OECD Arrangement Research Articles

The new OECD arrangement on export credits: Breakthrough or bad compromise?

AbstractPublic export credits and trade insurance require a global framework of institutions, rules and regulations to avoid subsidies and a race to the bottom. The extensive modernisation of the Arrangement on Officially Supported Export Credits (Arrangement) of the Organisation for Economic Co‐operation and Development intends to re‐level the playing field. This Practitioner Commentary describes the demand for adequate government interventions, considers the need for the reform and discusses key aspects of the new Arrangement. We argue that there is a breakthrough in several important areas such as tenors, repayment terms and green finance. However, we also find that the modernisation falls short in areas such as the interplay between different rulebooks, pre‐shipment instruments' regulations and climate action.

Managing the green transition: The role of the OECD export credit arrangement

AbstractThe OECD Arrangement on Officially Supported Export Credits has the potential to make a sizeable impact on the energy‐related aspects of the green transition because energy‐related projects have traditionally represented a significant share of the overall amount of support provided in accordance with the Arrangement. Export credits supported according to the Arrangement (except those provided under the aircraft sector understanding) amounted to USD 717 billion over the period 2007–2021, or an average of approximately USD 50 billion annually.

Problems with Long-term Financial Sustainability of Export Credit Agencies

This paper focuses on national support for export and examines whether, following the OECD arrangement, long-term financial sustainability is assured without sustained fiscal help. Rules on permitted state support in this area are stated by the OECD Consensus, which is meant to guarantee a level playing field for all exporters, to encourage competition among exporters based on the quality and prices of goods, and at the same time, not distort the free market. The main objective is that every export credit agency (ECA) should be self-sustainable with no need for state subsidies. However, this may not be achieved. This research proves inadequacy of minimum premium rates (MPR) due to insured interest. This issue arises mainly from the application of MPRs to the principal value of the insured loan with no correspondence to the insured interest amount. As many ECAs are publicly owned, all systematic losses must be covered by state budgets, which is against OECD agreements and is not allowed.

Official Export Credit Support: Competition and Compliance Issues

Aggressive competition in the official export credit support market has resulted in an increase in activity that lies outside of the main instruments regulating competition and sustainable development in export finance terms – the OECD Arrangement on Officially Supported Export Credits, (OECD Arrangement on Official Export Credits. TAD/PG(2019)1) and the OECD Common Approaches(OECD Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (The ‘Common Approaches’). TAD/ECG(2016)3). By default, the World Trade Organization’s Agreement on Subsidies and Countervailing Duties (SCM) is becoming the main legal deterrent, despite its weakness in not covering trade in services or the sustainable development dimensions of official export credit support. Yet the playing field is also unruly because of the apparent reluctance on the part of WTO Members to challenge these measures. Export Credit Agencies (ECAs), the OECD Arrangement, the OECD Common Approaches, the WTO SCM, International Working Group on Export Credit Support (IWG) The current economic slowdown in export growth, coupled with the rise of unruly export credit support programmes, presents a strategic dilemma for the Participants to the OECD Arrangement. They are faced with the difficult choice between taking a strong pro-competition position domestically, or by fighting fire with fire and developing their own non-Arrangement type export credit support programmes. The former option is the more preferable for economic efficiency considerations and long-term competitiveness, although it may result in a controversial reduced role for their ECAs. There is a collective interest in preventing publicly-funded, yet opaque, subsidy wars in export credit terms and conditions, with negative economic, political, social and environmental repercussions. This calls for heightened cooperation among ECA governments within international bodies such as the WTO, OECD and the International Working Group (IWG) on Export Credit Support. Export Credit Agencies (ECAs), the OECD Arrangement, the OECD Common Approaches, the WTO SCM, International Working Group on Export Credit Support (IWG)

Will OECD Governments Avoid the Path Towards a New Credit War?

