In 1919 the British government established the first government export credit insurance program “to aid unemployment and to re-establish export trade disrupted by the conditions of war.” Other industrial states soon followed, establishing their own agencies to address market failures in the private trade finance sector, to counter competitive subsidization by other states, to support domestic industrial policy and to spur exports in the face of financial and other crises at home and abroad. These Export Credit Agencies (ECAs) were expected to gradually recede into niche sectors as private financial actors grew in size, became integrated worldwide, and proved more capable of assessing and dispersing risk.
The onset of the global financial crisis, however, has shattered these predictions, as ECAs stepped in to fill the gap left by private financial institutions. Yet the expanded role played by ECAs in supporting trade finance has not been matched with stronger rules that address the human rights-related impacts of ECA financed projects. Given narrow set of regulations that currently apply to ECAs, this brief article argues that more needs to be done to ensure that ECA financed projects do not cause harm to home states.
The role of ECAs in trade finance
The importance of trade finance can hardly be exaggerated. Eighty to ninety percent of trade transactions involve some form of credit, insurance or guarantee. In a recent assessment of the impact of the global credit crisis on trade finance, the total value of trade finance arrangements was estimated at US$15.9 trillion, of which roughly a tenth is directly intermediated by ECAs. According to data compiled by the Berne Union (BU), an international association of export credit agencies, exposure of its members for 2011 amounted to over US$1.7 trillion, of which roughly 10% are investment guarantees and 37% medium- to long-term export credits.
Export credit and investment guarantee agencies take various forms and operate in different ways, but a few common features distinguish them from other actors in the trade finance and investment insurance fields. On the formal level, some ECAs are incorporated under domestic law as administrative departments within ministries, some are semi-autonomous public institutions, and still others are private corporations. Of the latter, some are totally or partially owned by the state, while others are authorized by law to operate as agents of specific state export credit policies, and do part of their business on their own account, and part on the government’s account. The unifying factor is that all of these agencies can rely on an explicit or implicit governmental backing. This support has two aspects: on the one hand, through ECA intermediation, exporter’s risk of loss is ultimately transferred to the tax-payer; on the other hand, ECA claims against foreign firms or states will be pursued by the state, increasing incentives for repayment. On the functional level, although ECAs undertake a great variety of transaction types, they tend to specialize in medium- to long-term operations and to focus on political— rather than commercial—risks. They complement private sector involvement in short-term export credit, which is generally safer due to its self-liquidating character.
Four main reasons for state involvement in the export credit and investment guarantee sector can be underlined. The first reason for government involvement was the impact of information asymmetry and availability on the willingness of private markets to underwrite overseas transactions. In the mid-twentieth century, governments were in a better position to collect and analyze information about foreign risks, and better poised to exercise influence over other governments. A second reason was the relatively smaller and more segmented nature of capital markets. Government-run export credit agencies did not have to consider capital and currency requirements, and could absorb even large losses by paying from the public budget and spreading repayment over time. Moreover, ECAs could expect ‘political coverage’ from their home state: ECA home-states could espouse claims against defaulting foreign firms or sovereigns. In the context of debt restructuring, ECA-held debt has been given de facto preferential status. A third reason was that states used ECAs to further industrial policy so as to manage employment levels, avoid balance-of-payment difficulties, or champion emerging industries. Private finance lacks incentives to prefer home-state exporters over other, possibly more lucrative, investment. Finally, states established ECAs so that during crises these agencies could respond positively to credit contraction in the private sector.
The importance of the first two reasons discussed above might have declined somewhat in importance due to the increased integration of capital markets, improved risk assessment capacity in the private sector, the increased size of global financial actors, and better legal framework for enforcement of transnational agreements through arbitration. But the role of ECAs has remained crucial with respect to the last two objectives. From the early phases of the crisis until now, the G20 has relied on export credit and insurance guarantee agencies to fill in the gap left by deleveraging private financial institutions, bringing public guarantees in support of US$250 billion of trade transactions in 2009 and 2010 alone. This has led to overall ECA exposure steadily increasing to reach US$1.7 trillion, as previously mentioned. These initiatives were coupled with crisis response package at the multilateral level: the Multilateral Investment Guarantee Agency nearly doubled its guarantees since 2008 to reach US$5.2 billion in 2011, while the International Financial Corporation’s transactions have increased by 35% since 2008, reaching US$15 billion. Regional responses have been even larger, with the European Bank for Reconstruction and Development and European Investment Bank group making €27 billion available by late 2010.
