by bridging the gap between exporters and importers differing expectations about when payment should be made.Trade finance includes loans and working capital facilities needed by exporters to process or manufacture products and by importers to buy inputs,raw materials and equipment.Insufficie
92、nt trade finance increases the risks of the trade transaction(i.e.not receiving payment or delivery)and trade costs(i.e.opportunity costs of using scarce cash resources).Trade finance at high interest rates or with expensive fees is also a trade cost.Trade finance is important for businesses because
93、 access to finance at affordable rates is an important element of a businesss competitiveness and its integration into global markets.Trade finance thus matters for societies as a whole by enabling producers to create better paid jobs and to diffuse technologies for a range of purposes,including,for
94、 example,lowering greenhouse gas emissions and adapting to climate change(for a recent review,see Engel et al.,2021).Trade finance can also enhance the benefits of trade for a wide range of market participants,such as smaller enterprises and younger entrepreneurs,which can be exposed to greater risk
95、s in cross-border transactions.More generally,trade finance matters for trade because it is not just demand driven.Research finds that an increase in the supply(or cost)of trade finance is associated with an increase(or decrease)of global trade volumes(Auboin and Engemann,2014).The share of merchand
96、ise trade supported by trade finance is relatively low in many developing countries:40 per cent in Africa as a whole and only 25 per cent in West Africa,as opposed to 60-80 per cent across high-income economies.Rejections rates for trade finance requests in developing countries can be high.In partic
97、ular,small and medium-sized enterprises(SMEs)are disproportionally affected by high rates of rejection.As a result,even though trade finance is one of the largest sources of cross-border capital flows(valued at over US$10 trillion annually),major gaps still persist.The Asian Development Bank reports
98、 that the global trade finance gap the difference between requests and approvals for financing to support trade grew to US$2.5 trillion in 2022,and mostly in developing countries.*Hence over time,trade finance has taken a more prominent position in the development agenda.Global trade finance gap in
99、2022 estimated at US$2.5 trillionIn IFCWTO studies,local banks are surveyed to estimate the amount of trade finance supported by the local financial sector in each country and how it relates to trade flows.Although the surveys do not capture financing by foreign banks provided outside the country,th
100、ey nevertheless provide an important measure of the ability of local financial institutions to support the countrys participation in international trade.The surveys examine the following elements:the trade finance instruments used;the cost at which trade finance is available;the rejection rate of tr
101、ade finance requests.Using general equilibrium analysis from the WTO Global Trade Model,these metrics are then used to explore the trade impacts of any potential BOX 1.1What is trade finance and why it matters?13CHAPTER 1:TRADE PROFILES OF THE MEKONG-3improvements to accessing local trade finance.Fo
102、r example,how much more trade would be generated by:(i)greater availability of trade finance (a higher share of trade finance covering trade);(ii)a reduced rejection rate for trade finance;and(iii)reduced interest rates and fees to align closer to international benchmarks.In this way,a combination o
103、f trade effects of these counterfactual scenarios can be explored.As shown in Chapter 3,most of the trade effects are generated by an increase in the availability of trade finance.In certain countries where the uptake of trade finance is very low,a reduction in rejection rates only impacts the few t
104、raders who seek trade finance and thus only marginally increases the coverage of trade by trade finance.*See https:/www.adb.org/news/global-trade-finance-gap-expands-25-trillion-2022.and depressed their bilateral trade flows relative to non-taxed products,bystander countries increased their exports
105、to the United States and the rest of the world.Cambodia and Viet Nam have been two of the major beneficiaries in a relocation process that started before 2018,owing to an increase of production costs in China.China and the United States have become the top export destinations from the Mekong-3.Over
106、the past decade,China and the United States have emerged as dominant destinations for exports from the region.In 2021,the United States was the primary export destination for Cambodia and Viet Nam,representing more than 31 and 26 per cent of the total value of exports,respectively(see Figure 1.2,Exp
107、orts).The Lao PDR,on the other hand,remains heavily oriented towards China and the rest of East Asia and Pacific in both trade directions.The share of Mekong-3 exports to Europe and Japan has dropped by over 10 percentage points for Cambodia,6 percentage points for the Lao PDR and 15 percentage poin
108、ts for Viet Nam;while intra-regional exports,excluding China,have been stable in relative terms at one fifth of the total value over the last decade.Money to service a microloan,Lao PDR.14TRADE FINANCE IN THE MEKONG REGIONSource:IFCWTO calculations based on World Bank WITS data.FIGURE 1.2Trade in va
109、lue in the Mekong-3 as a share of total exports and imports,2012 and 2021(in per cent)In quantity terms,shipments to all countries and regions have grown.China and the rest of the East Asia and Pacific region account for over 70 per cent of the total export volumes from the Mekong-3.Despite the decr
110、ease of their relative importance,Mekong-3 exports to Europe and Japan remain significant in volume and continue to grow(see Figure 1.3,Exports).Trade flows among the Mekong-3 have also grown over the last decade,although they still rank low relative to other destinations.Exports from Cambodia and t
111、he Lao PDR to Viet Nam increased by a factor of three to four since 2012,albeit from a low base.Trade flows from Viet Nam to Cambodia at least doubled and marginally increased to the Lao PDR.7.1%13.9%20.8%17.5%23.6%20.0%18.2%5.9%12.8%5.5%29.8%31.8%17.3%26.1%34.0%21.9%25.7%27.9%57.3%58.7%10.7%7.0%22.
112、5%14.8%11.9%9.5%13.4%14.6%2002120122021CambodiaLao PDRViet Nam2002120122021CambodiaLao PDRViet NamChinaRest of East Asia&PacificJapanUnited StatesEU,Switzerland&UKRest of world20.4%31.5%16.4%22.8%34.4%40.5%73.2%58.8%75.1%70.9%37.8%37.6%10.5%5.4%5.3%7.1%6.0%9.9%ExportsImports15C
113、HAPTER 1:TRADE PROFILES OF THE MEKONG-3Source:IFCWTO calculations based on World Bank WITS data.Missing volumes are imputed using average unit values.Average unit values of trade are calculated by dividing trade values in US dollars by the net weight values in kilograms,for observations with records
114、 of both value and quantity in kilograms.The averages are calculated by HS2 sector,origin,destination and year.Average unit values are then used to estimate the volumes where quantity is not reported,or reported in units different than kilogram,by dividing the value reported by its corresponding ave
115、rage unit value.Existing data in the net weight values in kilogram are unaffected by the process.FIGURE 1.3Trade volume in the Mekong-3,2012 and 2021(in million tonnes)Exports2002120122021CambodiaLao PDRViet NamMillion tonnesMillion tonnes204080051015205.4 8.0 6.1 3.6 12.7 31.8
116、 54.5 16.6 38.5 8.7 9.9 6.6 15.5 18.0 12.7 Imports2002120122021CambodiaLao PDRViet NamMillion tonnesMillion tonnes560800180200253.18.117.94.05.414.033.521.488.88.010.16.843.41.51.5600ChinaRest of East Asia&PacificJapanUnited StatesEU,Switzerland&UKRest of world16TRAD
117、E FINANCE IN THE MEKONG REGIONTwo-speed growth trajectory of Cambodia and Viet NamTrade growth in Cambodia and Viet Nam exhibits a two-speed trajectory.Exports to China and the United States have grown by a factor of five since 2012.This growth has outpaced exports to all regions,which have also gro
118、wn albeit at a slower pace.Notably,exports to Europe have more than doubled in value and volume over the last decade,which indicates expanding market opportunities.Exports to Japan have grown similarly in both value and volume as trade ties with the Japanese market strengthen.It is worth noting that
119、 while the value of exports from Cambodia and Viet Nam to the United States is high,it still represents less than 10 per cent of export volume.This indicates that these shipments are relatively more expensive than exports to other destinations.The same holds for shipments from China to the Mekong-3,
120、where the value of imports has outpaced the growth in volume,suggesting high relative unit values of imported intermediates(see Figures 1.2 and 1.3,Imports).Combined,these two observations point to the rise of global value chains(GVCs)in the region whereby high-value intermediate components are impo
121、rted,assembled and shipped to the United States as expensive final goods.Shipments from Viet Nam to China and Japan have also grown in value by more than volume;albeit not at the scale observed for shipments to the United States.The two-speed growth trajectory has also been clear in imports to Cambo
122、dia and Viet Nam.While trade from China and to the United States has been growing significantly faster than trade with other regions,imports to Cambodia and Viet Nam from all regions have increased in volume(see Figure 1.3,Imports).China and the rest of East Asia and Pacific collectively account for
123、 65 per cent of the total import volume into Viet Nam.However,imports from China and the United States tend to be considerably more expensive than imports from other sources.This disparity in aggregate statistics conceals moderate growth of the second-tier routes and trade flows.Imports to the Mekon
