Crisis and Rebirth
If one had been asked to discuss the greatest challenge facing official export credit agencies (ECAs) four years ago, the likeliest answer would have been finding a way to maintain their relevance in a world of excess liquidity and expanding markets. At the time, demand for ECA financing was stagnant and declining in real terms. For outside observers the question wasn’t how to support ECAs, but whether the time had come to wind down their business model over a reasonably short period of time. The global financial crisis and subsequent events have driven an ECA rebirth, and they remain a vital source of funding for the world economy. Ensuring that ECAs can continue offering short, medium and long-term financing – balanced by smart and fair export credit disciplines covering all countries – is now the most pressing major challenge.
In the fall of 2008, financial markets all over the world seized up in the aftermath of the failure of Lehman Brothers, and trade flows and employment levels declined sharply. ECAs not only became more important than ever as a source of trade finance, they actually became one of the principal policy tools governments used to cushion the real economy from the chaos in the markets.
The G20 developed a trade finance initiative for the London Summit that attracted more than $250 billion of short-term financing from governments, primarily from their ECAs and the multilateral development banks. The initiative helped finance the daily flow of trade, though liquidity enhancement and risk reduction actions, and even used ECAs to tap capital markets, “buying time” to repair what was then a broken financial system.
The medium- and long-term financing vehicles that are normally the core of ECA programmes were also coordinated to protect trade, employment and development, first within the OECD prior to the London Summit, and then in the broader G20 context at the Pittsburgh Summit. ECAs are now firmly back in the picture, and are more important than ever. While the initial drivers of the 2008-09 crisis have receded, new structural imbalances – in the form of sovereign debt problems and the strong ripple effects of that crisis in the form of fiscal imbalances – persist, particularly in the developed world, where the financial crisis originated. This has created a negative feedback loop in the banking system that continues to threaten the trade flows that are the lifeblood of the global economy. Contagion to the developing world remains a serious threat. Therefore, ECA financing remains a vital tool in export financing and management of the global economy.
Governments who co-operate on ECA policies in the OECD remain actively and publicly committed to ensuring that adequate levels of ECA financing remain available. The demand for medium- and long-term ECA financing is currently running at least 50% above pre-crisis levels.
Smart Rules for Fair Trade
The OECD has long housed the work of like-minded governments that seek to efficiently discipline support for national producers in export markets. The agreed framework of rules and procedures minimises subsidies, keeps the playing field level and resolves disagreements on transactions in real time to keep exports moving and citizens working. Export credit rules have been designed to reward the most efficient producers while protecting taxpayers and maximising global economic growth through rational resource allocation. Export credit work has developed provisions and procedures to ensure that governments don’t export their unemployment along with their goods and services; in short, they have created “smart rules” to keep ECAs financially strong and to counter pressures for destructive subsidy-based competition.
These smart rules work. They have evolved to keep pace with the particular needs of special sectors, such as aircraft, power and renewable energy, as well as the special financing flexibility requirements of project finance structures, because ECA customers are increasingly private, not sovereign buyers. They have protected ECAs from financial losses. And they have consistently been validated in WTO litigation. The rules have evolved to allow non-member governments to use them on equal footing with members.
And they have been operated so as to complement well-functioning private markets, rather than to crowd them out. New and important dimensions have been added, including bribery and environmental variables; always sub rosa but significant competitive issues, have now formally been brought into this calculation.
While all rules necessarily act as restraints, these smart rules have ensured fair competition, availability of financing and financial capacity. ECAs are government and taxpayer-supported entities, and are thus responsible to a variety of stakeholders for their financing decisions, including the business communities, and ultimately for the efficient functioning of the world economy. Ensuring that ECA programmes continue to be fair and efficient, maintain domestic political support, stand up to potential anti-subsidy litigation, remain coherent with other government policies and are not a financial drain on treasuries and taxpayers are necessary and increasingly complex challenges.
However, the greatest single challenge that governments and their ECAs face today is to preserve these smart rules. This does not mean deepening or expanding the scope of export credit disciplines that have been past priorities. This challenge is much more fundamental: preserving the enlightened post-World War II co operation that allowed ECAs to be vehicles for joint prosperity, rather than of destructive competition.