AbstractAfter 50 years of successfully avoiding a costly credit war, OECD governments find themselves back at a “race to the bottom” crossroad. Will OECD governments succeed in maintaining a level playing field? Or will the allure of promoting national interests in this new world order with new global political priorities, increasing competition and a complex globalized world lead governments to restart a race to the bottom and ultimately towards a new credit war? To avoid the path towards a credit war not seen since the 1970s, a renewed commitment is required. Securing a level playing field for OECD exporters and business should have high‐level political priority. The OECD Arrangement for export credits is in need of modernization, but governments must also recognize that securing a level playing field in terms of government financing goes beyond export credits and export finance. Official government involvement in international finance can be trade distortive regardless of the primary purpose of financing. A whole‐of‐government approach to the provision of official international financing, regardless of whether the primary purpose of financing is exports, development or climate, is necessary if OECD governments wish to avoid starting down a costly and destructive path.

How Rising Powers Create Governance Gaps: The Case of Export Credit and the Environment

This article analyzes how rising powers are affecting an important area of global governance at the intersection of trade and environment: export credit. State-backed export credit agencies (ECAs) play a major role in financing large infrastructure and energy projects, particularly in developing countries. Many of these projects carry significant environmental implications, yet there has been little scholarly attention to their governance. Since the 1990s, global governance of the environmental practices of ECAs has been progressively expanded and strengthened via the OECD Arrangement on export credit and Common Approaches for environmental and social due diligence. Recently, however, there has been a dramatic increase in export credit provision by rising powers, such as India and China, who are not members of the OECD nor subject to the Arrangement or Common Approaches. In this article, I argue that existing governance mechanisms have not caught up with the rapidly changing landscape of export credit. Drawing on the case of India’s financing for the Rampal coal-fired power plant in Bangladesh, I show that the problem of environmental governance for export credit increasingly extends beyond the advanced-industrialized states of the OECD. The failure to cover the large and growing volume of export credit provided by the emerging powers represents a major gap in the established system of environmental governance for export credit.

Government Support of Export Crediting: Implementation of the OECD Recommendations

Despite the ongoing sanction regimes, the Russian Federation is seeking to enhance the competitiveness of tradable goods and, hence, expand the international trade, increase exports and provide legal support for export crediting as a guarantee for maintaining the active trade balance of the country. until now the regulatory framework for export crediting in the Russian Federation is not complete: certain provisions of the Russian and international law related to the area under study need harmonization. In this paper, the author examines the compliance of the terms of the OECD Arrangement on Officially Supported Export Credits with the regulatory framework governing export crediting in the Russian federation. The paper analyzes the Russian legislation, strategic planning documents and in-house documents of organizations that form the national export support system. The analysis revealed the lack of legislative consolidation of export development in the Russian Federation, with regulatory issues reflected in non-core documents. The problem solution lies in improving the regulatory framework for support of export crediting so as to reduce the country risk and enhance the national competitiveness.

Does the US EXIM Bank really promote US exports?

AbstractThis paper investigates the impact of US Export‐Import Bank (EXIM) on US exports particularly in the wake of international competition from foreign national export credit agencies (ECAs). We employ a gravity framework on a country‐industry‐year‐level panel data set that matches EXIM authorisations with US bilateral exports. Our results depict the general ineffectiveness of the Bank in promoting exports within and across industries. Some heterogeneities behind the general finding are also uncovered: industries other than aerospace parts and products are more likely to benefit from EXIM authorisations, and EXIM authorisations to larger businesses seem to be more effective in encouraging exports. Furthermore, we find no evidence that EXIM encourages US exports by offsetting foreign ECA competition. These results are neither affected by competing countries’ membership to the OECD Arrangement nor by the size of American firms that received EXIM support. Our results cast doubt on the ubiquitously positive claims made by the Bank and its supporters, yet also provide policy lessons for countries that are either in the inception stages of establishing their own ECAs or are now placing greater importance on ECA financing in encouraging exports.

Does the US EXIM Bank Really Promote US Exports?

