Export credit agencies (ECAs) are institutions that offer loans, guarantees, insurance and other services to support domestic companies’ international exports. They help reduce the risks and uncertainties of exporting to foreign markets, especially in developing countries where commercial financing may be scarce or costly. ECAs can be government agencies, quasi-governmental agencies or private organizations.
How ECAs Facilitate Trade Finance
ECAs facilitate trade finance by providing different types of financing solutions to exporters and importers. Some of the common methods are:
- Direct lending: The ECA lends directly to the importer, who uses the loan to purchase goods or services from the exporter in the ECA’s country. The ECA charges interest and fees to the importer and collects the repayments.
- Financial intermediary loans: The ECA lends to a financial intermediary, such as a commercial bank, who then lends to the importer. The ECA charges interest and fees to the intermediary, who passes them on to the importer. The intermediary collects the repayments and transfers them to the ECA.
- Interest rate equalization: The ECA subsidizes the interest rate of a commercial loan to the importer, who uses the loan to purchase goods or services from the exporter in the ECA’s country. The ECA pays the difference between the market interest rate and the lower interest rate to the commercial lender. The lender collects the repayments from the importer and transfers them to the ECA.
- Loan guarantees: The ECA guarantees a portion or the entire amount of a commercial loan to the importer, who uses the loan to purchase goods or services from the exporter in the ECA’s country. The ECA charges a fee to the exporter or the importer for the guarantee. The lender collects the repayments from the importer and transfers them to the ECA. If the importer defaults, the ECA pays the lender the guaranteed amount.
- Insurance: The ECA insures the exporter or the lender against the risk of non-payment by the importer or the political risk of doing business in a foreign country. The ECA charges a premium to the exporter or the lender for the insurance, which is a fee that compensates the ECA for the assessed risk associated with the transaction.
ECAs in America
ECAs are important for the American economy because they help promote the national interests of the United States in the global market. By supporting the exports of American goods and services, ECAs create jobs, generate revenues, enhance competitiveness, and foster innovation in the domestic industries. ECAs also help advance the strategic and foreign policy goals of the United States by strengthening the economic and political ties with its allies and partners, and by promoting the values of democracy, human rights, and environmental protection in the developing countries.
According to the Export-Import Bank of the United States (EXIM), the official ECA of the United States, EXIM supported $23.1 billion worth of U.S. exports and an estimated 164,000 American jobs in fiscal year 2020. EXIM also generated $585.7 million in net income for the U.S. Treasury and maintained a low default rate of 0.81%. EXIM’s customers include small and medium-sized enterprises, minority- and women-owned businesses, and exporters of environmentally beneficial products.
ECA Services in Mainland China
Mainland Chinese businesses can access various ECA services from both domestic and foreign sources. China has three official ECAs: China Export and Credit Insurance Corporation (SINOSURE), Export-Import Bank of China (CHEXIM), and China Development Bank (CDB). These ECAs provide comprehensive financing solutions for Chinese exporters and importers, as well as for overseas projects involving Chinese contractors or investors. SINOSURE offers credit insurance and guarantees, CHEXIM offers direct lending and guarantees, and CDB offers medium- and long-term financing and guarantees.
In addition, mainland Chinese businesses can also benefit from the ECA services of other countries, especially those that have signed bilateral or multilateral agreements with China. For example, China has signed the Cooperation Arrangement on Officially Supported Export Credits with the OECD members, which aims to ensure a level playing field for exporters and ECAs. China has also signed the Agreement on the Promotion, Provision and Use of Export Credits to Support Renewable Energies and Environmental Protection with the European Union, which encourages the use of ECA financing for green projects.
How ECAs Support Development Projects in Small Pacific Countries
Small Pacific countries face many challenges in accessing trade and investment finance, such as their remoteness, small market size, vulnerability to natural disasters, and lack of infrastructure. These factors increase the risks and costs of doing business in these countries, and deter commercial lenders and investors from providing adequate financing.
ECAs can play a vital role in supporting development projects in small Pacific countries, by providing financing solutions that would otherwise be unavailable or unaffordable. ECAs can help bridge the financing gaps and unlock the potential of these countries to participate in regional and global trade, and to achieve their sustainable development goals.