The regulation of ECAs
Despite the importance of ECAs in supporting global trade and investment, regulation of their activity has focused on a very narrow set of issues. This is troubling as ECAs provide financial support on terms, for reasons, and with a degree of coverage that private risk insurers cannot or will not match. They underwrite the riskiest investments, in the most politically and economically unstable regions of the world. As public or publicly mandated entities, these agencies could be more easily held accountable—by both national democratic institutions and, to a certain extent, by international monitoring bodies—than other financial institutions.
It is in response to the issue of competitive subsidization in the 1960s that states began considering regulation of ECAs. Indeed, export subsidies were not a major area of regulation in the pre-WTO world, although policy-makers could easily see that the gains from tariff reductions would be nullified if states were allowed to replace these barriers by equally trade-distorting subsidies. So it is out of a concern for ensuring a competitive trade environment that the OECD began discussions on the question of ‘officially supported export credits,’ leading to the adoption of a gentleman’s agreement on the issue in 1978. This agreement has evolved considerably since and received binding recognition in the Marrakesh Agreements establishing the WTO, through items (j) and (k) of the ‘Illustrative List of Export Subsidies’ contained in Annex I to the Agreement on Subsidies and Countervailing Measures (SCM agreement). In a nutshell, international discipline on export credit focuses on two issues: the ‘breaking even’ requirement prohibits ECAs from running persistent deficits as had been the case where losses incurred by ECAs were consistently assumed by tax-payers. Secondly, ECAs may not practice interest rate subsidization below the OECD agreement levels, prohibiting states from subsidizing rates below capital market standards for protracted periods. Both restrictions focus on ‘leveling the playing field’ for international trade, and avoiding the repetition of ‘interest rate subsidization’ wars.
ECAs and human rights – the case for stronger regulation
Although the OECD framework has more recently been enriched by the adoption of additional non-binding policy guidelines and understandings on environmental standards and sustainable lending, these arrangements have generally done little to assuage concerns that ECAs promote harmful forms of exports and investment. Even if some ECAs today are more strictly regulated at the national level, and even if they have been subject to greater public scrutiny than their private sector counterparts, the residual and complementary character of their business focus has meant that the riskiest projects are either financed by these agencies, or not financed at all. Domestic scrutiny of the screening and eligibility criteria employed by ECAs is therefore of utmost importance to ensure that loans and guarantees underwritten by tax-payers do not end up supporting transactions and projects that are harmful to the human development and debt sustainability prospects of recipient states, and human rights enjoyment in host-states.
There is little evidence that the crisis measures adopted by individual ECAs or by multilateral agencies gave due consideration to issues of socio-environmental impacts or to debt sustainability in the medium- and long-term. The haste to ‘fill the trade finance gap’ raises concerns that screening and eligibility criteria applied by ECAs—already considered by most observers as being too few and to weakly implemented—might not have been strictly adhered to. This would increase the pool of unsound exports and investment projects being underwritten by tax-payers and increase the risk that developing and emerging economies might be saddled with unsustainable and unproductive debt. The exceptional character of the measures adopted since 2008 only exacerbates what is a more general problem of the position of ECAs in global economic governance: as creatures of industrial policy these institutions are focused on avoiding economic difficulties at home, without much consideration of what effects their loans and guarantees might have in host-states. Unlike purely private sector actors, however, ECAs and their support for potentially harmful transactions overseas might engage the responsibility of their home-state on human rights grounds.