This paper investigates the impact of US Export-Import Bank (EXIM) on US exports particularly in the wake of international competition from foreign national export credit agencies (ECAs). We employ a gravity framework on a country-industry-year-level panel dataset that matches EXIM authorizations with US bilateral exports. Our results depict the general ineffectiveness of the Bank in promoting exports within and across industries. Some heterogeneities behind the general finding are also uncovered: industries other than aerospace parts and products are more likely to benefit from EXIM authorizations, and that EXIM authorizations to larger businesses seem to be more effective in encouraging exports. Furthermore, we find no evidence that explains the role of EXIM in encouraging US exports by offsetting foreign ECA competition. These results are neither affected by competing countries’ membership to the OECD Arrangement nor by the size of American firms that received EXIM support. Our results cast doubt on the ubiquitously positive claims made by the Bank and its supporters, yet also provide policy lessons for countries that are either in the inception stages of establishing their own ECAs or are now placing greater importance on ECA financing in encouraging domestic exports.

International Regulation and Treatment of Trade Finance: What are the Issues?

The paper discusses a number of issues related to the treatment of trade credit internationally, a priori (treatment by banking regulators) and a posteriori (treatment by debtors and creditors in the case of default), which are currently of interest to the trade finance community, in particular the traditional providers of trade credit and guarantees, such as banks, export credit agencies, regional development banks, and multilateral agencies. The paper does not deal with the specific issue of regulation of official insured-export credit, under the OECD Arrangement, which is a specific matter left out of this analysis. Traditionally, trade finance has received preferred treatment on the part of national and international regulators, as well as by international financial agencies in the treatment of trade finance claims, on grounds that trade finance was one of the safest, most collateralized, and self-liquidating forms of trade finance. Preferred treatment of trade finance also reflects the systemic importance of trade, as in sovereign or private defaults a priority is to treat expeditiously trade lines of credits to allow for such credit to be restored and trade to flow again. It is not only a matter of urgency for essential imports to be financed, but also a pre-condition for economic recovery, as the resumption of trade is necessary for ailing countries to restore balance of payments equilibrium. The relatively favourable treatment received by trade finance was reflected in the moderate rate of capitalization for cross-border trade credit in the form of letters of credit and similar securitized instruments under the Basel I regulatory framework, put in place in the late 1980s and early 1990s. However, as the banking and regulatory communities moved towards internal-rating based and risk-weighted assets systems under the successor Basel II framework, a number of complaints emerged with respect to the treatment of trade credit particularly in periods of crisis. Issues of pro-cyclicality, maturity structure and country risk have been discussed at some length in various fora, including in the WTO at the initiative of Members. Part of the issue was that Basel II regulation was designed and implemented in a manner that, in periods of banking retrenchment, seemed to have affected the supply of trade credit more than other potentially more risky forms of lending. With the collapse of trade in late 2008 and early 2009, the regulatory treatment of trade credit under Basel II clearly became an issue and was discussed by professional banking organizations, regulators and international financial institutions. A sentence made its headway into the communique of G-20 Leaders in London in April 2009, calling upon regulators to exercise some flexibility in the application of Basel II rules, in support of trade finance. As the issue of removing the obstacles to the supply of trade finance spread became part of the public debate, discussions with respect to the regulatory treatment of trade finance in the context of the making of Basel III rules are now raising political attention.

How Much Credit for Export Credit Support Under the SCM Agreement?

This contribution examines the degree of policy space the WTO leaves its Members to support export credits for non-agricultural goods. In the light of existing case law, it illustrates that export credit support offered by export credit agencies that aims at complementing the private trade finance market would in principle be prohibited under the SCM Agreement. However, while some low-income countries can rely on a specific exception on the prohibition on export subsidies, all WTO Members can, on the basis of the Illustrative List of Export Subsidies, justify certain subsidized export credits that are in accordance with the interest rate provisions of the OECD Arrangement. But, as the case law and the OECD Arrangement currently stand, subsidized export credit guarantees and insurance as well as subsidized short-term export credits cannot rely on this safe haven. Hence, the article shows that export credit agencies, except for those of some low-income countries, cannot play a complementary role to the private market in offering such support. Moreover, this contribution demonstrates that export credit support in accordance with the safe haven might still be countervailable and actionable. Finally, it is argued that an exception which can be modified by a subgroup of WTO Members, like the safe haven, can no longer be accepted.

