Foreign Trade Finance: Requirements and Challenges in Times of Change
| Published date | 01 September 2019 |
| Date | 01 September 2019 |
| DOI | http://doi.org/10.1111/1758-5899.12708 |
Foreign Trade Finance: Requirements and
Challenges in Times of Change
Edna Sch€
one
Euler Hermes Aktiengesellschaft
Abstract
The global trade world is changing. In order to support their exporters, ECAs need to adapt to a changing competitive envi-
ronment and develop rules and processes that are made for todays export realities. Euler Hermes advocates an adaption of
the OECD consensus and believes in digitalization as a mean to make ECA cover attractive for exporters also in the future.
Old truths do not seem to apply any longer. Open markets
and free trade are suddenly called into question. The renun-
ciation of multilateralism as well as nationalistic and protec-
tionist tendencies on important markets for exports and
investments are posing major challenges not only to Ger-
man exporters and the export nation Germany. Financing
arrangements regarded as utopian only a few years ago are
now a reality. They include, for example, transactions involv-
ing local costs and/or foreign content of well over 50 per
cent. But not only political and economic circumstances are
changing –in the field of technology, too, scarcely a stone
remains standing. The digital transformation of the economy
will place trade and trade finance on new foundations.
Adapting the framework conditions to the realities
Under these circumstances, a level playing field –namely,
fair and equal competitive conditions for all involved –is
particularly important. However, a level playing field does
not exist until we succeed in integrating all major players
into an international set of rules. Germany is bound by a
close-set of international rules and agreements through the
OECD Consensus. Since 1978, the OECD Consensus has set
uniform minimum standards for export credits, which are
supported by a state export credit agency or by means of
public funding. This is intended to guarantee that competi-
tion is driven by price and quality and not by the extent
and the conditions of state support.
Among other things, minimum standards for credit periods,
repayment profiles, down-payments, the inclusion of local
costs as well as premiums and minimum interest rates for the
insurance of political and commercial risks are fixed. The OECD
country risk classifications are also harmonised. Thus, the OECD
Consensus is the guideline for OECD export credit agencies
(ECAs) and guarantees WTO conformity and fair competition.
But what is such a consensus worth now if major players,
such as China or India, are not bound by it? According to the
current competitiveness report of US Exim, the share of OECD
Consensus governed trade in total trade has shrunk for the
fourth consecutive year to now 27 per cent despite a rise in
trading volumes. The biggest share of transactions not gov-
erned by the OECD Consensus is accounted for by China (more
than 50 per cent) according to the report. The share of India is
also rising. But OECD ECAs, too, are becoming increasingly
active where the rules and regulations do not apply.
The ‘victims’of this development are German exporters
and banks, who are committed to respect the Consensus.
Therefore, it is extremely important to adapt the Consensus
to the new realities in export trade as regards content and
flexibility, for example, with regard to the possibility to
include local costs to a greater extent than so far. The OECD
Consensus limits cover of local costs to 23 per cent of the
contract value. This rule seems to be out-of-date. In particu-
lar countries with emerging, transition and developing
economies are insisting ever more frequently that contracts
provide for locally sourced supplies and services, the
employment of local workers or the use of regional
resources. Therefore, the OECD Consensus should take bet-
ter account of the increasing importance of local production
and expand the cover facilities for local costs. Besides, such
a regulation would improve the chance to integrate states
such as China into a set of rules. However, an increased por-
tion of locally sourced goods and services is only one side
of the coin. Digitised valued added chains, automatisation
and platform solutions are another.
Digitisation: new challenges for export financing
The digitisation of the economy is steadily progressing. Net-
worked production, the smart factory and predictive mainte-
nance are already a reality. The hippest sneakers emerge
from 3D printers these days. The self-learning machine diag-
noses and maintains itself and in the health care system
artificial intelligence fuels medical progress in an unprece-
dented way. The list of examples could readily be contin-
ued, and it shows: digitisation is no longer a long way off
but a key element of our economic world. But that is just
the beginning. In the internet of things, everything
Global Policy (2019) 10:3 doi: 10.1111/1758-5899.12708 ©2019 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 10 . Issue 3 . September 2019 419
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