124、g-3 from China and East Asia and PacificChina has become the largest supplier of imports to the Mekong-3,at par with the imports from all other regions combined.By 2021,the total value of imports from China was three times its 2012 level.Although East Asia and Pacific continues to represent the larg
125、est share of imports into Cambodia and the Lao PDR,the share has dropped since 2012.In Cambodia,imports from Viet Nam in 2021 increased in value by a factor of three since 2012;although the countrys relative importance has declined behind Chinese imports,which grew much faster.The consequences of in
126、creasing reliance on imports from China have a nuanced impact on trade finance markets.According to interviews conducted in the Mekong-3,imports from China often involve payment arrangements that bypass the local banking system.These arrangements,together with the robust competition among Chinese pr
127、oducers in the global market,are some of the unique characteristics of Chinese trade.Moreover,payment terms often depend on relationships,favouring importers with established,long-term partnerships,which can yield more advantageous import terms.Net trade in the Mekong-3 and comparator countriesViet
128、Nams increasing participation in GVCs has cemented its status as a net exporter,with the value of exports consistently surpassing imports since 2016(see Figure 1.4).This trend highlights the role of trade as a financing mechanism for the countrys development.Viet Nams trade performance follows the t
129、rajectory of more advanced economies in the region,such as Malaysia and Thailand.Meanwhile,Cambodia and the Lao PDR maintain a relatively balanced trade,with marginal net imports,as their trading activities steadily expand.Product diversificationThe diversification of the product mix crossing border
130、s has an impact on trade finance markets.Research shows that different products vary in the coverage by bank-intermediated finance when traded across borders(Crozet et al.,2022).In addition,young traders expanding into new markets have a greater need to mitigate risks with new clients,making them mo
131、re prolific users of trade finance(Antrs and Foley,2015).As the demand for finance rises,banks may be hesitant to assume these risks for activities or participants with which they may be less familiar.By expanding trade into uncharted territories,there is thus a greater need for market intelligence
132、and adaptable instruments to support importers and exporters active in these markets.China has become the largest supplier to the Mekong-3.17CHAPTER 1:TRADE PROFILES OF THE MEKONG-3Source:IFCWTO calculations based on World Bank WITS data.Net trade corresponds to the total value of exported goods and
133、 services minus the total value of imported goods and services.FIGURE 1.4Net trade in the Mekong-3 and comparator countries,2012-2021(in US$billion)The economy in Viet Nam is more diversified than Cambodia and the Lao PDR,both in terms of imports and exports.Viet Nams range of products traded has th
134、us remained relatively stable,with only a marginal annual growth rate in the number of products exported(see Figure 1.5).However,the value of Viet Nams exports has been surging at growth rates of 15 per cent annually,which would suggest an ongoing process of qualitative improvement in similar produc
135、t categories.The same applies to Viet Nams imports,indicating a steady and diversified influx of goods from various sources.With regard to the types of product traded by the Mekong-3,electronics,machinery,textiles and food form the bulk of both imports and exports in Viet Nam(see Figure I.1 in Annex
136、 I).Just three products integrated circuits,telephones and rubberized fabrics have consistently accounted for around 20 per cent of Viet Nams imports from China since 2016;while broadcasting equipment substantially increased its share in the value of exports to the United States,from around 2 per ce
137、nt in 2012 to approximately 18 per cent in 2021.Cambodia relies heavily on its garment and textile industry,which comprises nearly half of its exports,with machinery and other consumer goods making up the remaining portion (see Figure I.1 on Annex I).A handful of key products and services,including
138、garments,footwear,rice,cassava and tourism in services,dominate the export basket of the country(World Bank,2021).+15%per annumValue of exports,Viet Nam-60-40-2002040602000021US$billionCambodiaLao PDRViet NamMalaysiaSri LankaThailandPhilippines18TRADE FINANCE IN THE
139、MEKONG REGIONSource:World Bank WITS(mirror data).Figures from different sources show similar trends,although the number of products exported/imported seems higher when based on World Bank WITS(mirror data).FIGURE 1.5Number of products traded by the Mekong-3 (HS 6-digit products)The Lao PDR primarily
140、 exports energy resources,while heavily relying on imports for various other products.Notably,gold has emerged as a significant import commodity for both Cambodia and the Lao PDR,possibly accounting for previously underreported trade flows.Cambodia and Lao PDR are diversifying fastCambodia and the L
141、ao PDR have considerably expanded their imports,connecting with new markets.In 2021,Cambodia and the Lao PDR imported more than 13 and 10 per cent of additional products since 2012,respectively(see Figure 1.5).Similarly,exported products have grown remarkably,expanding from 1,597 to 2,250 for Cambod
142、ia(an increase of over 40 per cent)and from 1,204 to 1,440 for the Lao PDR(an increase of nearly 20 per cent).Starting from a highly diversified base,the expansion of Viet Nams export basket has been more moderate than Cambodia or Lao PDR.However,among the categories that have experienced significan
143、t growth over the extensive margin are chemical products in Viet Nam,as well as machinery components in the Mekong-3(see Table 1.1).The dynamics of these sectors highlight the growing capabilities of the manufacturing base in the Mekong-3,albeit from considerably different starting points.This expan
144、sion of opportunities for new traders in new markets generates expectations of demand for trade finance that requires adaptation,as it concerns clients active in markets with which the financial system may be less familiar.01,0002,0003,0004,0005,0002000021
145、4200021ExportsImportsCambodiaLao PDRViet Nam19CHAPTER 1:TRADE PROFILES OF THE MEKONG-3TABLE 1.1Top five HS2 sectors in the Mekong-3 as a share of new products exported,2012-2021Source:IFCWTO calculations based on World Bank WITS.Difference (2012-2013 vs 2020-2021)Share of total
146、 difference(%)Harmonized System 2Cambodia6612.5Machinery and mechanical appliances;nuclear reactors,boilers366.7Electrical machinery and equipment and parts thereof356.5Optical,photographic,cinematographic,medical instruments 244.4Plastics and articles thereof203.8Iron or steel articlesLao PDR2510.1
147、Machinery and mechanical appliances;nuclear reactors,boilers249.5Plastics and articles thereof156.0Electrical machinery and equipment and parts thereof135.2Paper and paperboard124.6Iron or steel articlesViet Nam4818.2Organic chemicals2710.1Inorganic chemicals135.0Machinery and mechanical appliances;
148、nuclear reactors,boilers114.2Chemical products n.e.c.114.0Meat and edible meat offalThe Mekong-3 are expanding their access to new export marketsCambodia and Viet Nam have made remarkable strides in expanding their reach of export markets,achieving significantly higher export penetration.Exporters i
149、n Viet Nam in particular have achieved a level of market access on par with their counterparts in Malaysia and Thailand(see Figure 1.6).The Lao PDR has also managed to increase its export penetration albeit from a modest base.While the number of exported products from Viet Nam has not experienced a
150、substantial growth,exporters have succeeded in diversifying their market reach.This trend suggests that the surplus capacity built in Viet Nam from global trade reconfiguration has led to an expansion of trade beyond the routes from China to the United States.A striking example of this development i
151、s evident in the export of broadcast equipment,a dominant category in Viet Nams exports to the United States:exporters in this sector found their way to 113 global markets in 2010,expanding to 130 markets by 2021 a 15 per cent increase in market access.20TRADE FINANCE IN THE MEKONG REGIONSource:Worl
152、d Bank WITS.The index follows Brenton and Newfarmer(2007)by comparing for each exported product,the number of countries to which the country exports that product relative to the total number of countries which import that product,and then sums across all products exported.The ratio yields the Index
153、of Export Market Penetration(IEMP),which measures the extent to which a country is exploiting the market opportunities from the existing set of export products.FIGURE 1.6Index of Export Market Penetration,2011 and 2021Trade of goods at different stages of processingGoods at different stage of proces
154、sing vary systematically both in the utilization of trade finance instruments they require and in the demand itself for coverage(see Box 1.2 for a description of trade finance instruments).An analysis of letters of credit usage,independently of transaction timing or destination,reveals that capital
155、and intermediate goods are more often covered by this type of finance instrument when they cross borders,compared to consumer goods or raw materials(see IFC/WTO,2022,based on Crozet et al.,2022).While variations exist across categories,this pattern suggests that overall dependence on bank-intermedia
156、ted trade finance is,to an important extent,associated with the structure of trade and its dynamics.The Mekong-3 rely significantly on the import of intermediate goods,which utilize letters of credit more intensively.Imports into Cambodia and Viet Nam largely comprise intermediate goods,surpassing g
157、lobal and regional average shares (see Table 1.2,Share of total imports).Viet Nam,in particular,imports intermediate and capital goods in proportions comparable to more advanced economies in the region,such as Malaysia and Thailand.The Mekong-3 rely significantly on the import of intermediate goods.