New OECD Sector Understanding on Export Credits for Civil Aircraft

On 30 July 2007, Brazil and certain OECD countries announced the signing of a new Sector Understanding on Export Credits for Civil Aircraft. The Understanding forms part of the OECD's Arrangement on Officially Supported Export Credits and replaces the outdated 1986 agreement. As one of the leading aviation manufacturing and exporting countries, Brazil's agreement is an important advancement in the international framework regulating officially supported export credits of such assets. This article considers the main terms of the new agreement which, although addressing some industry concerns with the previous understanding, introduces new issues for banks and operators seeking officially supported financing.

The Japanese Export Insurance Arrangements: Promotion or Subsidisation?

Japan has promoted its exports by reducing the risks accompanying overseas sales through short‐term facilities for exporters. Short‐term export insurance schemes operated in line with rules on minimum premia are not prohibited according to current international trade rules. The insured amount of underwriting has however grown steadily and the balance of accounts of export insurance has deteriorated over a sustained, ‘long‐term’ period. The Japanese government has supported the system by reinforcing its financial base. In the 1980s and 1990s, the amount of claims was almost three times higher than premium incomes. Although the Japanese government may have subsidised exporters through the export insurance system, such subsidisation is notionally at least in accordance with the current regulations of the global trading system. The multilateral trading system has included export insurances at premium rates inadequate for covering the long‐term operating costs and losses of the programmes in the list of export subsidies. The current Members of the WTO are obliged to abide by the Agreement on Subsidies and Countervailing Measures which comprises the illustrative list of export subsidies. However, the Agreement also stipulates that export insurances consistent with the interest rate provisions of the OECD Arrangement should not be considered as an export subsidy. Therefore, provision of export insurances not prohibited by the WTO regulations may be considered by developing countries undergoing trade deficits as a means of export promotion. Japan has done similarly for the past half century.

The Politics of Self–Restraint: FDI Subsidies and Japanese Mercantilism

Home governments seek to enhance the international competitiveness of private enterprises not only through export credit, but also through preferential loans for foreign direct investment (FDI). Indeed, contrary to the common image of nation‐states resenting their loss of jurisdiction over the mobile transnational corporation, some governments have become active financiers of multinational investment to serve their industrial policy goals. The uneven use by industrialized states of preferential credit to further MNC expansion challenges the current characterization of home government policy as both homogenous and ineffective for the task of industrial promotion. The world's most active state in FDI finance, Japan, has enjoyed an inordinate degree of freedom to engage in subsidization of MNC investment since no international regime on FDI credit, similar to the OECD arrangement on government export finance, exists. Moreover, Japanese labor has not challenged the legitimacy of state FDI finance. In the absence of international or societal constraints on soft FDI credit, Japanese self‐restraint in FDI subsidization is better explained by the internal budgetary makeup of government financial institutions with a mandate to finance FDI. Treasury bureaucrats concerned with healthy public finances and politicians eager to reward core support groups, have repeatedly competed for control over the budgetary strings on soft FDI finance. This political contest is far from over. This paper, therefore, highlights the political agency behind rules of financial discipline that have so far inhibited Japanese rent‐seeking international economic behavior.

The repositioning of Ex-Im bank

In recent years, U.S. government policy has shifted in favor of government export support similar to that provided by other G-7 nations. In a major initiative in 1993, the Clinton administration devised a national strategy to reposition Ex-Im Bank to respond to the long-standing needs of U.S. exporters. Today, there are several hundred million dollars at Ex-Im Bank's disposal to meet or match the subsidies offered by U.S. trade rivals, and there is a determination to use such resources to help U.S. exporters compete. Yet attempts by Congress during 1995 to trim Ex-Im Bank's capacity in the name of budget cutting have reawakened the debate over export subsidies. The author asks whether it is possible that Washington will forget the adverse consequences of the two-decade failure to keep Ex-Im Bank's loan program competitive with support agencies in Japan and Europe? The article uses the 1992 OECD arrangement, with its restrictions on foreign loan programs tied to the purchase of donor exports, to examine the United States' recurring confrontations with foreign export-subsidy programs and the prospects for U.S. government export support in coming years.