Extending the Smart Rules to Emerging Economies
The rapid growth and development of major emerging economies (principally Brazil, China, India and South Africa) with important export sectors and expanding export credit programmes is altering the shape of the playing field and posing new challenges.
The asymmetry of commitments with respect to multilateral export credit disciplines warrants prompt attention. An obvious solution is for emerging market governments to join in operating and managing the export credit disciplines and participate in their design and evolution over time as full and equal partners. This is the option under which multilateral co-operation continues in an efficient and orderly system, the WTO-consistent level playing field for export competition is preserved and destructive financing competition is avoided. Clearly, the sovereignty concerns of emerging economies would have to be addressed through a thorough review and adjustment of existing rules, to ensure that they too can embrace them in this context.
If this approach fails, and financing conflicts emerge, as subsidy-based competition increases between those inside and those outside the disciplines, two results seem inevitable: (1) these smart rules will be undercut, as governments revert to subsidised financing; and (2) litigation in the WTO will increase. The absence of mutually agreed, voluntary co operation would introduce – at least in the medium term – a cycle of WTO litigation and destructive financial practices that would seriously undermine efficient and fair export competition and the sound management of the global economy.
Over the last 50 years, when policymakers have been faced with this very same situation, they have recognised that competing for export markets with financing subsidies is a massive negative sum game: it is costly for all and beneficial for no one. They have seen that co operation, rather than matching and litigation, is the better course, and not merely in theory. The history of Brazil/Canada WTO litigation, for example, resulted in both parties deciding to eschew litigation and to join and renegotiate the OECD-housed Aircraft Sector Understanding.
It should be noted that Brazil, which is not an OECD member, was welcomed as a full ASU negotiator and Participant in the design and implementation of these smart rules as they apply to aircraft financing, without taking on any unrelated obligations. Co operating governments, not institutions, “own” these smart rules. Current signators, for their part, need to ensure that there are no artificial barriers, not merely to close co operation on export credits with non-participants, but also to full membership in the export credit rule making bodies. Those governments that have major programmes that would be governed by the export credit rules must have a say in their implementation and evolution.
Export credit cooperation is in the interest of all governments. Any move away from the existing rules-based system would inevitably see countries revert to the provision of costly forms of financing subsidies for exports, draining public coffers of funds that would be better spent on their domestic economic priorities.
A new OECD publication, Smart Rules for Fair Trade: 50 Years of Export Credits, delves in greater depth into the history, benefits and the challenges of creating such smart rules. The Brazil model should be replicated to expand further multilateral co operation, continue to neutralise government financing as a competitive tool, respect market-based pricing and maintain a level and transparent playing field for an efficient and open trading system. Brazil’s article in the publication, describing its own experience, demonstrates how the challenge of new co-operation between developed and emerging market governments can be successfully addressed in select sectors of urgent competitive need. Similarly, Korea’s highly positive experience becoming a full participant, helping to operate and develop all the export credit rules, demonstrates the longer-term solution.
Therefore, successful paths to full emerging market participation in multilateral rule-making are proven. Today, the benefits of such expanded multilateral co-operation as well as the dangers of an export credit race that would also promote broader protectionist pressures are as great as at any time since World War II. As then, governments now have the opportunity to work together to extend the rules-based system that has promoted fair trade, efficient markets and global prosperity for over 50 years. This work needs to begin immediately. The OECD-housed rule-making bodies are fully open to emerging economy participation and membership.
About the Author
Steve Tvardek was appointed Head of the OECD’s Export Credits Division in 2010. From 1995-2009, he served as the U.S. Treasury Department’s Director for Trade Finance and as the United States’ Head of Delegation and chief negotiator to the OECD export credits rule-making bodies. Mr. Tvardek was instrumental in the design and implementation of the G20 Trade Finance Initiative and was Co-Chairman of the G20 Trade Finance Experts Group. He as an advanced degree in economics and an MBA in Finance.