158、20112021CambodiaLao PDRViet NamMalaysiaPhilippinesSri LankaThailand4.35.81.51.78.711.712.512.66.56.85.96.322.821.021CHAPTER 1:TRADE PROFILES OF THE MEKONG-3TABLE 1.2Share of trade in the Mekong-3 by stage of processing,2020-2022(including comparator economies and the world)(in per cent)Source:World
159、Bank WITS(mirror data).Share of total importsPrimaryConsumerIntermediateCapitalOtherCambodia9166492Lao PDR111945223Viet Nam91560141Malaysia161752141Philippines82551142Sri Lanka131557141Thailand131458151East Asia&Pacific191845153World142144155Share of total exportsPrimaryConsumerIntermediateCapitalOt
160、herCambodia6831010Lao PDR34194700Viet Nam54537130Malaysia191255140Philippines151446250Sri Lanka5672530Thailand72542233East Asia&Pacific102146203WorldTRADE FINANCE IN THE MEKONG REGIONBOX 1.2Trade finance instrumentsTrade finance instruments can be broadly categorized as the following:inst
161、ruments that enable cross-border payments;instruments that guarantee payments over time;credit that enables production;mixed instruments with more than one of the above objectives.In the absence of any intermediation,payments for goods that cross borders are made in advance of shipment,with the full
162、 risk of default borne by the importer.These cash-in-advance payments therefore represent the highest risk benchmark for any service provided by banks in this type of intermediation.Payment methodsIn order from least secure to most secure for the importer,payment methods include the following:1.Cash
163、-in-advance payments require the importer to pay for goods well in advance of receiving them sometimes by as much as a year.This provides the exporter with payment certainty but leaves significant delivery risk for the importer.2.Letters of credit are the most widely used instrument within the categ
164、ory of documentary trade finance.In its simplest form,a letter of credit is a written commitment to pay and is typically issued by a bank on behalf of the buyer(importer)to the seller(exporter)or its bank.Letters of credit carry a number of obligations to the buyer(delivery conditions,submission of
165、documentation)and the seller(notably the guarantee that if the buyer is unable to pay,the bank will cover the outstanding amount).3.Documentary collections refer to the handling of documents by banks according to instructions received,typically by an exporter or their bank,in order to obtain either
166、direct payment or acceptance of deferred payment.This differs to a letter of credit in that the bank faces no liability in the case of payment default or non-conformity of final goods.4.Open account payments usually indicate payments that occur following shipment or receipt of goods.While cash-in-ad
167、vance payments provide full certainty to the exporter,open account payments provide certainty to the importer against any risk.Similar to cash in advance,these payment arrangements are not bank intermediated.Payment guaranteesIn addition to payments,there are a number of trade finance instruments th
168、at guarantee future payments to the seller/exporter or the delivery of goods or services.Payment guarantees and stand-by letters of credit are bank guarantees to pay the exporter on delivery of the goods.Bid bonds and performance bonds also fall into this category and help the recipient to mitigate
169、counterparty risk in the delivery of goods or services.Capital loansTrade finance also includes instruments to enable production for an overseas destination in the form of capital loans,such as:(i)pre-export finance,which finances expenditures before export deliveries take place;(ii)post-shipment/im
170、port finance to enable the importer to pay the exporter at a subsequent stage once the goods have been sold;and(iii)working capital loans,which are more flexible ways to pre-finance imports and exports.Supply chain finance Purpose-defined categories such as supply chain finance(SCF)refer to the open
171、 account payments discussed above combined potentially with risk mitigation practices to optimize the management of working capital and liquidity invested in supply chain processes.SCF can refer,for example,to supplier finance or reverse factoring.These are financing solutions in which suppliers can
172、 receive early payment on their invoices.23CHAPTER 1:TRADE PROFILES OF THE MEKONG-3Reverse factoring refers to an arrangement whereby the supplier receives early payment based on the credit rating of the buyer.The term SCF can also be used generically to describe a broader range of supplier financin
173、g arrangements,including solutions such as dynamic discounting,in which the buyer enables suppliers to access early payment on invoices in exchange for an early payment discount.The Lao PDR imports a higher share of all other categories consumer,capital and primary goods which is likely a reflection
174、 of its stage of economic development.With regard to intermediate goods,the Lao PDR mirrors the import patterns of its neighbouring countries.Similarly,the composition of exports from the Mekong-3 reflects the level of development of the three countries(see Table 1.2).Exports from Viet Nam encompass
175、 a wide range of products,including intermediate and consumer goods,showcasing the countrys growing industrial capabilities.Cambodia primarily exports consumer goods(over 80 per cent of total export value),while the Lao PDR focuses heavily on exporting primary products(34 per cent of the total)and e
176、nergy to China.Both economies lag behind in exports of intermediate and capital goods combined compared to more advanced economies in the region,such as Malaysia,the Philippines and Thailand.This dynamic,however,has been changing.In 2020,there was a slight shift in Cambodia,with a marginal increase
177、in intermediate goods exports.Exports of intermediate goods from the Lao PDR steadily increased from 30 per cent of total exports in 2012 to more than 50 per cent in 2021.An entrepreneur visiting a bank in Vientiane,Lao PDR.24TRADE FINANCE IN THE MEKONG REGIONCompetitiveness and trade costsTrade fin
178、ance and competitiveness in international markets are inherently intertwined.In a mutually reinforcing cycle,an economys competitive edge in international markets reflects its capacity to sustain and expand trade flows,which in turn impact the demand for trade finance.Moreover,a strong trade positio
179、n enhances exporters returns and creditworthiness,facilitating access to favourable terms for trade finance.Exporters in the Mekong-3 have improved their export performance,despite adverse conditions.They have significantly enhanced their global presence throughout the last decade outperforming coun
180、terpart economies in the broader East Asia and Pacific.Analysis based on the World Bank Measuring Export Competitiveness(MEC)Database,1 updated through 2021,shows that the expanded global footprint of Mekong-3 exporters is not primarily driven by an upsurge in global demand for the products they spe
181、cialize in,nor is it driven by stronger demand across the board in their primary export destinations(see the sectoral and geographical effects,respectively,in Figure 1.7).Rather,this expansion can be attributed to residual performance associated with distinctive developments within each of the three
182、 countries broadly captured as“performance”or“competitiveness effect”.This residual performance includes possible excess capacity from trade diversion:that is,the shift of production away from China;high-value exports along these trade routes;as well as improvements in the productivity of local expo
183、rters (see ILO,2022).2 Although trade diversion effects can be short-lived,improvements in productivity underpin a more resilient export growth trajectory for Cambodia and Viet Nam.Local producers progressively develop both the capacity and capabilities to compete internationally,should future geopo
184、litical alignments favour different locations.Exporters in the Mekong-3 notably secured disproportionately larger shares of the Chinese market in product categories experiencing a simultaneous surge in demand and prices (see Table I.1 in Annex I for more details).Exporters in the Lao PDR experienced
185、 the same in the rest of East Asia and Pacific,resulting in a largely positive geographical effect on their export competitiveness.Conversely,Mekong-3 exporters to Japan faced the opposite trends relative to average growth of demand and prices.With regard to specific sectors,electronics exporters in
186、 Viet Nam expanded their footprint in products which had concurrent above-average growth in volume,despite below-average growth in prices for the products exported(see Table I.2 in Annex I for more details).It is noteworthy that,at the onset of the COVID-19 pandemic,both the price and volume effects
