The opening up of trade in a multilateral trading system has provided one of the major pillars for economic growth enjoyed by developed countries in the last century. Although emerging countries were latecomers to international trade, they too have significantly benefited from trade liberalisation. Export oriented economies have advantages from improved allocation of scarce resources, greater economies of scale, know-how sharing as well as innovation. Countries like Brazil and India developed competitive export industries and have been rewarded with impressive economic growth. Generating growth through trade has also been a central pillar in the policy strategy of many Western economies. As a result, merchandised trade in the European Union, for example, has more than doubled from around GBP 1,600 bn to GBP 3,350 bn between 2000 and 2010.
Challenges in a competitive global environment
During and after the 2008-9 financial crisis, international trade played a crucial role in strengthening the global economic recovery as a non-debt creating source of growth. Governments around the world responded quickly by introducing large fiscal stimulus packages and monetary easing to bring back confidence in financial markets, create growth and secure jobs. They backed the financial system to boost lending and have strengthened financial regulation as well as supervision to rebuild trust. These funds included various measures for government export credit agencies (ECAs) to expand their operations in order to help banking systems providing liquidity and restore lending. Now, the global economy is again exposed to significant threats. The financial and sovereign debt crisis in Europe remains the key economic challenge in 2012. Finding and executing decisive as well as consistent policies for solving the financial and sovereign debt crisis in Europe is crucial.
Government instruments as a contribution to economic growth
What is too seldom recognized is that focussed policy programmes are a necessary but insufficient condition for trade success. Governments need to create a comprehensive ‘trade polity’, an institutional framework that provides a fertile breeding ground, for trade to flourish. Innovative exporters and SMEs in particular are dependent on such a support framework. Given exporters’ critical role for employment and as drivers of innovation, export promotion instruments are a substantial factor for economic success.
The role of export credit agencies
Exporters frequently require insurance cover for risks linked to export transactions. Typically, these risks arise from non-payment for political or commercial reasons. Political causes of loss can be the lack of hard currency in the buyer’s country or, for example, wars, civil unrest or a payment moratorium imposed by a government. Commercial risks include payment defaults by the customer or insolvency leading to temporarily uncollectible receivables or full write-offs. As export credit coverage available from private insurance companies is sometimes restricted, export transactions can often only be realized on the basis of governmental support. Export credit agencies are regarded as an insurer of last resort. They step into the breach when private insurers do not offer sufficient cover. ECAs are official or quasi-official branches of their governments and as such form an integral part of national governments’ industry, trade promotion and foreign aid strategies. They pursue their aims by providing export credit insurance facilities of privately financed transactions through direct lending or pure cover support. Collectively, ECAs account for the world’s largest source of government financing for private sector industries: Together with investment and private credit insurers, they have covered more than GBP 1.2 trillion of global trade in 2011, a record amount of more than 10 per cent of international trade.
Continuous support and level-playing-field for national exporters
In order to foster growth through trade, export credit agencies have to provide sufficient insurance facilities in the future. They have to confirm their strong commitment to remain reliable partners for exporters and financing banks where the private market fails to supply sufficient financing and insurance. Governments will continue to be important players for world trade flows due to the continued shortage and high costs of export finance. Furthermore, it is of crucial importance that export credit agencies are reliable in the future focussing on new or amended products as well as a further development of cover and country policies. The ECA offer must stay flexible, and export credit agencies have to liberalize rules for eligibility of non-domestic content. They also have to include aspects of foreign, developmental or structural policy. In addition, common rules for export credit agencies have to be developed further without regulation in excess endangering growth through trade. This includes an integration of the BRICs economies as well as other developing countries to implement global standards and create a level-playing-field for exporters around the world.
Export credit agencies have to act counter-cyclicalyl and prove their capability as an effective instrument against market failure. The footprint of government support in trade finance continues. It is important for governments to realise that policy initiatives work best when embedded in a permanent framework that focuses important sectors of the economy. Enhancing trade polities is not the only necessary measure to bring economies back onto the growth path. But given the importance of trade in the economic strategies of many governments and given the fiscal neutrality of export credit agencies, they can make a significant contribution to growth in challenging circumstances.
This article is part of the European growth strategy expert sourcing jointly organised by Social Europe Journal, the Friedrich-Ebert-Stiftung, the Bertelsmann Stiftung, the IMK of the Hans Boeckler Stiftung and the European Trade Union Institute (ETUI).