. /.RESTRICTEDWORLD TRADE
ORGANIZATIONWT/GC/W/347
8 October 1999
(99-4237)
General Council Original:  English
PREPARATIONS FOR THE 1999 MINISTERIAL CONFERENCE
Proposal for the Establishment of a Working Group fo r the Study of the Impact of the Current Global
Financial and Monetary System on Trade and Development
Communication from the Dominican Republic, Indonesia, Malaysia and Thailand
The following communication, dated 1 October 1999, has been received from the Permanent
Mission of Malaysia.
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Background
1. Recent developments in the global financial markets have had major  negative effects on the
world economy, on national economies and on international trade.   Indeed, the financial turmoil hascaused the biggest harm ever done to the world economy since the Great Depression and, according to
many analysts, it does constitute a permanent threat.
2. The lack of global regulation and inadequate regulation of the major international financial
players (especially hedge funds and other highly leveraged institutions)  and of new financial
instruments (including derivatives), has allowed the proliferation of new sophisticated financial
products and tools.  This has subsequently led to a concentration of the financial resources and
economic power in the invisible hands of a fe w, and has led to the rampant speculation and
manipulation of foreign currencies, affecting mainly, if not solely, developing economies.
3. The current trend of deregulation in international finance, advances in technology, and the
development of new financial instruments and institutions has resulted in huge volumes of short-term
funds crossing borders, estimated at around US$ 1.5 to 2 trillion daily.  The massive inflows and
outflows of funds have resulted in volatility and la rge swings in currency values, money supply, stock
market and commodity prices.  Currencies no longer necessarily reflect their fundamental values, as
their levels can violently fluctuate as a result of herd instinct.  In this context, developing countries
and emerging markets have been especially vulnerable, while industrialized countries have benefited.
4. The most recent bout of financial volatility and crisis has had disastrous effects on many East
Asian countries and Latin American countries as well as Russia.  In East Asia, following the collapseof the national currencies and  stock markets, and the very heavy increase in debt servicing burdens
(as a result of currency devaluation), the growth rates for many countries fell from positive 7-9 per
cent average of recent years to minus 7 to 15 per cent in 1998.   Development efforts and sacrifices of
many, as well as their achievements have been set back many years, if not decades.
5. It is obvious that unless adequate remedies are taken, there will be more bouts of financial
volatility, and more countries will be subjected to perpetual financial and monetary instability. In this
context, even the stronger economies are not guaranteed from such negative impacts.WT/GC/W/347
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6. Since price, the necessary component of any type of trade transaction of goods and services,
can be easily affected by ‘external’ financial and monetary disruptions, via exchange rates and
currencies convertibility, exchange rates and customs duties are closely interrelated.  Hence, an
abusive use of exchange rates, through monetary convertibility and speculative trading on foreign
currencies can inflict, as it has been the case, an  irremediable damage to the world trading system.
7. The downside effects on international trade, and its consequential effects on economic growth
are manifold:
(a) the growth rate of the volume of world merchandise exports slowed significantly to
only 3.8 per cent in 1998 from 10 per cent in 1997, due mainly to the economic
contraction in much of Asia, according to the WTO’s latest report;
(b) many other developing countries are also suffering from sharp declines in commodity
prices, which to a significant extent is the result of reduced demand from the
countries, which have been directly affected by the financial and monetary instability.
8. It is thus clear that financial volatility and monetary uncertainty are now the biggest threat to
the expansion of trade and to the benefits that countries can derive from trade, as well as to outputgrowth and employment, especially in developing countries.   This is because the speculatory trade on
foreign currencies and the inflows and outflows of funds has a larger impact on developing countries
as their economies are smaller.  For example, the flow of a very small percentage of the funds of a
financial institution into or out of a developing country can have a large effect on the national
currency or the domestic stock market or debt situation of that country, whilst the same volume offunds may have an insignificant impact on a developed economy.
Proposal
9. For the foregoing reasons, it is proposed that a working group be established in the WTO to
study the relationship between the workings of the current global financial and monetary system andtheir effects on international trade and the multilateral trading system, including on the  development
dimension.
10. The working group should focus, inter alia, on the reforms that may be necessary to
(i) safeguard the multilateral trading system from new external financial and monetary disruptions,
(ii) provide certainty and predictability to the con tinuous expansion of trade, and (iii) to ensure that
Members genuinely benefit from further liberalization efforts.
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