187、 were positive for Viet Nams exports in this sector that is,price conditions were favourable for the products in which Viet Nam had been specializing.Garment exporters in Cambodia managed to expand their footprint in products experiencing a below-average increase in both global demand and global pri
188、ces.Collectively,the specialization and scale effect in these garment segments outweighed the adverse conditions.Trade costs in the Mekong-3Trade involves various costs arising from transportation,regulatory adherence,currency conversion and trade-related levies such as import tariffs.As an economys
189、 infrastructure strengthens and trade agreements are established,many of these associated costs will tend to diminish.WTO statistics reveal that global trade costs fell by approximately 15 per cent between 2000 and 2018(WTO,2021).In the Mekong-3,however,progress has been less pronounced,with dispari
190、ties in improvements across countries.In Cambodia,there were substantial reductions of 13-22 per cent in both import and export costs to its top ten partner economies between 2008 and 2018.In Viet Nam,however,trade costs fell only for exports,with costs for imports marginally increasing.Over the sam
191、e period,the average trade costs in the Lao PDR for exports to its top ten partners rose sharply by more than 35 per cent,and import costs were 15 per cent higher than in 2012 both of which,moreover,from an already high initial base(see Figure 1.8).Importing costs from the region generally followed
192、an upward trend during the first half of the last decade but subsequently improved in the latter half.Trade costs with China the major import partner of the Mekong-3 on both sides have followed a similar trajectory over the last decade.25CHAPTER 1:TRADE PROFILES OF THE MEKONG-3Source:World Bank MEC
193、Database.The numbers reported in the tables are log first differences.They represent an approximation of the percentage change in the variable of interest.Strictly speaking,the percentage change in a variable at period is defined as,which is approximately equal to.The approximation is almost exact i
194、f the percentage change is small.FIGURE 1.7Decomposition of change in export market share(trade values),period averages 2010-2021It is important to recognize that higher trade costs not only impose direct constraints on trade but can also impede access to trade finance.When trade becomes less lucrat
195、ive and profit margins are squeezed,extending trade finance services to importers and exporters becomes riskier for financial institutions.-3-2-1011Competitiveness effect(push)Geographical effect(pull)Sectoral effect(pull)Change in export market shareLog first differences(delta log)Cambod
196、iaLao PDRViet NamBrunei DarussalamThailandIndonesiaMalaysiaMyanmarPhilippinesSingaporeTrade costs are falling slowly in Cambodia and Viet Nam,while increasing in the Lao PDR.26TRADE FINANCE IN THE MEKONG REGIONSource:IFCWTO calculations based on the WTO Trade Cost Database.The index of global trade
197、costs can be interpreted as how many times higher international trade costs are compared to domestic trade costs(WTO,2021).For example,a value of 2 means that international costs are double the domestic trade costs(ad valorem equivalent of 200 per cent).The box plots display a three-number summary o
198、f the trade cost distribution across the Mekong-3 and their top partners(top ten origin countries for imports,top ten destinations for exports).The bottom of each box represents the first quartile,the horizontal line the median,and the top of the box the third quartile of trade costs in each year.FI
199、GURE 1.8WTO Trade Cost Index in the Mekong-3,0WTO Trade Cost Index0510152008 2012 2015 20182008 2012 2015 20182008 2012 2015 2018WTO Trade Cost IndexCambodiaLao PDRViet NamExportsImports2008 2012 2015 20182008 2012 2015 20182008 2012 2015 2018CambodiaLao PDRViet Nam27CHAPTER 1:TRADE P
200、ROFILES OF THE MEKONG-3Participation in global value chainsSeizing trade opportunities in GVCs through expansion into new products and services requires deeper and more diverse trade finance instruments.Over time,the Mekong-3 have experienced greater GVC integration both in terms of backward partici
201、pation(i.e.the share of imported intermediates in exports)and forward participation(i.e.the share of intermediate exports from the Mekong-3 in third countries exports)(see Box 1.3 for definitions).Leading the way in the East Asia and Pacific region,Cambodia and Viet Nam have demonstrated remarkable
202、growth in their participation levels(see Figure 1.9).Two sectors account for the majority of this development.Since the late 2000s,when Viet Nam made a pivotal entry into GVCs,the country has been recognized as a second-tier global supplier for computer,communication and consumer products.Yet despit
203、e its prominent position,Viet Nams role within electronic GVCs has primarily involved a transition from being a mere integrator of components to engaging in midstream activities that still generate relatively lower value(OECD,2021).These midstream activities encompass subassemblies such as displays
204、and special parts,as well as finished products such as consumer electronics,communications and computers.An essential aspect of Viet Nams electronic industry involves significant imports of components and subassemblies,which accounted for about 65 per cent of imports in 2019.Cambodias garment manufa
205、cturing sector has experienced a flourishing trajectory.A distinctive feature of this sector is the prevalence of cutmaketrim firms,which rely heavily on imported materials for their production processes and often operate along narrow profit margins.This unique model has contributed to the sectors g
206、rowth and impact on the broader economy.Foreign investment drives trade growth in Cambodia and Viet NamThe landscape of Viet Nams trade is prominently shaped by the activities of multinational enterprises,which contributed to roughly 70 per cent of the merchandise imports and exports in 2021(see Fig
207、ure 1.10).3 Large and mega firms(conventionally defined as those employing over 5,000 employees)contributed more than 80 per cent of goods exports from the country.These shares are significant in terms of trade finance,as subsidiaries of multinational enterprises and large conglomerates tend to rely
208、 to a greater extent on intra-firm financial solutions and syndicated arrangements with international banks(Nguyen and Almodvar,2018).4 New evidence from the 2023 IFC survey of traders in the Mekong-3 lends support to the key take-away that foreign affiliates rely significantly less on local bank-in
209、termediated trade finance than domestic firms or firms of smaller sizes (see Chapter 2).A closer examination of the electronics sector in 2021 reveals that multinational firms accounted for nearly all of the imports and exports of these goods domestic firms accounted for 0.5 per cent of imports and
210、1.6 per cent of exports(see Figure 1.11).Most shipments to Viet Nam(62 per cent)and over 50 per cent of exports were undertaken by businesses with more than 5,000 employees so-called mega-firms.A similar structure can be found in Viet Nams garment sector;although a more considerable share of domesti
211、c firms engage in trade and there is a greater presence of large rather than mega firms.Small and medium-sized enterprises(SMEs)are concentrated in other exports(39 per cent)and imports (23 per cent).Combined,these observations help to explain the two-speed trajectories of trade growth in Viet Nam w
212、here large multinational conglomerates outpace smaller,albeit growing,domestic sectors.The prospects of local bank-intermediated trade finance in the region will likely depend on further integration of local firms into GVCs a process that has been gaining traction.Tier 1 and 2 suppliers in Viet Nam
213、to Samsung,a manufacturer based in the Republic of Korea,witnessed a ten-fold increase from 2014 to 2022,from 25 local companies to 257.5 Furthermore,Samsung has partnered with 400 Vietnamese firms to improve product quality in this supply chain generating US$72 billion in local revenue.The situatio
214、n in Cambodia is similar,although access to firm-level information is more challenging.The garment industry relies heavily on foreign capital,with approximately 90 per cent of garment enterprises under foreign ownership,primarily from:China;Hong Kong,China;the Republic of Korea;and Chinese Taipei(Ca
215、labrese and Balchin,2022).The advantage of these foreign entities lies in their access to capital,expertise,well-established networks and a skilled labour force resources that are not as readily accessible to their domestic Cambodian counterparts.The growth of both Cambodias textile exports and Viet
216、 Nams electronic industry is primarily driven by foreign investors.28TRADE FINANCE IN THE MEKONG REGIONEconomies participate in global value chains(GVCs)by importing foreign inputs to produce the goods and services they export and also by exporting domestically produced inputs to partner economies i