As we have argued elsewhere, the UN Charter and international human rights law can be construed as demanding, at a bare minimum, that states ensure that economic regulation of world trade and investment does not impede development and does not cause foreseeable and avoidable human rights harm abroad. This is itself linked to a requirement of due diligence: export credit agencies relying on an explicit or implicit public guarantee ought to ensure that in the screening and selection procedure projects are assessed in terms of impacts on human rights and general developmental outcomes. More broadly, however, it is worth asking what regulatory policy states should pursue when defining the mandates of their own ECAs: a narrow focus on ‘trade fairness’ in times of stability and on ‘filling the trade finance gap’ in moments of crisis has not served us well, and has nullified most benefits from official development assistance. It is time to adequately price the externalities of developed state’s industrial policies and address their distributive effects at home and abroad.
Author: Matthias Sant’Ana is a doctoral researcher with the Centre for International and European Law and associate research fellow with the Centre for Legal Philosophy, Université catholique de Louvain.
 Delio E Gianturco, Export Credit Agencies: The Unsung Giants of International Trade and Finance. Westport, CT: Greenwood Publishing Group, 2001, p. 41.
 M. Auboin, ‘Restoring Financial Trade During a Period of Financial Crisis: Stock-Taking of Recent Initiatives’, WTO Staff Working Paper (ERSD-2009-16), 2009, available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535309> (accessed 26 March 2012), p. 2.
 J.P. Chauffour and M. Malouche (eds), Trade Finance During the Great Trade Collapse. Washington: World Bank Publications, 2011, p. 4.
 Berne Union, Statistics 2007-2011, available at <http://www.berneunion.org/pdf/Berne%20Union%202012%20-%20Charts%20and%20numbers%20for%20website.pdf >
 Export credit agencies and investment guarantee agencies are sometimes folded into a single entity, and sometimes handled by agencies with distinct legal personalities. In the US, for instance, the Export-Import Bank of the United States (Eximbank) handles export credit while the Overseas Private Investment Corporation (OPIC) provides political risk insurance for US investors seeking guarantees for foreign direct investment. For simplicity’s sake we will refer interchangeably to both types of agencies by a single acronym.
 M. Auboin, ‘International regulation and Treatment of Trade Finance: What are the Issues?’, WTO Staff Working Paper (ERSD-2010-09), February 2010, at p. 1.
 Malcolm Stephens, The Changing Role of Export Credit Agencies, Washington: International Monetary Fund, 1999, pp. 29-30. (articulating the ‘conventional wisdom’ for state involvement around ten reasons).
 M. Auboin, ‘Restoring Financial Trade During a Period of Financial Crisis: Stock-Taking of Recent Initiatives’, WTO Staff Working Paper (ERSD-2009-16), available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535309>
 MIGA, Annual report 2011, Washington: World Bank Publications, p. 4.
 IFC, Annual Report 2012, Washington: World Bank, p. 25.
 EBRD, EIB, WB, Final Report on the Joint IFI Action Plan, March 2011, available at <http://www.ebrd.com/downloads/news/Final_Report_on_Joint_IFI_Action_Plan_Feb_2011.pdf>, pp. 12-16.
 OECD, Arrangement on Officially Supported Export Credits, 1978.
 The latest edition of the Arrangement was adopted in January 2013. More importantly, however, a number of additional OECD agreements concern measures for specific sectors (aircraft, etc.) or providing specific guidance with respect to environmental standards, corruption, or sustainable lending. These agreements can be accessed at <http://www.oecd.org/tad/exportcredits/>.
 Agreement on Subsidies and Countervailing Measures, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 14.
 OECD, Council Recommendation on Common Approaches on Environment and Officially Supported Export Credits [TAD/ECG(2012)5].
 OECD, Principles and Guidelines for Sustainable Lending to Low-Income Countries, 22 April 2008 [TAD/ECG(2008)15].
 I have discussed the question in greater detail in ‘Risk Managers or Risk Promoters? The impacts of export credit and investment guarantee agencies on human development and human rights’ in Olivier De Schutter, Johan Swinnen, Jan Wouters (eds). Foreign Direct Investment and Human Development: The Law and Economics of International Investment (New York: Routledge, 2013), pp. 189-232.
 ibid., pp. 208ff.
 In this respect, see Eurodad, Responsible Finance Charter, 2011, available at <http://eurodad.org/uploadedfiles/whats_new/reports/charter_final_23-11.pdf>, p. 3.