The financial system risks undermining global trade if it fails to adapt to the economy’s needs, with developing countries likely to suffer the most, the UN Trade and Development Agency said on Tuesday.

Shifts in financial markets now drive global trade almost as much as real economic activity, with financial conditions increasingly determining global trade flows and shaping development prospects worldwide, the UNCTAD report, which was presented in London, said.

“Trade is not just a chain of suppliers. It is also a chain of credit lines, payment systems, currency markets and capital flows,” UNCTAD’s secretary-general, Rebeca Grynspan, said in a statement.

Grynspan told Reuters in an interview that the financial and trade systems are so closely synchronised that any rise in market volatility or uncertainty will have a significant impact on global trade.

UNCTAD said global growth was expected to slow from 2.9% in 2024 to 2.6% in 2025 due to rising financial volatility and geopolitical tensions.

More than 90% of global trade relies on bank financing, with dollar liquidity and cross-border payment systems remaining essential to international commerce.

“This deep reliance on financial channels makes trade closely linked to global financial and monetary conditions,” the report said. “A shift in interest rates or investor sentiment in a major financial centre can affect trade volumes worldwide.”

The report said although developing economies are expected to grow faster than advanced ones, they face higher financing costs, volatile capital flows, and rising climate-related risks, factors that constrain the fiscal and investment space needed to sustain growth.

The dollar remains central to global finance. That offers stability in uncertain times, but it also ties developing economies to financial cycles they have little power to influence, the agency said.

“We need to find ways in which the instruments of the payment system, of the insurance, of the capacity of these countries to lend or do things in their own currency will be part of the resilience of the system for the future,” Grynspan said.

UNCTAD called for reforms to align trade and finance and ensure long-term stability, including modernising trade rules, reforming the international monetary system to limit damaging currency and capital-flow volatility, and strengthening capital markets to expand affordable long-term finance.

Reuters