ECAs and Development
ECAs can provide direct lending or guarantees to finance infrastructure projects, such as roads, ports, airports, power plants, and telecommunications, that can improve the connectivity, productivity, and resilience of these countries. For example, the Export-Import Bank of Korea (KEXIM) provided a $32.6 million loan to Samoa to build a hydropower plant, which will reduce the country’s dependence on fossil fuels and lower its electricity costs.
ECAs can provide insurance or guarantees to protect exporters and investors from the political and commercial risks of doing business in these countries, such as expropriation, currency inconvertibility, war, civil unrest, and non-payment. For example, the Export Finance and Insurance Corporation of Australia (EFIC) provided a $15 million political risk insurance to an Australian company to invest in a tuna processing plant in Papua New Guinea, which will create jobs and income for the local community.
ECAs can support the development of the private sector and the financial sector in these countries, by providing loans, guarantees, or equity to local businesses, banks, or microfinance institutions, that can enhance their access to finance, markets, and technology. For example, the Japan Bank for International Cooperation (JBIC) provided a $20 million loan to the National Bank of Vanuatu, which will enable the bank to lend to small and medium-sized enterprises, especially in the agriculture and tourism sectors.
The Costs and Benefits of Using ECAs
Using ECAs can have both advantages and disadvantages for the exporters and importers involved in international trade. Some of the benefits are:
- ECAs can provide financing when commercial banks and private investors are unwilling or unable to do so, especially in high-risk or low-income countries. This can help overcome the financial barriers and liquidity constraints that may hinder trade opportunities.
- ECAs can reduce the exposure to credit risk and political risk by offering insurance and guarantees that cover the possibility of non-payment, expropriation, currency inconvertibility, war, civil unrest, and other adverse events. This can increase the confidence and security of the trading parties.
- ECAs can offer competitive and flexible terms and conditions, such as lower interest rates, longer repayment periods, grace periods, and local currency financing. This can make the trade deals more attractive and affordable for the exporters and importers.
- ECAs can support the development and diversification of domestic industries by promoting the exports of strategic sectors, such as renewable energy, infrastructure, and technology. This can create jobs, generate revenues, enhance competitiveness, and foster innovation in the home country.
Drawbacks of ECAs
- ECAs can create market distortions and unfair competition by subsidizing the exports of their own country at the expense of other countries. This can lead to trade disputes and conflicts among the trading partners.
- ECAs can have negative environmental and social impacts by financing projects that may cause pollution, deforestation, displacement, human rights violations, and other harms in the host country. This can undermine the sustainability and responsibility of the trade activities.
- ECAs can incur financial losses and contingent liabilities by taking on high-risk and low-return projects that may default or fail. This can affect the fiscal balance and credit rating of the home country.
Summary and Future Outlook
ECAs are important players in the trade finance market, as they provide various financing solutions to support the exports and imports of goods and services across the world. ECAs can facilitate trade finance by offering loans, guarantees, insurance, and other services that can reduce the risks and costs of doing business in foreign markets. ECAs can also promote the national interests and strategic goals of their home country by supporting the domestic industries and advancing the foreign policy objectives.
However, ECAs also face some challenges and criticisms, such as creating trade distortions, causing environmental and social harms, and bearing financial losses. Therefore, ECAs need to balance their commercial and developmental roles, and adhere to the international standards and best practices of trade finance. ECAs also need to adapt to the changing trends and demands of the global trade environment, such as the rise of emerging markets, the digitalization of trade, and the green transition of the economy.
ECAs have a significant role to play in the future of trade finance, as they can help address the financing gaps and opportunities that exist in the global trade system. ECAs can also contribute to the recovery and resilience of the trade sector after financial shocks such as COVID-19 pandemic, which disrupted trade flows and supply chains around the world. ECAs can support the trade diversification and innovation that are needed to overcome the ever-changing challenges thrown up by geopolitical shifts, catastrophic climate events and global financial downturns. In many cases ECAs facilitate trade that would otherwise be impossible especially for small developing countries.