217、n charge of further production stages.Forward GVC participationForward GVC participation is the share of domestic value-added content of exports to an economys total gross exports.This is the supply side in GVCs,where an economy exports intermediate goods to third economies for further processing.Ba
218、ckward GVC participationBackward GVC participation is the share of foreign value-added content of exports to an economys total gross exports.This is the sourcing side in GVCs,where an economy imports intermediates to produce its exports.Source:See https:/www.wto.org/english/res_e/statis_e/miwi_e/exp
219、lanatory_notes_e.pdf.BOX 1.3Forward and backward participation in global value chainsA local footwear manufacturing plant,Cambodia.29CHAPTER 1:TRADE PROFILES OF THE MEKONG-3Source:World Bank WITS,GVC Trade Table.FIGURE 1.9Forward and backward GVC participation in the Mekong-3,2000 and 2021(in per ce
220、nt of trade)8.4%15.5%22.7%28.1%11.9%6.0%14.7%16.6%21.9%17.2%17.1%9.9%15.0%12.9%26.3%31.8%10.1%7.8%20.7%46.8%25.5%27.0%14.0%19.2%23.0%21.0%26.0%27.4%20002021CambodiaLao PDRViet NamMalaysiaPhilippinesSri LankaThailandForwardBackward20002020020200202TRADE FINANCE IN THE
221、 MEKONG REGIONFIGURE 1.10Viet Nam:Share of exports and imports by ownership,industry and firm size,2021(in per cent)Source:IFCWTO calculations based on 2021 Vietnam Enterprise Survey and Custom data from the General Statistics Office of Vietnam,excluding data from the services sector,except wholesal
222、e and retail.Foreign firms with at least 10 per cent foreign ownership;SME 1-100 employees;large 101-4,999 employees;mega 5,000+employees.Electronics includes ISIC Rev.4 divisions 26 and 27 and apparel includes divisions 13-15.DomesticForeignApparelElectronicsOtherLargeMegaSME020%40%60%80%100%Owners
223、hipIndustryFirm sizeExportsDomesticForeignApparelElectronicsOtherLargeMegaSME020%40%60%80%100%OwnershipIndustryFirm sizeImports31CHAPTER 1:TRADE PROFILES OF THE MEKONG-3FIGURE 1.11Viet Nam:Share of exports and imports in apparel and electronics industries by ownership and firm size,2021(in US$billio
224、n)Endnotes 1.See Gaulier et al.(2013)for more details on methodology and indicators of the shift-share analysis.2.The International Labour Organization(ILO,2022)notes that from 2010 to 2019,Viet Nam experienced the fastest growth in the average annual real minimum wage in Southeast Asia(11.3 per cen
225、t);exceeding the annual productivity growth over the same period by a factor of two.The ILO(2022)concludes that:“While this may signal lower competitiveness for low-cost manufacturing activities,Viet Nams average minimum wage is still lower than other competitor production countries in the region.It
226、 also reflects that labour productivity can be raised to match higher wages by increasing the value-added of production activity”.3.The Centre dtudes Prospectives et dInformations Internationales(CEPII)reports similar results for 2019(Fouquin and Caponnire,2020).4.The United States Census Bureaus Re
227、lated Party Trade database reveals that 31 per cent of the total US$101 billion goods imported into the United States from Viet Nam in 2021 were between related parties,with the electronics goods category representing the overwhelming majority (90 per cent,equivalent to US$28 billion).A share(possib
228、ly high)of these intra-company flows is likely to be financed by large global banks outside Viet Nam and not captured in this publication.5.See https:/.vn/vietnamese-suppliers-to-become-part-of-samsungs-global-value-chain-99735.html.Source:IFCWTO calculations based on the 2023 IFC firm-level survey
229、of trade finance.Foreign firms with at least 10 per cent foreign ownership;SME 1-100 employees;large 101-4,999 employees;mega 5,000+employees.Electronics includes ISIC Rev.4 divisions 26 and 27 and apparel includes divisions 13-15.020406080100120140ApparelElectronicsOtherUS$billionDomesticForeignLar
230、geMegaSMEExportsImports7.773.524.1126.067.254.821.960.475.68.365.810.4020406080100120140ApparelElectronicsOtherUS$billion15.241.646.9146.057.922.536.455.466.423.590.110.7Trade finance in the Mekong-3CHAPTER 2 Bank transactions during the COVID-19 pandemic in Cambodia.Local trade finance markets in t
231、he Mekong-3 were worth nearly US$152 billion in 2022.Vietnamese banks supported about 21 per cent of exports and imports with trade finance,a substantial contribution which represents 22 per cent of total banking assets in the country.The local banking sector in Cambodia supported a much smaller sha
232、re of the countrys import and export operations,some 3 per cent of total trade,accounting for only 2.5 per cent of banks total assets.Data collected for the Lao Peoples Democratic Republic(PDR)are rather weak,but a rough estimate suggests that local trade finance supports an even smaller share of tr
233、ade.In Cambodia and Viet Nam,the existence of alternative,foreign supply chain finance(SCF)arrangements provided by large multinational companies to their subsidiaries and tier 1 suppliers may explain the limited share of trade finance provided by local banks.The extent and nature of these arrangeme
234、nts is not captured by the data.Local banks have a limited role in supporting trade arising from the production of consumer electronics,textiles and clothing by foreign-owned firms.Greater involvement is found in locally owned sectors of wholesale and retail trade,agriculture and fishing,and interme
235、diary industrial products(metals,plastics).Local banks are also more likely to support intra-regional trade than global trade.Supply and demand constraints impact the availability of locally provided trade finance.On the supply side,60-80 per cent of banks surveyed identified disruptions to mobility
236、 and operations due to the COVID-19 pandemic as the main constraint.The banks also report the need for technical and financial assistance to create trade finance capacity for instruments that they do not provide.On the demand side,the high cost of finance,along with collateral requirements and unfam
237、iliarity with trade finance are highlighted by survey.Banks offer mostly traditional trade finance instruments such as letters of credit,guarantees and pre-export loans.Short-term working capital lines are often used as a substitute to trade finance,particularly in Cambodia,while SCF supplied by loc
238、al banks in Cambodia and Viet Nam accounts for only 2 per cent of available trade finance.Promisingly,a quarter of surveyed banks intend to introduce SCF in the next two years.Trade finance usage differs significantly across different types of firms.Large firms(at least 100 employees)are over 65 per
239、 cent more likely to use external trade finance than firms with 5-99 employees.Perhaps more counterintuitively,foreign-owned and high-tech manufacturing firms tend to use trade finance much less often:domestic companies are twice as likely to use trade finance than foreign-owned companies.Similarly,
240、the share of wholesalers and retail traders using trade finance is almost twice that of firms in high-tech manufacturing.Key findings34TRADE FINANCE IN THE MEKONG REGIONLocal trade finance marketsBased on the data collected from local banks,the current value of the local trade finance market is esti
241、mated to be US$1.6 billion in Cambodia and US$150 billion in Viet Nam(see Table 2.1).There is insufficient data to estimate the local trade finance market in the Lao PDR.However,rough calculations indicate it to be around US$0.5 billion less than a third of Cambodias market.1There is a significant d
242、ifference in magnitude among finance markets in the Mekong-3 Viet Nam accounts for 98 per cent of the total and the extent to which local financial sectors contribute to supporting trade flows.Local banks supported 21 per cent of trade flows in Viet Nam,3 per cent in Cambodia and possibly less in th
243、e Lao PDR(see Table 2.1).As described in Chapter 1,Viet Nams share of trade(exports plus imports)expanded to 185 per cent of GDP2 in 2022,which reflects its growing participation in global supply chains.The mobilization of domestic financial assets for trade facilitated the fast expansion of trade o
244、perations in Viet Nam.The estimated share of trade finance in the total banking assets of Viet Nam is about 22 per cent a large share by any international estimate.Although the local trade finance market in Viet Nam supports only one-fifth of total trade flows,the survey did not cover SCF arrangemen
245、ts provided by foreign banks to subsidiaries of foreign firms in Viet Nam producing goods for export.Only a global survey involving,for example,global banks and banks from China,Europe,the Republic of Korea and the United States could capture additional trade finance flows.This chapter uses new prim
246、ary data collected by the IFC through two surveys covering the supply side(banks)and the demand side(exporters and importers)of trade finance.The 2023 IFC survey of trade finance in the Mekong-3 covers the banks currently in operation in the region.The 2023 IFC firm-level survey of trade finance is
247、based on a nationally representative sample of firms engaged in international trade in Viet Nam.SCF programmes have recently been introduced by local banks.KPMG,a major consulting firm,estimates the potential of the SCF market in Viet Nam to be close to US$50 billion annually.However,only a minor pa
248、rt of such potential has yet been exploited.3 According to the survey,SCF supplied by local banks accounts for only 2 per cent of the total estimated trade finance.The local trade finance market in Cambodia is smaller both in absolute and relative terms(see Table 2.1).The estimated trade finance por
249、tfolio of banks was about US$1.6 billion,out of US$52 billion in trade flows in 2022.Cambodia shares a common characteristic with Viet Nam of having a high trade-to-GDP ratio,which exceeded 210 per cent in 2022.Support by the financial sector to the integration effort of Cambodia is therefore import
250、ant for the competitiveness of its traders in international markets.However,the survey confirms previous analysis(Kingdom of Cambodia,2018),according to which the 3 per cent share of trade supported by formal trade finance instruments was relatively small by international standards.These differences
251、 may result from a range of triggers,such as:underreporting in the survey owing to a narrow interpretation of trade finance by respondent banks;the existence of foreign financing flows sourced outside Cambodia;intra-company financing from abroad;the existence of temporary imports where garment facto
252、ries are directly provided with inputs for local processing before re-exporting to the country of origin.Bank-intermediated trade finance as share of total bank assets2.5%Cambodia22%Viet NamSource:IFCWTO staff calculations based on the 2023 IFC survey of trade finance in the Mekong-3.Local trade fin
253、ance markets in the Mekong-3 are worth nearly US$152 billion.35CHAPTER 2:TRADE FINANCE IN THE MEKONG-3TABLE 2.1Bank-intermediated trade finance in the Mekong-3Source:IFCWTO calculations based on the 2023 IFC survey of trade finance in the Mekong-3(see Box 2.1).*The estimated size of bank-intermediat
254、ed trade finance in the Lao PDR is based on data received from three banks providing this information.Total bank assets for the Lao PDR refer to the 2021 due to unavailable estimates for 2022.TotalCambodiaLao PDRViet NamNo.of banks surveyed143613943No.of respondent banks6133820Respondent banks share
255、 of total banking assets75%81%61%74%Share of respondent banks involved in trade finance87%82%88%95%Total merchandise trade(US$billion)7985215731Size of bank-intermediated trade finance(US$billion)1521.60.5*150Average share of bank-intermediated trade finance19%3%1 in the above regression.For ease of
256、 interpretation and analysis,the preferred test for the power law is a one-sided t-test for 0 in the regression:The preferred specification chosen for the proportional relationship is a straightforward no-intercept regression of the banks total assets on its trade financing:where is the value of tra
257、de finance assets of bank in country and is the error term.For both the power law and the proportional relationships,the models are estimated separately for each country to allow for distinct market conditions across the region.The analysis and estimates from this exercise are then used to predict t
258、he trade finance lending for non-reporting banks as a function of their total asset holdings.This enables the total trade finance coverage in the country to be estimated.The results indicate that while data on banks in Cambodia sufficiently point towards the existence of a power law in trade financi
259、ng,banks in Viet Nam fail to exhibit a clear-cut relationship in this direction.Eventually,the rejection of the power law in the framework(=1)collapses the model back to the proportional relationship.Hence,the prediction of trade finance coverage does not differ appreciably for Viet Nam whether the
260、power law relationship with 1 is used or a proportional relationship.Once the coefficients are estimated using the proportional methodology,the trade finance assets of banks that were not in the survey results can be estimated given their known total assets(e.g.from each banks annual report)and the
261、estimated coefficients.Finally,the observed and estimated trade finance assets of all banks in a country are combined to estimate the total value of trade finance in that country.73ANNEX III.COUNTERFACTUAL ANALYSISCounterfactual analysisANNEX IIIThe bank survey contains information on the costs of t
262、rade finance,the share of trade covered by trade finance and the trade finance gap.This information is used to generate projections of the trade effects of changes in the price and availability of trade finance.The WTO Global Trade Model(GTM),a computable general equilibrium model,is used to simulat
263、e the effects of changes in trade costs because of changes in the price and availability of trade finance.This annex describes the economic model employed,explores how the trade costs of financing international trade are modelled and outlines how trade finance shares and the costs of the trade finan
264、ce instruments are calibrated in the baseline and counterfactuals.Economic modelThe GTM is a quantitative trade model describing the economic interactions between regions.It is designed to provide in-depth insights into the specific impacts of trade policy measures at both the sectoral and national
265、levels.The model accounts for international upstream and downstream linkages between sectors through intermediate production and trade.The GTM model incorporates three distinct types of final demand:private household expenditure;government spending;and investment.The income of a representative house
266、hold in each country is allocated to private household expenditure,government expenditure and savings.Assuming a fixed trade-balance-to-GDP ratio,investment follows savings.The allocation of private household expenditure across sectors adheres to non-homothetic preferences,where the budget shares of
267、 certain sectors(primarily essential goods like food and basic manufacturing)decrease as countries become more prosperous.Conversely,the budget shares of other sectors(especially services)increase.Firms produce with production factors and intermediate inputs,reflecting the presence of intermediate l
268、inkages.There are five primary production factors:high-skilled labour;low-skilled labour;and capital,land and natural resources.High-skilled and low-skilled labour,along with capital,are mobile;natural resources are specific to each sector;and land has limited mobility.The model incorporates various
269、 taxes,including income taxes,endowment taxes,import tariffs and export subsidies.The baseline is calibrated to data from the Global Trade Analysis Project(GTAP)Data Base,Version 11 for 2017,projected forward to 2022 using standard techniques described for example in Four et al.(2017);that is,imposi
270、ng population and labour force growth and targeting GDP per capita growth endogenizing productivity growth.A technical description of the model focusing on the code is available in Aguiar(2019),whereas a description of the model outlining the economic structure into detail is available in Bekkers et
271、 al.(2018).Trade is handled through Armington preferences displaying love of variety by country of origin.The expression for the(physical)quantity()traded is relevant for the modelling of trade finance from source to destination in sector,following a standard Armington formulation:where:is iceberg t
272、rade costs;is the export tax rate(in power terms);is the import tax(in power terms);is the costs of transportation(in power terms);(1)74TRADE FINANCE IN THE MEKONG REGION is the export price in source;is the import price in destination;is the quantity imported in destination;is the substitution elas
273、ticity between imports from different sources.The costs of trade finance will be incorporated in the import tax,export tax and iceberg trade costs as outlined below.Trade costs of financing international tradeThe costs of international trade are an important determinant of trade flows and comprise a
274、 range of transaction costs incurred in trading goods and services internationally of which the costs of financing international trade are an important component.These financing costs consist of two main components which are intertwined.First,costs associated with the transaction risk that the count
275、erparty will not pay or will not deliver the goods.Second,the financial costs relating to the cost of using an instrument mitigating such risks,consisting both of fees to cover risk and capital costs,and to bridge the time when goods are in transit.The total costs of financing international trade tr
276、ansactions are determined by the instruments employed.The analysis distinguishes between four modes of payment or financing employed,each differing in cost and transaction risk:cash in advance(cia);export or import loans(loa);exports financed with internal working capital(int_wc);letters of credit(l
277、c).To keep the model tractable,the costs of trade finance are included as a component of trade costs.To do so,both the financial costs and the costs associated with the transaction risk of each of the instruments are expressed as an ad valorem share of the value of trade.The total trade costs associ
278、ated with the financing of international trade are then expressed as a value-weighted average of both types of cost over each of the instruments.The two types of cost of each of the instruments and the baseline shares are based on the questionnaire(for the surveyed countries),data from international
279、 institutions and data available in the academic literature,as further detailed below.The financial costs paid by importers and exporters are modelled as import and export taxes,respectively.This is a good approximation of a more detailed model incorporating an explicit banking sector to which tradi
280、ng firms would pay the financial costs given that the model features a consolidated representative household collecting both factor income and tax income.The reason is that changes in the costs of trade finance can be seen as changes in profit margins of the banking sector.Hence,the financial costs
281、can be seen as a rent/profit collected by the banking sector and thus as an import/export tax collected by the representative household.The costs associated with the transaction risk are modelled partially as an import/export tax and partially as an iceberg trade cost.The share of goods lost in trad
282、e calculated based on default rates is modelled as an import tax for the importer or an export tax for the exporter.Hence,the goods lost in transactions are modelled as a tax paid by one party to the other(e.g.the importer paying a tax to the representative household).Furthermore,the costs associate
283、d with risk aversion are modelled as a resource loss for agents involved in international trade in the form of an iceberg trade cost.Limitations of the frameworkAnnex III first describes the calibration of the costs of each of the instruments and then the shares of the different trade finance instru
284、ments.Before turning to the details of the calibration three remarks are in order about the potential limitations of the framework employed,First,in the counterfactual experiments the shares of trade finance instruments and their costs are changed exogenously.Obviously,both these shares and costs ar
285、e endogenous in the real world and driven by a variety of factors.However,modelling these shares and costs endogenously is beyond the scope of this publication and would require extending the trade-oriented model with a full-blown financial sector.Such an exercise 75ANNEX III.COUNTERFACTUAL ANALYSIS
286、would be more complicated than most analyses of trade finance in the literature,given the comprehensive nature of the study,including most trade finance instruments.Second,in the framework the financial costs associated with different instruments to finance international trade transactions vary,base
287、d on data collected in the survey and other data on lending rates.Accordingly,there is no perfect arbitrage between the different instruments equalizing financing costs.This reflects that there are differences in the degree of risk driven by among others,differences in borrowing constraints relating
288、 to the extent to which collateral is available and to which payments are guaranteed by third parties(i.e.a bank in case of letters of credit).Third,supply chain finance(SCF)/factoring is not included in the analysis as one of the trade finance instruments.The survey indicates that the share of this
289、 type of trade finance provided by domestic financial institutions in Cambodia and Viet Nam is marginal.Furthermore,SCF is similar in structure to loans provided to the exporter(risk is not transferred to the bank and the exporter accepts a discount which from a cost perspective is similar to intere
290、st paid on loans).Hence,introducing SCF,either in the baseline in the form of SCF provided by foreign banks or in the counterfactuals in the form of an expanding trade finance coverage manifesting itself in the form of more SCF,would have a marginal impact on the effect of counterfactuals.Hence,the
291、listed limitations do not invalidate the analysis conducted.The necessary data are lacking for a more detailed analysis.Going into further detail would be mainly useful for a more detailed analysis of the policy interventions possible both to raise the coverage of trade finance and to reduce their c
292、osts.The current analysis instead takes these costs as given.Costs of trade financeThe two types of cost(cost of funds,costs associated with risk)are now described for each of the four ways to finance international trade.The starting point,however,is with an exposition of the way the costs associate
293、d with risk are modelled.Integrating risk aversion in the modelIf traders are risk averse,the costs associated with risks of the transaction tend to be larger than the share of goods not arriving in the destination.Hence,the costs associated with risk can be expressed as a function of the probabilit
294、y that goods do not arrive,or importers do not pay for goods shipped.A transaction has a good outcome of 1 with probability 1-.The transaction has a bad outcome of 0(meaning for an importer that the product is not received after paying for the goods,or the payment never occurs after an exporter ship
295、ped the goods)with a probability.The costs associated with the risk is equal to the utility loss because of the risk.This loss is equal to the good outcome of 1 minus the certainty equivalent,which is defined as the certain value for which the agent is indifferent between engaging in the transaction
296、 or accepting this lower certain value.To calculate the costs associated with risk,a constant relative risk aversion(CRRA)utility function is assumed for agents involved in international trade with,the CRRA parameter:The certainty equivalent of the transaction,can be calculated as follows,with the p
297、robability of a bad outcome(goods not arriving):Hence,the certainty equivalent is given by:(2)(3)(4)(5)(6)76TRADE FINANCE IN THE MEKONG REGIONHaving obtained the certainty equivalents(the certain value for which the agent is indifferent between engaging in the transaction or accepting this lower cer
298、tain value),the costs associated with risk aversion,can be calculated as the difference between the expected value shipped and the certainty equivalent:The total costs associated with risk,can be written as the sum of the costs of risk;that is,the probability that goods are lost,and the costs associ
299、ated with risk aversion,:As discussed above,the costs of risk(the probability that goods are lost or payments are not made)are modelled as an import tax for the importer and as an export tax for the exporter;whereas the costs associated with risk aversion are modelled as a resource loss for agents i
300、nvolved in international trade in the form of an iceberg trade cost.As shown in Conine et al.(2017),the formulation of risk aversion with a parameter has been largely used in the financial and macroeconomic literature,with a large interval of values.Studies focusing on risky assets markets have priv
301、ileged estimates of the above 3.Azar(2006)finds calibrated s between 4.2 and 5.4 in a study mimicking the US stock market.A large literature focusing on labour supply chose instead values of below 1,such as Chetty(2006)choosing a coefficient of 0.7.Employing this value for real economy applications
302、instead of financial markets generates intuitive values for the costs associated with risk in the model.Cash in advanceUnder this payment option,the importer pre-finances the exporters cash needs,while incurring the risk that goods would not be delivered.Therefore,the importer bears both a transacti
303、on risk and a financial cost linked to using own funds to make the payment.Under cash in advance(),exporters do not incur financial costs or costs associated with risk since they would ship the goods only upon receipt of the payment.The costs of using cash in advance()in sector from source(exporter)
304、to destination(importer)thus consists of the costs of financing the transaction by the importer,the cost of risk in the destination,the costs of risk aversion in the destination,.The latter two can be written as the probability that goods are not delivered,:Import and export loansImport and export l
305、oans are trade finance instruments which can be used to address the liquidity needs for both importers and exporters until they have to pay or they get paid.The financial cost of loans are the interest rates on them.With a pre-export shipment loan,the exporter also incurs the risk of not being paid
306、this risk is not mitigated by the loan itself.The import loan does not mitigate or alleviate the risk of not receiving the merchandise(only a letter of credit would do that),so the importer similarly bears the risk of not receiving the goods.Hence,the costs of an import loan(export loan)consist of t
307、he costs of financing of an import loan,the costs of risk,and the costs of risk aversion,which can be expressed as the probability that goods are not delivered:(7)(8)(9)(10)(11)(12)77ANNEX III.COUNTERFACTUAL ANALYSISExports financed with internal working capitalIn the absence of the availability of
308、a pre-shipment export loan,an exporter can also decide or be constrained to finance the process of production for the purpose of exporting.Upon order,the exporter would typically receive a small advance from the buyer.In this case,the whole production and shipment cycle would have to be financed,inc
309、luding inputs purchase,salaries,machinery,packaging and shipping,before receiving its export receipt.By doing so,the exporter incurs the opportunity cost of using capital to produce the goods,and the transaction risk of sending the goods before the payment.Hence,the costs of exports financed with in
310、ternal working capital consist of the costs of financing internal working capital,the costs of risk,and the costs of risk aversion,with the latter two being a function of the probability that goods are sent and no payment is received,:Letters of credit and other documentary creditFinally,letters of
311、credit are a payment guarantee in case of importers default.An issuing bank commits to pay for the transaction if the importer is unable to pay.A confirming bank in the exporters region could also bear the final payment risk if the issuing bank cannot pay either.To open a letter of credit,the import
312、er incurs an opening fee to the issuing bank,and the exporter pays a confirmation fee to the confirming bank.Only if the exporting region is considered riskier than the importing region is a confirming bank required.While being a guarantee of future payment after delivery,the letter of credit does n
313、ot provide the exporter the required liquidity to produce and ship the goods in other words,it is not a substitute for a pre-shipment loan.Under a letter of credit,the exporter would continue to face an opportunity cost if using its own funds for this purpose.However,there is no cost associated with
314、 the transaction risk under a letter of credit.Instead,opening and confirming fees are paid by the importer and the exporter,respectively.Hence,the total trade finance costs of using a letter of credit consist of the costs of financing in the source country,consisting of the capital costs for sendin
315、g the goods before payment is received,the letter of credit opening fee,and the letter of credit confirmation fee,if the destination country is considered riskier than the source country.For an importer,letter of credit costs include the letter of credit opening fee,since the costs of financing the
316、transaction are borne by the exporter.Writing trade costs as a function of the costs of trade financeEmploying data on the shares of the four ways to finance international trade,the import tax,export tax and iceberg trade costs associated with the costs of financing international trade from source t
317、o destination in sector can be written as follows:with as a dummy for the relative riskiness of source and destination equal to 1 if destination is riskier than source.The shares of the different instruments vary by sector as further detailed below.Due to a lack of survey data,the costs of the diffe
318、rent instruments do not display sectoral variation.(13)(14)(15)(16)(17)78TRADE FINANCE IN THE MEKONG REGIONCalibration of costsSince there are four ways to finance international trade and two types of cost for each trade(the costs of funds and the costs associated with risk)four sets of two types of
319、 trade cost have to be calibrated.Costs associated with riskTo calculate the costs associated with risk,data are required on the share of non-delivery or non-payment,ND,for the different trade finance instruments.To do so,data from various sources on the probability of default on loans are employed
320、as a proxy.For cash in advance and internal working capital for exports,ND is based on the share of bank non-performing loans to total gross loans from the International Monetary Fund(IMF).1 For import and export loans,ND is based on the International Chamber of Commerce(ICC)Obligor-weighted export
321、and import loan default rates(ICC,2020b).Financial costsData on the costs of finance,come from the survey for surveyed countries and from data provided by international organizations and available in the academic literature.The two groups of countries are discussed separately.(1)Surveyed countries:(
322、a)The costs of financing for export and import loans,and,are based on survey answers calculated as a trade finance portfolio weighted average of the costs of funds across different banks.(b)The costs of financing for cash in advance and exports with internal working capital,and,are for the surveyed
323、countries assumed to be equal to the cost of trade loans multiplied by a factor of two.This assumption is motivated by the fact that the survey answers combined with other data indicate that the interest rates for microfinance are at least twice as large as for trade loans.More specifically,the trad
324、e loan costs of financing for Cambodia are between 5.25 and 5.75 per cent,whereas Cambodia established a cap of 18 per cent on interest rates in 2017.In 2016,the average lending rate of banks was 12 per cent in US dollars and 21 per cent in Cambodian riels and much higher for microfinance institutio
325、ns(Heng et al.,2021).Hence,the ratio of 2 seems on the conservative side.For Viet Nam,the largest microfinance institutions charged annual interest rates in 2020 between 8.75 and 16 per cent(Capital Aid for the Employment of the Poor Microfinance Institution)and 7.6 percent and 17.75 percent(Tao Yu
326、My Tinh Thuong One-Member Limited Liability Microfinance Institution),whereas the trade loans costs of financing according to the survey are 6.5-6.75 per cent(Bevacqua et al.,2021).In light of these numbers,a ratio of 2 is appropriate.(c)The letter of credit opening and confirmation fees,and,are bas
327、ed on survey answers for Cambodia and Viet Nam.(d)The cost of funds for using letters of credit for an exporter,are calculated by multiplying the costs of financing for cash in advance()and internal working capital(int_wc)for each region by the ratio of the risk on export/import letters of credit me
328、asured by the average default rate on export and import letters of credit from the ICC(2020b)and the average default rate on cash in advance and internal working capital measured as the share of bank non-performing loans also employed above,:Therefore,the cost of funds for letters of credit is lower
329、 than for cash in advance and internal working capital,reflecting the fact that letters of credit are less risky.(18)79ANNEX III.COUNTERFACTUAL ANALYSIS(2)Non-surveyed countries:(a)The letter of credit opening and confirmation fees,and are based on average fees in members of the Organisation for Eco
330、nomic Co-operation and Development.(b)The costs of financing for cash in advance and internal working capital,and,are based on lending rates from the IMF.2(c)To obtain the costs of financing of import and export loans,and,the costs of financing for cash in advance/internal working capital based on l
331、ending rates from the IMF are scaled down by a factor of two reflecting that interest rates for microfinance are approximately twice as large as for trade loans as discussed for the surveyed countries.(d)The cost of funds for using letters of credit for an exporter,are calculated in the same way as
332、for surveyed countries,using equation(18).Calibration of trade finance sharesSince there are four ways to finance international trade in the model,four shares are calibrated for region:import and export loans,;letters of credit,;internal working capital,;cash in advance,.The analysis proceeds in two
333、 steps to obtain the shares of trade finance.First,insights from the survey and from the literature are employed to obtain trade finance shares at the country level.Second,data on the shares of foreign-owned firms and related-party trade per sector are employed to introduce sectoral variation in the trade finance shares.Aggregate trade finance sharesThe aggregate trade finance shares for the two g